Tax-Backed Loans Would Aid Office-to-Residential Conversions

As cities such as New York, San Francisco, and Washington scramble to revitalize struggling commercial districts post-pandemic, tax abatements for office-to-residential conversions are proving less than effective because they apply after project completion. Instead of making developers wait years to benefit from tax breaks, states should let them borrow against future tax savings with upfront, low-interest bridge loans that can get projects off the ground.

This wouldn’t require a new subsidy; it would be the same tax break timed more effectively. By front-loading future tax savings for developers into a structured drawdown loan, states wouldn’t commit new funds to these projects—they would just make the existing expenditures work.

With record-high US office vacancies and high housing prices, as well as persistent housing shortages, the logic of office-to-residential conversions seems obvious. If we have too much office space and not enough living space, incentivizing the conversion of the former to the latter makes good policy sense.

Yet offices aren’t being converted quickly enough to make a significant difference in the housing shortage issue. Moody’s estimated that 103 projects were completed last year—up substantially from 2023 but still insufficient to solve the vacancy and shortfall issues.

One hurdle to office conversions is that they’re expensive. Traditional loans are difficult to secure on favorable terms as interest rates stay high. Because most existing tax incentives only kick in after construction is done, developers are forced to front the conversion costs, hoping for a tax offset in the years or decades that follow.

In addition to worrying about when they’ll see tax benefits, developers may be concerned about how much those eventual benefits will be worth. Property taxes are inherently unpredictable. If a municipality later hikes rates to offset declining commercial revenue, or if it introduces a new tax, a 75% tax abatement may not be worth what it was when the project was at the planning stage.

A bridge loan program, secured by future tax savings, would help mitigate this risk by locking in the value of the abatement at the time of financing, giving developers a more stable number to work with.

Here’s how it could work: A developer would apply for a state-run bridge loan program to finance an office-to-residential conversion for a property already eligible for a tax abatement. The state would calculate the total future tax savings. Through a public-private partnership, it then would underwrite a low-interest loan from a commercial bank to provide immediate funding secured by those tax savings.

Once the project was complete, the developer would repay the loan using the tax abatements—the revenue that would have been directed to the state to pay property taxes is instead directed to pay down the loan.

This shift would take the financial incentive from a delayed and uncertain benefit to immediate and usable capital, making conversions more financially viable. If a project didn’t get built, no tax break would be awarded, and the drawdown loan wouldn’t be issued. That means states wouldn’t waste tax revenue on speculative projects that never materialize.

Structuring the program as a public-private lending model would further reduce risks. Banks wouldn’t be asked to take on much additional risk because the loans could be designed as drawdown facilities and backed by a pre-existing tax obligation.

Developers would have access to funds in phases as the project progresses, rather than as a lump sum. Capital would be deployed as milestones were met, reducing exposure while maintaining the tax obligation as a backstop.

Unlike public grants or subsidies, this model wouldn’t cost taxpayers anything upfront beyond the abatements already in place. Those abatements have already committed, at least nominally, tax expenditures to encourage conversions—but those abatements have been rendered largely useless because of their structure.

This model should be an easy sell politically. Increasing housing supply without giving developers a handout would further progressive interests, and ensuring the program was self-financing would support fiscally conservative interests.

This broad idea has already worked in other contexts. In Wisconsin, the state launched a loan program for senior housing development, offering interest-free loans to developers who committed to converting office buildings into affordable senior housing. Although it’s too early to gauge the program’s long-term success, it saw significant developer interest during its initial funding round.

More broadly, tax increment financing districts operate on a largely similar principle throughout the country. These districts allow developers to borrow against future property tax increases that will be generated by the improvements made to the underlying property. A tax-backed bridge loan for a conversion has even firmer footing because it’s secured by the abatements developers are already entitled to, not somewhat-speculative future tax revenue based on expected gains in real estate values.

Cities can keep offering post-hoc tax abatements that developers can’t use for years—or they can restructure incentives and provide upfront capital when it’s needed. Tax-backed bridge loans are a practical fix to a well-documented problem. If office conversions can alleviate the housing crunch, it’s time to start making them easier.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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