In July, Democratic Senators Gary Peters and Debbie Stabenow (along with Democratic Representatives Dan Kildee, John Larson, and Jimmy Gomez) introduced the Revitalizing Downtowns Act (“The Act”) to Congress. With the goal of reviving urban districts and downtown commerce, the Act would establish a new federal tax credit that encourages property developers to convert unused office space into residential or mixed-use space.
The Act defines an obsolete office structure as a building at least 25 years old, and at least 20 percent of the residential conversion must be dedicated to affordable housing. If these criteria are met, 20 percent of the conversion expenses will be covered by the tax credit. The Act has growing support from economic development organizations across the country, including the International Downtown Association and the Federal City Council. Together, 37 organizations formed the Revitalize Our Cities coalition, committed to reenergizing downtown spaces and strengthening the U.S. economy.
The Act presents a substantial opportunity to improve American cities of all sizes. Justin P. Weinberg, Partner in Charge at Taft Stettinius & Hollister’s Minneapolis office, said of the Act, “It’s an opportunity to revitalize and reenergize existing spaces. Giving new purpose – and attracting new tenants – to buildings that would otherwise be vacant means more people, customers, and workers to build and sustain a strong community and business district where there wasn’t one before.”
How Can Federal Tax Credits Help Unused Office Space Redevelopment?
With employees still working from home and a permanent return to the office for countless businesses seeming more uncertain as the COVID-19 pandemic continues, many office buildings may remain vacant and unused, leaving downtowns with fewer opportunities for investment and revenue generation.
“This Act would be huge in encouraging all types of business to invest in downtown markets. It would be most helpful though if the tax credit provided could be used in conjunction with other credits, such as historic tax credits, Low-Income Housing Tax Credits (“LIHTCs”) and/or new markets and also incentivized business owners to open. Residential development works best if it is in conjunction with other retail, services and other amenities and, of course, plenty of parking,” said Kelly Rushin Lewis, partner in Jones Walker’s tax practice and leader of the firm’s tax credit finance team.
For buildings needing a lot of work, tax credits are essential to ensuring the project has the necessary financing. Without them, many projects requiring a lot of renovations and updates may not be able to move forward, Ms. Lewis said.
“Tax incentives are a key tool in attracting private capital in neighborhoods or towns in need of revitalization. These conversions can be much more challenging than building from the ground up, especially if dealing with vacant buildings that may have environmental, zoning, code compliance, or other latent issues that may be expensive to correct. The projects often are just not financially feasible and will not get done without those incentives,” she said. “A credit or some other incentive for potential tenants in the commercial spaces would be helpful – many business owners may be reluctant to be the first or one of few to open in what may be an otherwise quiet downtown. Tax incentives would encourage them to come and hopefully give them a cushion while the neighborhood is being revitalized.”
Another potential impact of the bill would be the increased investment in affordable housing. With many cities large and small struggling to provide enough affordable housing, the Act would create an opportunity to develop vacant buildings into much-needed affordable housing developments.
“Now more than ever, investment in affordable housing is critical. Housing costs are at an all-time high with demand outpacing supply. The costs of acquiring housing is high and the cost of building it is as well,” Ms. Lewis said. “Affordable housing developments do so much more than create housing – they create jobs and careers in everything from construction, accounting, legal work, property management, and more.”
In addition to creating jobs, the creation of affordable housing has the potential to slow down the gentrification affecting many large cities, said Lacy Clay, a former congressman from Missouri and a Senior Policy Advisor at Pillsbury Winthrop Shaw Pittman LLP.
“If you can convert these older buildings into affordable housing units, then you will slow down the gentrification process taking place in quite a few of these urban centers. You can look at any major city now and see that low to moderate income families and people of color are being pushed out of those cities, and then to further into the suburbs,” he said. “This would help reverse those trends.”
How Investing in Affordable Housing Actually Can Help with the Current Labor Shortage.
The Revitalizing Downtowns Act is a timely piece of legislation for investing in urban centers during the COVID-19 pandemic. For many industries, it appears that widespread remote work is here to stay, and it is critical that American cities reflect that new reality. By providing incentives for developers and property owners, the Act makes these necessary overhauls far more viable. “Tax incentives reduce investors’ financial risk,” explained Mr. Weinberg. “[This makes] taking on such a project highly attractive.”
The bill’s emphasis on affordable housing is especially notable. Through this provision, legislators hope to provide equal footing for renters and thereby attract young talent to fill employment needs.
“I want to compliment Senator Stabenow and Gary Peters and Dan Kildee for coming up with this innovative way to be able to bring populations back in a way that does not exclude communities of color, but will include communities of color,” Mr. Clay said. “If you build enough affordable housing units, according to the legislation, at least 20 percent of any of those redevelopments have to be dedicated to affordable housing.”
Through investing in affordable housing, downtowns would benefit from an increased flow of commerce, as well as a buffer against the ongoing U.S. labor shortage and or talent mismatch.
“The trick is to prioritize affordable housing without eliminating or displacing families in market-rate housing that do not otherwise qualify for affordable housing,” said Mr. Weinberg. “But if done well, a city that strikes the right balance of available affordable housing benefits from additional economic stability and makes itself a sustainable destination for business, families, and communities.”
