Office and Commercial Space Conversion Initiative

Summary of Procedures and Policies

Purpose of the Initiative

In its 1998 session, the Maryland Legislature enacted Governor Glendening's Office and Commercial Space Conversion Initiative. The Initiative is intended to assist in the revitalization of Maryland's downtowns by converting older office and commercial space into new, market-rate, rental housing. The influx of new residents will create more lively, thriving downtown communities with greater economic diversity. By increasing the supply of market-rate housing in downtown areas, the Initiative effectively focuses the demand for apartments in areas with existing infrastructure and preserves open space. In many areas, the new housing will be close to jobs and educational opportunities, reducing the demands on the State's transportation system.

Why State Resources Are Needed

The conversion of old office and commercial space is expensive. Current market rents are unable to support the high cost of physically transforming these buildings and their infrastructure. To spur additional development, the Initiative will provide gap financing on flexible terms. This reduction in debt will in turn reduce the rents necessary to operate the projects, bringing them in line with current market conditions and changing many older buildings into viable housing opportunities. In FY 1999, the Maryland State Legislature authorized $3 million for the Initiative, and another $4 million has been requested for FY 2000. Because of the Initiative's nature as gap financing, funds will be approved only when it is clear that private bank financing is not available for all necessary costs.

How to Apply

Applications may be filed at any time but must be submitted through the local jurisdiction which will be supporting the project. An abbreviated version of the Department's current housing development application form will be used. Applications will be date stamped upon receipt and awards will be made on a first-come/first-served basis.

For the first 9 months of a fiscal year, applications will only be accepted for that fiscal year and must be able to receive commitments for all funding in that fiscal year. Beginning on the first day of April (the 10th month of the fiscal year), applications may be made for the next fiscal year as well. Again, projects must receive commitments for all funding in that fiscal year.

When all Program funds have been reserved, projects will be added to a waiting list in the order in which they are received. If a project is unable to obtain all commitments for financing by April 30th of any year, DHCD may reject the project and select the first project from its waiting list instead. A project on the waiting list must therefore be able to obtain all commitments for funding in the year for which its application is submitted.

Application Instructions 

Loan Terms

Office and Commercial Space Conversion projects are expected to be financed primarily with private funds. Since commercial loans often carry restrictions regarding other funding sources, the Program's loans must be made on flexible terms. Interest rates and repayment terms will vary, depending on the amount and type of the first loan. The loan period may be for as long as thirty years. During the construction period, interest will be waived and no principal payments will be required.

Threshold Requirements

Because the Initiative is an extension of the existing Rental Housing Production Program (RHPP), loans must conform to the requirements of both the RHPP and the Office and Commercial Space Conversion Initiatives. The only exception is that the RHPP income limits do not apply.

1. Buildings must be more than 30 years old and have at least two floors.
2. Buildings must have been primarily built and last used for office or commercial space.
3. Buildings must be in Designated Neighborhoods* under DHCD's Neighborhood BusinessWorks Program (formerly the Neighborhood Business Development Program).
4. Local jurisdictions must submit applications and provide a local resolution and a contribution in support of the project.
5. Loans must be secured by a deed of trust.
6. Funds may be used only for the residential portion of a building and may not exceed the lesser of:
   1. 20% of the total residential development costs or
   2. $1 million.
7. Total funds administered by the State may not exceed 30% of the total development costs of the project. Historic Tax Credits are excluded from this limit.
8. No State Rental Housing Funds or Federal Low-Income Housing Tax Credits may be used for the residential portion of the project in conjunction with the Initiative. On a case by case basis the Department will consider using State allocated bond funds in conjunction with the Initiative.
9. Generally, developer fees will be limited to 10% of total residential development costs, however the Department will consider higher fees if they are consistent with industry practrices for the project being financed and if the fee is consistent with the policy of the private lender.

Geographic Distribution

In order to ensure the opportunity for all local jurisdictions to participate in the Initiative, projects in any single local jurisdiction may not receive more than a cumulative of two-thirds of Initiative funds per fiscal year. On April 1 of the year in question, if there are insufficient applications from other jurisdictions to use the remaining one-third of Initiative funds by the end of the fiscal year, the remaining funds may be awarded to projects in any local jurisdiction.

Loan Processing

Upon receipt, applications will be reviewed against the threshold requirements. Projects meeting the requirements will then be reviewed to ensure that gap financing is necessary. Upon completion of construction, a project cost certification will be required to confirm project costs and finalize the financing gap and DHCD loan amount. The amount of the gap will be based on project costs, standard financing terms which may be obtained from private sources and the amount of the local contribution. Projects will be expected to maximize the amount of private financing they receive.

All materials submitted to the primary lender must be simultaneously provided to DHCD. The Department will review the materials and, prior to commitment, must approve a market study, appraisal, operating pro forma, sources and uses, capital needs assessment, scope-of-work or budget, including cost estimates for construction, any credit enhancement, and all terms of other financing.

*Designated Neighborhoods are geographic areas identified for revitalization by the local jurisdiction with the concurrence of the Secretary of DHCD.

For More Information, Contact:

Housing Development Programs
Community Development Administration
Maryland Department of Housing and Community Development
100 Community Place
Crownsville, MD 21032-2023
rentalhousing@mdhousing.org
410-514-7446
Toll Free (Maryland Only): 1-800-543-4505