Retail Sales and Use Tax.
Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes were not collected when the user acquired the property, digital products, or services, then use tax applies to the value of property, digital product, or service when used in this state. The state, all counties, and all cities levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary from 0.5 percent to 4.0 percent, depending on the location.
Tax Incentives for Creating or Developing Affordable Housing.
The Multi-Family Property Tax Exemption.
All property is subject to a tax each year based on the highest and best use, unless a specific exemption is provided. The Multi-Family Property Tax Exemption (MFTE) exempts real property associated with the construction, conversion, or rehabilitation of qualified, multiple-unit residential structures located in residential targeted areas contained within an urban center.
The MFTE applies only to the value of the construction, conversion, or rehabilitation projects and does not exempt the value of the underlying property or other improvements on the property.
The MFTE on qualifying property lasts for eight consecutive years. However, the exemption is available for a 12-year period if the owner commits to renting or selling at least 20 percent of multiple-family housing units as affordable housing to low- and moderate-income (LMI) households.
For the purpose of the MFTE, affordable housing is housing for low- to moderate-income households that does not exceed one-third of the household's monthly income. Low-income households must have an income that is no more than 80 percent of the median income of their county. Moderate-income households must have an income between 80 and 115 percent of the median income of their county.
Low-Income Housing Tax Credit Program.
The Washington State Housing Finance Commission (Commission) administers the Low-Income Housing Tax Credit (LIHTC) program, which finances construction of low-income housing through federal tax incentives. Housing financed through the LIHTC program must be affordable to households with incomes at 60 percent of the area median income (AMI) or less. LIHTC provides an indirect subsidy to housing developers where federal tax credits are allocated at the state level. The Commission awards these state tax credits to developers under two different LIHTC programs. Under one LIHTC program, after a competitive application process in which projects are evaluated and scored according to established policy criteria, a developer may receive a 9 percent tax credit that typically generates equity for 70 percent of a project's development cost. Scoring categories include type of population served, targeted income levels, length of commitment to keeping units affordable, project costs, project location, and developer type. Tax credits are limited to an annual allocation to each state on a per capita basis. The Commission partners closely with the Department of Commerce (Commerce) to align the competitive process with the state Housing Trust Fund (HTF), where, for example, 75 percent of projects under this program included HTF funding in 2019. Nonprofits and housing authorities are typical recipients, although for-profit developers are eligible under this program especially when establishing partnerships with nonprofits. Under a second LIHTC program, a developer may receive a combination of a 4 percent tax credit and tax-exempt bonds that typically generates equity for 30 percent of a project's development costs as long as 50 percent of the costs are financed by tax-exempt bonds. Tax credits are unlimited in this program. Typical eligible recipients are nonprofits, housing authorities, and for-profit developers. Under both LIHTC programs, the developer transfers the credits to an investor that funds the housing. The investor becomes a majority owner of the housing and uses the credit to reduce its federal income tax liability. The developer uses the money received from the investor to build low-income housing.
Property Tax Exemption Program.
A city governing authority (City) may establish a Property Tax Exemption Program (Program) for commercial properties which are converted into multiunit residential buildings that contain affordable housing units for low-income households.
"Governing authority" means the legislative authority of a city having jurisdiction over the property for which an exemption may be applied.
"Low-income household" refers to households whose income is at or below 80 percent of the area median income where the building is located.
"Affordable housing" means either of the following:
To qualify for a property tax exemption, the building must:
Under the Program, the value of qualifying property is exempt from ad valorem property taxation for 30 successive years starting the year after application for exemption is approved.
To be eligible for the tax exemptions, the property must be in compliance with the following for the entire exemption period:
Program Application.
Once an application for exemption is approved, the following must occur:
If an application is denied, the reasons for the denial must be provided in writing and notice of the denial must be issued within 10 days of the denial. An applicant may appeal this decision, and the appeal must be submitted within 30 days after the applicant's receipt of the denial decision.
The application expiration date is December 31, 2029.
Requirements of Owners.
The owner of a property which receives a tax exemption, must:
If an owner intends to discontinue compliance with the affordable housing requirements of the Program, the owner must notify tenants and the jurisdiction 60 days before the owner's discontinuance.
If the owner intends to convert any affordable housing rental units to market rate units before the 30-year exemption period or after the exemption period ends, the owner must:
Requirements of Cities.
A City that issues a tax exemption must report the following to Commerce every year:
If the City is notified by the owner, or if the City discovers that a portion of the property no longer meets the qualifications of the tax exemption, the tax exemption is canceled, and the following apply:
When a City plans to cancel a tax exemption, the City must notify the taxpayer and the county assessor. The owner may appeal the determination within 30 days of the date of the notice by filing a notice of appeal with the clerk of the governing authority.
If a City adopts an existing building conversion exemption program to provide the tax exemptions described above, it must modify that program to include the qualifying standards for affordable housing described above.
Tax Incentives for Property Conversion.
An exemption is created for sales and use tax imposed on goods and services incorporated as a component of a conversion of a commercial building into affordable housing.
To qualify for the sales and use tax exemption, the owner of a commercial building which is converted into affordable housing must rent or sell a minimum of 10 percent of the residential units in the property to low-income households for at least 10 years. If the owner intends to discontinue compliance with the affordable housing requirements or the department discovers that eligibility conditions for the exemption are no longer met, the owner must repay the total amount of the exemption received plus a 20 percent penalty.
As compared to the original bill, the substitute bill:
(In support) This bill creates incentives for the production of affordable housing by providing a means to leverage existing buildings for that purpose. This is important for areas where there is not much land left to build on. The bill takes much of the vacant space we see now and utilizes it to create the affordable housing we need. This bill helps our climate by reducing impacts of commuting and by tearing down or building new structures. This bill helps economic vitality of downtown areas by filling empty spaces, and it utilizes space that is available now making it something we can begin doing immediately.
Work has been done to determine the appropriate number of affordable units to produce a public benefit by creating affordable housing units the way that this bill seeks to encourage. The private sector needs to be involved in our solution to the affordable housing issues we face. This bill provides that by applying to existing buildings rather than waiting for new buildings which face issues including supply issues. These projects are challenging and the incentives this bill provides seeks to address those challenges.
Work has been done to understand what number of affordable units is the right number to produce a public benefit by creating affordable housing units the way that this bill seeks to encourage.
Commercial to residential conversion projects are very expensive due to the unique challenges they present. The incentives this bill provides will make it feasible for developers to begin working on these projects where before they may have chosen not to due to cost concerns.
In commercial real estate we live and die on a five to seven year leasing cycle and leases put in place before COVID-19 will begin to terminate over the next 12 to 18 months leaving a commercial cliff that threatens the viability of downtowns across the state. We urgently need to consider incentives can be used to revitalize commercial buildings while also providing needed housing options. This bill provides such an incentive.
This bill would provide one more tool for us to add to our toolbox to help incentivize that workforce housing for both renters and homeowners.
(Opposed) None.
Representative Amy Walen, prime sponsor; Tim Cavanaugh, Marc Angelillo, and Briahna Murray, Urban Housing Ventures; Chris Batten, 135; Teri Stripes, City of Spokane; Carl Schroeder, Association of Washington Cities; Angela Rozmyn, Natural and Built Environments; and Representative Spencer Hutchins.
The second substitute bill makes the following changes to the substitute bill:
(In support) There have been several iterations of this bill the past few years. The housing crisis in our state cannot be fixed by using our state capital and operating budgets. The private sector must be engaged to help solve this problem. Many current housing conversion projects are on hold due to high interest rates, labor shortages, and supply chain issues. This bill is the result of trying to think creatively about how to use existing buildings that are often vacant to create affordable homes for people. It also recognizes that converting commercial buildings to residential use is not straightforward and can be costly. Sometimes internal walls, plumbing, and electrical needs to be redone, and to make projects a reality, an incentive to do that is necessary. This bill also creates climate benefits by reducing long commutes, reducing waste because a lot of our landfills are full of construction material, and advancing equity by creating mixed income and mixed-use buildings that will help bring economic vitality back to downtowns and suburban areas. Most importantly, the bill quickly addresses affordability by reducing existing market rate rents and increases housing supply by adding units created from the commercial to residential conversions.
(Opposed) None.
Representative Amy Walen, prime sponsor; McKenzie Darr, National Association for Industrial and Office Parks-Washington Chapter; and Marc Angelillo, Urban Housing Ventures.