Washington prepares to roll out tax break for office-to-housing conversions

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Cities in Washington are eager to see underused office buildings converted to housing.

A new state tax break could help. The Legislature approved a law this year to allow developers to defer sales and use taxes if they convert existing structures, like office buildings, into affordable housing.

The Department of Revenue last week continued the process of finalizing the rules for how that incentive would work. It said it anticipates having preliminary guidance in August. Cities could start implementing the program after that.

“We support rapid completion of the rulemaking process and are prepared to put the provisions of the law to use once it’s fully enacted,” said Andrew Rolwes, vice president of the Downtown Spokane Partnership.

Converting offices to housing has become a big topic of discussion in addressing Washington’s housing crisis. The logic: the buildings already exist, and with fewer people in them working, they make good candidates for increasing housing quickly.

Housing advocates, developers and local governments support conversion, but also acknowledge it’s not as easy as they might hope. It can sometimes be just as expensive as new construction given the complex plumbing, heating and ventilation upgrades or changes in floor layouts that are required.

Still, state lawmakers want local governments to try it. They passed a bill earlier this year that allows a city to establish a sales and use tax deferral for developers looking to convert a commercial building into affordable housing. The law passed almost unanimously in the state Legislature. The only people opposing the proposal were Sen. Bob Hasegawa, D-Tukwila, and Democratic Reps. Frank Chopp, of Seattle, and Mia Gregerson, of SeaTac.

In order to receive a deferral under the new law, the project must consist of multifamily housing units with at least 10% considered affordable to low-income households, and it must be located on what the city considers underutilized commercial property.

If a project maintains those qualifications for at least 10 years, the sales and use taxes would not need to be repaid.

On Tuesday, Michele Thomas, at the Low Income Housing Alliance, encouraged the Department of Revenue to find a way to ensure that the projects receiving the deferral remain affordable after they are built.

Under the new law, the Joint Legislative Audit and Review Committee is charged with evaluating the tax break’s effectiveness. By 2032, the committee must review whether the number of affordable housing units has increased because of the incentive. If it has not, the Legislature intends to repeal the deferral, according to the law.

While cities and towns can issue their own resolutions for what a sales and use tax deferral might look like, they must follow the forthcoming guidance from the Department of Revenue. The department is still looking for clarification on whether adjacent property, such as parking lots, would be eligible for a deferral, and whether demolishing an existing building for new housing would qualify, staff said.

While the department finishes their work, local jurisdictions are preparing.

Rolwes said Tuesday that the Spokane City Council has already enacted a resolution requesting quick completion of the rulemaking process and a resolution that states their intent to enact the incentive as soon as possible.

He said the city has a number of projects downtown that could qualify for this incentive and are awaiting approval from the state.

The city of Seattle is also prepared to implement the deferral, said Geoff Wentlandt, planning manager at the city.

Earlier this month, the Seattle City Council also voted unanimously to exempt conversion projects from some regulations and fees. The city plans to use both the new state tax incentives along with the local changes in an attempt to build more housing more quickly.