City of Seattle: Tax deferral for building conversions from Commercial to Residential
On February 11, 2025, the Seattle City Council passed Council Bill 120937, a pivotal piece of legislation designed to incentivize the conversion of underutilized commercial properties into residential housing. This initiative, set to take effect in 2025, aims to address both the city's housing shortage and the challenges faced by the commercial real estate market in the wake of the COVID-19 pandemic.
The pandemic significantly impacted Seattle’s commercial real estate, leading to increased vacancy rates, particularly in the office sector, as businesses adopted remote and hybrid work models. This legislation represents Seattle’s strategic effort to reinvigorate urban areas, particularly downtown and other zones suitable for residential or mixed-use development, thereby enhancing economic vitality and increasing housing availability.
The legislation provides financial incentives by allowing developers to defer the 10.3 percent sales and use taxes on construction costs for eligible conversion projects. This deferral helps mitigate upfront expenses, making such projects more financially viable. Furthermore, developers can combine this tax deferral with the Multifamily Housing Property Tax Exemption under SMC Chapter 5.72 or Chapter 5.73, further reducing property tax obligations and enhancing economic benefits.
Eligibility for this tax deferral program is contingent upon several key criteria. Firstly, the property must be classified as “underutilized commercial property,” defined as a property or portions thereof used or intended for retailing, office-related, or administrative activities. Notably, the legislation does not explicitly define “underutilization,” providing potential flexibility in identifying qualifying properties. Secondly, the property must be located in a zone permitting residential or mixed-use redevelopment, ensuring a smooth transition to residential use. Lastly, the property must not have been acquired through eminent domain as per Title 8 RCW.
Developers seeking to utilize this program must submit a comprehensive application to the Seattle Office of Planning and Community Development, including detailed project descriptions, site plans, and projections for both affordable and total dwelling units. Crucially, at least 10 percent of the units must be designated as affordable housing. The entire project must be completed within three years of receiving a conditional certificate of program approval, adhering closely to the initial plans and affordable housing projections.
Post-completion, developers must submit final compliance reports and secure a certificate of occupancy. They are also required to conduct annual reporting for ten years to maintain the tax benefits. The property must remain in eligible use throughout this period to avoid triggering deferred tax liabilities.
This legislation is expected to have significant positive impacts on Seattle. By mandating affordable housing units, it directly addresses housing accessibility for low- to moderate-income families. The conversion of commercial spaces will also enhance economic and urban revitalization by increasing downtown activity, benefiting local businesses and contributing to community vibrancy. Furthermore, the redevelopment process is likely to improve public amenities and infrastructure, benefiting both residents and visitors.