Bromfield Street in downtown Boston. Buildings in Downtown Crossing contain some of the highest concentrations of expiring state leases, potentially adding to the city’s office market woes. iStock photo
As part of a $100 million package of incentives to help communities remove their barriers to affordable housing production, the Biden administration announced a pair of much-maligned below-market loan program for office-to-residential conversions are getting a revamp.
The two loan programs, run by the federal Department of Transportation and aimed at spurring transit-oriented development, were initially touted by the White House as important capital sources for developers trying to make downtown office conversions pencil amid steep financing and construction costs.
But the Transportation Infrastructure and Finance Innovation Act (TIFIA) and Railroad Rehabilitation & Improvement Financing (RRIF) programs, which together can inject up to $35 billion into conversions, came with a slew of red tape including extensive environmental impact studies more typically associated with billion-dollar rail projects. According to reporting by Bloomberg, the requirements led to 18- to 24-month turnaround times on loan approvals instead of the normal two- to three-month commercial real estate loan underwriting period. Combined with sizable – and nonrefundable – deposits required just to submit an application, few if any developers jumped on board.
On Tuesday, the Biden administration issued new rules saying that both TIFIA and RRIF loans for office-to-residential conversion projects “may be eligible” to skip lengthy National Environmental Policy Act, or NEPA, reviews. Projects must be within a half-mile of a transit station, can’t expand the footprint of the building and can’t “modify other facilities” according to an updated “frequently asked questions” webpage on the DOT website.
TIFIA loans can be used to refinance existing debt as part of conversion projects, and both TIFIA and RRIF loans can serve as permanent, take-out financing for construction loans. TIFIA loans must be at least $10 million in size and can cover up to 49 percent of eligible project costs; RRIF loans can cover up to 75 percent of total project costs. Neither program has a maximum loan size and both can have ultra-long-dated maturities – up to 75 years but “will likely be shorter, e.g., 35 years post substantial completion,” the FAQ states.
While the changes don’t mean the loans will have the same short turnaround that accompanies normal development financing, the White House promises that the time to close the loan will be under 12 months under the new rules. A webinar is planned Aug. 27 to provide more information.
It remains to be seen if the program changes will have an effect on downtown Boston’s vacant-office conundrum.
A city of Boston tax abatement program for office-to-residential conversions was extended and expanded last month with state financing that would give developers $215,000 for each income-restricted unit in office buildings converted into housing. The city itself is also offering expedited permitting and a 75 percent abatement on property taxes for 29 years for projects that submit applications by Dec. 31, 2025. Approved projects are required to obtain building permits and begin construction by Dec. 31, 2026. Mayor Michelle Wu has also proposed standardizing and raising building height limits downtown, among other zoning reforms.
To date, the program has only generated applications to convert office space in 15 buildings into 507 housing units totaling 470,000 square feet, or a little over 4 percent of the city’s vacant office space, with many developers citing high interest rates and the particularly large construction costs per square foot as their biggest hurdles.
Boston’s overall office vacancy rate hit 17.7 percent on June 30, CBRE research shows, representing around 11 million square feet of space, with class B and C space being even harder-hit.
