Legislation Would Incentivize Conversion of Office Buildings

If a bill before the Minnesota Legislature passes, downtown office buildings could soon be given a new life as housing. The bill would provide developers with a tax credit or grant for up to 30% of the cost of converting an underutilized building for a new use.

A hearing before the Senate Taxes Committee on Thursday was attended by six municipal, civic and business leaders, all of whom spoke in favor of the bill.

Senator Matt Klein (DFL-Mendota Heights), who is sponsoring the bill along with Senator Scott Dibble (DFL-Minneapolis), explained that the bill would apply to downtown office buildings, but it could also be used for other underutilized buildings. Buildings would have to be at least 15 years old to qualify. The legislation would apply to buildings that were being converted to a use they were not originally built for or had not been previously used for, or buildings that have been at least 50% vacant for five years. The bill would require that 75% of the original external walls be retained, and would sunset in fiscal year 2030.

Several testifiers contended that the bill would increase the tax base, which would lessen the tax burden for homeowners. Dan Colison with real estate developer Sherman Associates argued that in addition to increasing the tax base the bill would mean that less tax increment financing would be necessary to make projects viable. Minneapolis mayor Jacob Frey stated that if underutilized office buildings in his city aren’t converted to residential use the taxes that the city is unable to collect from these buildings will have to be collected from homeowners. He noted that although more workers are coming into downtown offices, there are still substantial vacancies in office buildings.

However, Senator Carla Nelson (R-Rochester) expressed concern that converting office buildings into residential properties would result in less tax revenue because rental properties are taxed at a lower rate than commercial properties are. Committee Chair Senator Ann Rest (D- New Hope) pointed out that in addition to paying less in local property taxes rental properties don’t pay the state general levy that commercial properties do.

But Colison pointed out that if office buildings go bankrupt they won’t produce any tax revenue. Nicole Goodman, the Director of Planning and Economic Development for the City of St. Paul, stated that the reduced market value of downtown properties means that the city collects less revenue from them. There is currently a 22.5% vacancy rate for downtown St. Paul office space, and that number is likely to increase when current leases expire.

Heidi Swank, the executive director of historic preservation organization Rethos, asked the legislators to learn from the past when crafting policies that could mean the difference between preserving and demolishing buildings. After describing the urban renewal movement in the 1950s and 1960s during which mass demolition of old buildings occurred, she opined that we “need new tools to make sure that these buildings can stay in use and that we won’t have to figure out how to responsibly dispose of several million square feet of building materials.”