Federal Program for Transit-Oriented Conversions Hits Snags

When the White House announced a plan last October to help commercial property owners convert buildings to residential use, it seemed like a great idea.

“These announcements will create much-needed housing that is affordable, energy efficient, near transit and good jobs, and reduce greenhouse gas emissions, nearly 30 percent of which comes from the building sector,” a Biden administration fact sheet noted.

An initial review by GlobeSt.com of the available documents suggested that the plans opened existing programs to conversion projects without net new funding, which meant more competition for the same funds. Since then, at least one of part of the initiative — transit-oriented development projects — have shown far bigger challenges for developers.

Requirements for buildings to be within a half mile of a train station, along with agonizingly slow approval processes of up to two years, strict environment reviews, and exacting credit demands, can quickly shut down any attempt by a developer to qualify, Bloomberg reported.

Conversions already face fundamental difficulties. Gregor Watson, co-founder of 1Sharpe Capital, told GlobeSt.com in February 2024 that “many structures simply lack the structural feasibility for cost-effective conversion.”

There are conversion programs that work. New York City’s Office Conversion Accelerator had 46 enrolled projects as of January 2024. A report from Yardi’s Rent Café said that the number of apartment units converted from office buildings increased from 12,100 to 55,300 from 2021 to 2024.

However, the Department of Transportation program requirements almost seems more designed to repeatedly fail than succeed. Here are some of them:

• The project sponsor has to provide funds for the external advisors’ fees to enable the required formal credit review. That starts with a $250,000 initial deposit at the beginning. If fees run higher, the sponsor needs to meet them.
• The sponsor has to maintain liquidity of 10% of the requested loan amount and net worth of 100%.
• The project sponsor is supposed to have an executed Regulatory Agreement with a state or local municipality to restrict rents on the subject property.

According to Bloomberg, to date, no transit-oriented development loans had closed although three projects were in active underwriting. Fund approval reportedly takes between 18 and 24 months.

“The Bureau is aware of challenges associated with using the processes and procedures for loans that were primarily developed for well-established 26-year-old transportation financing programs,” USDOT spokesperson Edward Dao told Bloomberg. “Four months into this new initiative, we expect these comprehensive, below market rate interest loans to take between 12 to 18 months to finalize, but we are optimistic that as the program matures, we’ll be able to shorten loan closing times to half that.”

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