Milwaukee taxpayers might help convert office towers to housing. That tactic is used in Chicago

Milwaukee Mayor Cavalier Johnson's administration is considering city financial help to convert downtown office buildings to apartments, including affordable units − marking a new tactic that's being used in Chicago, St. Paul and other cities.

That comes as the nationwide office market continues seeing reduced demand tied to remote work's rise.

There are no specific proposals yet. But owners of the largely empty 100 East office tower and the vacant former Marshall & Ilsley Bank building have had preliminary talks with city officials, said Development Commissioner Lafayette Crump.

A tax incremental financing district tied to 100 East's redevelopment could surface for Common Council review this fall, said Ald. Robert Bauman, whose district includes downtown.

The 35-story building, 100 E. Wisconsin Ave., was sold in August for $28.75 million to a group led by Klein Development Inc. and developer and investor John Vassallo. They plan to convert it to around 380 apartments after the few remaining office tenants relocate.

A TIF district would provide public funding from the new development’s property tax revenue.

Also, Mark Irgens wants to redevelop the 20-story former Marshall & Ilsley Bank Building, 770 N. Water St., with 125,000 square of renovated office space on the upper floors and around 150 apartments on floors two through 10.

Irgens said he plans to seek a TIF district in connection with that project.

Tax districts often used for below-market price apartments

Milwaukee and other Wisconsin communities regularly use TIF districts to help finance apartments that use federal and state affordable housing tax credits to generate cash.

Developers receiving those credits must provide 85% of the apartments at below-market rents to people generally earning no more than 60% of the area median income.

The credits are sold to raise equity cash. A developer then typically obtains a bank loan, and perhaps other cash sources, to complete the financing.

Milwaukee, dating to Mayor John Norquist's administration in the 1990s, generally hasn't used TIF districts to help pay for market rate housing.

The recently completed Couture upscale apartment high-rise, 909 E. Michigan St., includes a $17.5 million TIF district − but it paid for the building's transit concourse and other public improvements.

City cash considered for mid-priced apartments

Department of City Development officials recently have been discussing what role the city might play in financing "missing middle" housing, Crump told the Milwaukee Journal Sentinel.

He defined that as the sector between higher-end units, such as those at The Couture, and tax credit-financed apartments with below-market rents.

Crump said an expanded use of housing TIFs would amount to a new approach − with inflated construction costs and higher interest rates making it more difficult for developers to finance the missing middle.

"The past (policy) worked for where the market was at that time," he said.

"None of these proposals are doable without the boost of public sector participation," said Bauman, downtown's longtime representative on the Common Council. "That seems to be a valid argument."

Downtown sees new housing as office market lags

Downtown has had several new apartment developments in recent years, including two high-rises completed this summer: The Couture and 333 Water.

Downtown's office market ended the second quarter with a 16.8% vacancy rate, with the four-county Milwaukee area posting an 18.6% vacancy rate, according to the latest Commercial Association of Realtors-Wisconsin survey. Multitenant downtown office buildings reported a 23.2% vacancy rate.

That double-digit vacancy rate for multitenant office buildings comes even as downtown continues drawing corporate tenants from the suburbs, including Fiserv Inc., Allspring Global Investments and Enerpac Tool Group Corp.

Bauman said he's inclined to support TIFs for the office tower conversions, depending on the proposals' details. He said a big selling point would be a commitment by the developers to include apartments with affordable rents.

Chicago moves aggressively to help finance conversions

Chicago officials are taking that approach.

Mayor Brandon Johnson is proposing TIFs totaling $151 million to help pay for converting four underused downtown office buildings into more than 1,000 apartments − with at least 319 units provided at affordable rents, according to the mayor's office .

The developments include a $64.2 million redevelopment of the Bell Federal building into 117 apartments, with 41 affordable units provided in return for a $28 million TIF.

Bell Federal's developers include R2 Group, which features in its portfolio some prominent Milwaukee buildings: ASQ Center, a mix of office and retail space at 600 N. Plankinton Ave.; an office/retail building at 222 E. Erie St.; Teweles Seed Tower Lofts, 222 S. Third St., and The Tannery office complex, 700 W. Virginia St.

Those TIF plans will likely undergo Chicago City Council review this fall.

Chicago's aggressive stance is spurred by a big decline in people working downtown thanks to the rise of remote work during the COVID-19 pandemic.

St. Paul among cities helping finance office conversions

Other cities using TIFs to help finance conversions of offices to market rate apartments include St. Paul.

That includes the Landmark Towers project, led by Minneapolis-based Sherman Associates Inc. − which also developed Oaks of Shorewood Apartments, 3900 Estabrook Parkway.

The St. Paul City Council last year approved $21.9 million in TIF funding to help Sherman Associates convert Landmark Towers, a vacant downtown office building, into 187 market rate apartments.

Renovations are underway, and the $70.1 million development is expected to be completed by March, according to a city report.

Unlike Chicago, the St. Paul TIF agreement doesn't require Sherman Associates to provide any apartments at below-market rents.

Around 26% of downtown St. Paul apartments are income-restricted affordable units − the highest such share of any St. Paul neighborhood, said Rebecca Noecker, a City Council member.

Noecker, whose district includes downtown St. Paul's business district, supported the Landmark Towers TIF because it's converting a large, blighted building into new housing. That creates more property tax base for the city while also helping shore up downtown, she said.

"If downtown (property) values tank," Noecker said, "it affects revenue for all (city) services."

Noecker also supports a proposed state tax credit for office conversion projects throughout Minnesota. That proposal died in this year's state legislative session, but advocates hope to revive it in 2025.

Congress considers tax credit for renovating offices into housing

Meanwhile, a similar federal proposal, the Revitalizing Downtowns and Main Streets Act , has been introduced by Rep. Mike Carey (R-Ohio) and Rep. Jimmy Gomez (D-California).

Both are members of the House of Representatives Ways and Means Committee − where tax legislation originates − with a companion bill introduced in the Senate by Sen. Debbie Stabenow (D-Michigan). The annual credit amount would equal 20% of qualified conversion expenses.

Also, it would require reserving for 30 years at least 20% of a building's apartments for people with incomes no higher than 80% of the area’s median income, according to a statement from Carey's office. Those units would have restrictions on their rents, according to the legislation.

The total credit authority would be limited to $15 billion and would be allocated by state housing finance agencies, such as the Wisconsin Housing and Economic Development Authority, according to a Real Estate Roundtable analysis. That industry group supports the proposal.

To be sure, the idea of using TIFs to help finance office tower conversions has opponents.

Real estate developer and Wisconsin State Sen. Duey Stroebel (R-Saukville) said the prospect of obtaining TIF help can lead to investors paying higher property purchase prices than they would otherwise accept.

"My question would be: how much did you pay for that office building?" Stroebel said.

Milwaukee development officials want TIF to be the last piece in a developer's financing package − assuming it's even necessary, Crump said.

But there's an upside, Crump said, that developers are having those conversations with city officials − particularly as Mayor Johnson's administration pursues plans to grow Milwaukee's population with more housing .

"It's a very good thing that developers are interested in building in the city of Milwaukee," Crump said.

Tom Daykin can be emailed at tdaykin@jrn.com and followed on Instagram , X and Facebook .

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This article originally appeared on Milwaukee Journal Sentinel: Milwaukee taxpayers might help convert office towers to housing. That tactic is used in Chicago