Earlier this month, the District of Columbia’s Office of the Deputy Mayor for Planning and Economic Development (DMPED) issued proposed rules that lay the groundwork for a competitive process to provide gap financing of approximately $500 million for office to residential building conversions. The regulations envision an open process where developers and others can compete for these subsidies. We expect the process, including the first round of applications, to start in Q2 — a couple of months from now.
If adopted, and we assume they will be, the regulations will implement the Housing in Downtown Tax Abatement Act of 2022. The act authorized 20-year real estate tax abatements for office to residential conversion projects. Generally speaking, eligible projects must be located in the central business district, Foggy Bottom, the West End, or the East End, an area generally bounded by the National Mall to the south, Massachusetts Avenue to the north, 24th Street to the west and North Capitol the east.
After a ramp-up period, the act authorizes tax expenditures (i.e. tax abatements of up to $41 million per year in 2028 dollars). Conceptually, these abatements could offset approximately 10% to 15% of an eligible project’s capital stack.
While the proposed rules are scant on detail, DMPED’s proposal makes it clear that abatements will only be awarded "through a competitive process initiated by DMPED" and that each applicant will need to fill out a standard application. We assume the process will run somewhat similar to that used by the Department of Housing and Community Development to award Housing Trust Fund dollars and to allocate Low Income Housing Tax Credit (LIHTC) subsidies.
The rules do not indicate when the process will initiate, but DMPED had established a goal of starting the process in Q1. Given that the earliest the rules could become effective is the first week of March 2024 (and more likely mid to late March), it seems that this process will start in April or May of 2024.
The proposed regulations do not specify what criteria will be used to evaluate the applications and select the winners other than to state the process will be based on the benefit of the project to the "area surrounding the parcel" and the District. The regulations provide, however, that the solicitation document to be issued by DMPED will provide greater specificity. But it is not hard to envision what factors will be emphasized, namely affordable housing, economic equity, participation by local businesses and residents, and the impact of the development on re-imagining the downtown neighborhoods.
What Else to Know About the Program
The legislation and its implementing regulations require that eligible conversion projects make at least 10% of the residential units affordable to households earning no more than 60% of median family income. It also requires that 18% of units are set aside for households earning no more than 80% of median family income.
Owners of eligible projects are still required to enter into a First Source Employment Agreement, obligating them to use the District’s Department of Employment Services as its first source of seeking employees and to hire District residents for at least 51% of new jobs created by the project’s operation. This obligation would apply to both the construction and operational phases of the project. Owners will also need to agree to enter into a memorandum of understanding with the Department of Small and Local Business Development and pledge that 35% of the development phase dollars be spent with Certified Business Enterprises. This obligation, however, only applies to the development phase.
Finally, the act provides that subsidized projects will be exempt from the Tenant Opportunity to Purchase Act.
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