Seattle Passes Bill to Incentivize “Office-to-Residential” Conversions  

The Seattle City Council passed Council Bill 120937 on February 11, 2025, aimed to encourage developers and commercial property owners to convert underutilized commercial properties into residential housing. Set to take effect in 2025, this legislation presents opportunities for developers and owners of commercial property through financial incentives, while also addressing broader community needs.

The commercial real estate market in Seattle, like many other urban areas, underwent significant changes due to the COVID-19 pandemic and its aftermath. Initially, there was an increase in vacancy rates as companies adapted to remote work and economic uncertainty impacted leasing activity, particularly in the office sector. Over time, some businesses have returned to offices, but hybrid work models continue to influence demand for office space.

This legislation is part of Seattle’s objective to invigorate urban areas, particularly focusing on downtown and other zones where residential or mixed-use development is appropriate. This aligns with efforts to enhance economic vitality and increase housing availability.

The legislation allows for the deferral of the 10.3 percent sales and use taxes on construction costs for eligible conversion projects, which helps mitigate upfront costs for developers. The deferred taxes will become due if the project does not comply with the stipulated requirements or fails to remain in eligible use during the specified period. Developers may also combine this tax deferral with the Multifamily Housing Property Tax Exemption under SMC Chapter 5.72 or Chapter 5.73, further promoting the economic benefits by reducing property tax obligations.

Eligibility for the conversion of underutilized commercial properties into residential housing under this legislation involves the following key criteria: (1) The property must be classified as “underutilized commercial property,” which is defined as a “property or portions thereof currently used or intended for retailing, office-related, or administrative activities” (notably, neither this definition nor the legislation provides an explanation as to what constitutes “underutilization,” thus potentially allowing for broad leeway in identifying commercial properties that could qualify for this tax relief); (2) The property must be located in a zone permitting residential or mixed-use redevelopment (this requirement is designed to ensure a seamless transition to residential use); and (3) The property must not have been acquired through eminent domain as per Title 8 RCW.

Once conversion eligibility is established, a comprehensive application must be submitted to the Seattle Office of Planning and Community Development. This application should include detailed project descriptions and site plans, along with projections for both affordable and total dwelling units that will be created.

The conversion project must designate at least 10 percent of the units as affordable housing. The entire project must be completed within three years after the issuance of the conditional certificate of program approval, adhering closely to the initial project plans and compliance with the affordable housing projections.

After the project is completed, final compliance reports must be submitted and a certificate of occupancy secured. There is also an obligation to conduct annual reporting for 10 years to maintain the tax benefits associated with the project. The property must be maintained for eligible purposes throughout the specified period to avoid triggering deferred tax liabilities.  

This new legislation offers a number of potential impacts to the City. For one, it mandates the inclusion of affordable housing units, which directly addresses housing accessibility for low- to moderate-income families. In addition, the conversion of commercial spaces is expected to enhance economic and urban revitalization by increasing downtown activity, which benefits local businesses and contributes to the overall vibrancy of the community. Moreover, the redevelopment process is likely to improve public amenities and infrastructure, providing benefits to both residents and visitors alike.

California, Nevada, and Arizona are also experiencing a notable shift in their approach to addressing housing shortages – particularly in affordable housing – through various zoning relief measures. Click here to read more about these initiatives in our prior Advisory.

Attorneys in Ballard Spahr’s Housing Group stay informed on ongoing developments and are available for counsel.