A new bill up for debate in the Minnesota Legislature could spark a wave of office-to-residential conversions across downtown Minneapolis and help stabilize its flagging commercial real estate market.

The Conversion of Underutilized Buildings Tax Credit, or CUB credit, would offset up to 30% of qualified conversion costs for projects over $5 million. Projects under $5 million would qualify for grants covering up to 90% of what the CUB credit would’ve covered, or up to 27% of qualifying conversion costs. 

The bill text hasn’t been finalized, so it’s subject to change, according to Rethos Executive Director Erin Hanafin Berg. 

Proponents hope the CUB credit leads to more projects like Northstar Center East, Sherman Associates’ office-to-residential conversion that’s in progress at 608 Second Ave. S in downtown Minneapolis.

Hanafin Berg told Downtown Voices that Rethos, a St. Paul nonprofit that promotes adaptive reuse of older buildings, works closely with developers active downtown, including Sherman Associates and Hempel Real Estate to educate state legislators about the need for a CUB credit. Property owners and developers “are attuned to the grim situation they’re facing currently” in downtown Minneapolis, Hanafin Berg said.

But as bad as things seem now, they could get worse if developers can’t get financing to restore older, underutilized buildings to productive use. 

“There is a tipping point of vacancy that will be hard to come back from,” Hanafin Berg said. 

By shoring up values for older office buildings suitable for residential conversion, the CUB credit could also benefit Minneapolis residents who directly or indirectly pay property taxes, including renters. 

In a Feb. 23 email to constituents, Ward 3 Councilmember Michael Rainville touted the CUB credit, saying it “will provide needed help to revitalize underused commercial buildings in large and small cities across the state.” He specifically noted the recent sale of the Kickernick Building at 416 First Ave. N, which fetched just $3.8 million, one-fifth of its sale price in 2017. The building was valued at $11.3 million in 2023, according to Hennepin County tax records.

That “drop in value means every renter and homeowner in Minneapolis will have to pay higher rent or property tax to make up the difference,” Rainville wrote in the email. He added that higher housing costs could lead to “cuts to city services, park services, and school funding.”

The proposed CUB credit is broader than the Minnesota Historic Structure Rehabilitation Tax Credit, which the state Legislature reinstated in 2023, following a two-year lapse. The Historic Structure Rehabilitation credit applies only to certified historic buildings, which are typically more than 50 years old, and tops out at 20% of rehabilitation costs.

To qualify for the CUB credit, a building must be at least 15 years old, or have been more than 50% vacant for at least three years. In most cases, especially in places like downtown Minneapolis, the building must be converted to a new use, most likely office to residential, Hanafin Berg said.

The renovation itself must preserve at least 75% of the existing external walls and internal structural elements. Developers can combine CUB credits with any other financial incentive, except for the Historic Structure Rehabilitation credit, according to a fact sheet shared by Rethos.

The CUB credit could enable previously unviable office-to-residential conversion projects across downtown. 

In 2022, Sherman Associates purchased the vacant Wells Fargo operations center at 255 Second Ave. S, with grand plans to replicate the building with a $400 million mixed-use development dubbed Washington Yards.
Ground-up development remains “Plan A” for the site, Dan Collison of Sherman Associates previously told Downtown Voices in an interview. But the Minneapolis-based company hasn’t yet closed on the financing that it needs, and the CUB credit could encourage Sherman to consider “Plan B,” which involves repurposing the existing building.

More generally, downtown has “10 to 15 buildings where the conversion credit would be ‘Plan A,’” Collison said.

It’s unclear when developers could begin taking advantage of the CUB credit. Lawmakers probably won’t have time to get it across the finish line before the current legislative session ends on May 18.

“They could squeeze it in, but I’m not sure how likely that is to happen,” Hanafin Berg said.

But she’s hopeful that the bill will at least get a hearing this year, putting it on track for possible passage in the next legislative session, which begins Jan. 14, 2025.