Minnesota Seeks State Support for Office Conversions

As the value of commercial buildings collapses in the wake of the pandemic, Minnesota city leaders want state help to convert underutilized buildings into housing or better commercial uses, according to an article by Madison McVan for the Minnesota Reformer.

Office towers that were once prime locales for blue chip tenants have been selling at massive discounts — 97 percent in one recent case — alarming city leaders who are forced to shift the tax burden to residents. 

There are already state and federal tax credits for the rehabilitation or conversion of historic buildings, but developers and city leaders want a bigger state tax credit — up to 30 percent of a project’s cost, compared to 20 percent for the existing historic state credit — and to apply it to more buildings.

The bill (SF768/HF467) does not require that the buildings be converted to housing to qualify for the credit. Instead, conversions qualify if they remake a commercial building for another commercial use that the building was not originally built to accommodate, or if at least half of the building has been vacant for five years, and the conversion “will return that vacant area to an income-producing, habitable condition.”

The credit — called the “credit for conversion of underutilized buildings,” or the “CUB credit” — would apply to buildings at least 15 years old.

Converting office buildings to apartments is complicated.

Many office towers aren’t structurally fit for housing: Some are so large that many apartments would lack windows, a dealbreaker for prospective residents. Others have exteriors made almost entirely of glass. Plumbing is often centralized — one floor may have one or two common restrooms, while apartments require many bathrooms spread across the floor. 

And while interest rates have dropped from their most recent peak in 2023, they’re still well above the rates of the 2010s and the historic lows reached during the pandemic.

Minneapolis Mayor Jacob Frey testified in support of the tax credit proposal. Commercial property values in Minneapolis have dropped by 9.5 percent over the past year, and the shrinking commercial tax base means an increased property tax burden on homeowners. 

Rest, a co-author of the bill, pointed out that commercial properties are taxed at a higher rate than residential properties, so conversions could reduce the tax rate on many buildings. 

A longer version of this story was originally published on Minnesota Reformer.