The Department of Revenue has produced interim guidance on administration of this incentive, which allows for applications to be submitted before final rulemaking to be adopted into the Washington Administrative Code. Please note, final regulations may change during DOR’s rulemaking process.
In 2024, the Legislature passed Senate Bill 6175, to create a meaningful redevelopment incentive to stimulate the rehab of underutilized commercial buildings through the use of a sales and use tax deferral program. The incentive assists property owners in converting existing commercial buildings into affordable housing, particularly addressing post-Covid work and real estate trends to give such buildings new use.
Under Chapter 82.59 RCW, in coordination with a local government the Department of Revenue can issue a sales and use tax deferral certificate for the conversion of existing, underutilized commercial to create at least four affordable multifamily units. Utilizing the tax deferral certificate, a property owner does not have to pay sales or use taxes on the construction costs of residential improvements. The property owner would still pay sales and use tax on non-residential improvements, like the commercial portion of a mixed-use building.
In support of increasing the housing supply, the City of Spokane has adopted code enabling use of the Underutilized Commercial to Affordable Housing Sales and Use Tax Deferral (aka Commercial Conversion). This incentive helps the City to realize the goals of the recently updated Downtown Plan, while also encouraging construction of more affordable housing and providing the benefit of more construction jobs. You can review the Ordinance C36548 for the municipal regulations, which become effective September 15, 2024.
Economic Development is currently only accepting PDF applications. Please fill out the Commercial Conversion application and supporting documents and email it to incentives@spokanecity.org.
The Department of Revenue oversees the statewide Underutilized Commercial to Affordable Housing Sales and Use Tax Deferral program. Chapter 82.59 RCW directed the DOR to develop an apportionment rule, which will be finalized in the WAC.
Eligible Buildings:
Apportionment is calculated using the following:
(SF of qualifying use) / (Total SF) = Percent of qualifying use
(Percent of qualifying use) x (Estimated costs for SF of qualifying use) = Estimated eligible costs
(Estimated eligible costs) x (Local tax rate) = Estimated tax deferral
Please reach out to staff inquiring about a site early in the development planning process by emailing incentives@spokanecity.org.
Property owners can expect to save approximately $900 for every $10,000 spent on applicable taxed goods and services. The savings rate is based upon the City’s sales tax rate, and therefore will vary in future years as rates change. Download the Sales Tax Estimated Savings Calculator to help you estimate the possible sales tax savings. Please note, the Department of Revenue has ultimate authority over final sales tax savings.
Examples of applicable items that a project may defer sales tax on include:
The Department of Revenue requires an application for each building in a project, and if a project is to be phased. Under Commercial Conversion, projects must be completed within 3 years of approval from the City and the DOR. A property owner may request one 24-month extension before expiration of the Conditional Contract. The deferral certificate expires the day the property owner receives the certificate of occupancy.
To receive approval, a project must set aside at least 10% of the units as affordable rental housing or affordable homeownership housing. At least 10% of the investment project set aside for multifamily housing units will be rented at a price at or below median rent for Spokane county or sold at a price at or below Spokane county median price.
How is affordable defined for Commercial Conversion?
“Affordable housing” is rented by a person or household whose monthly housing costs, including utilities other than telephone, do not exceed 30% of the household’s monthly income. Different price points are affordable for different income levels. For housing incentivized through Commercial Conversion “affordable housing” means residential housing that is within the means of low- or moderate-income households.
Please refer to Spokane 2024-2025 Area Median Income and 2024-2025 Max Rent by Household Size published each year for the City’s Multifamily Tax Exemption Program. Income restrictions are defined by State law in RCW 82.59.010.
Economic Development is currently only accepting PDF applications. Please fill out the Commercial Conversion application and email it to incentives@spokanecity.org. A complete application must include photos of the site, a copy of the property owner’s state business license, and DOR Form 81 1041.
You can reach out to the Economic Development team with questions on potential sites even before you submit for a Pre-Development conference. We highly encourage reaching out early so that our team can see what other city or state incentives can apply to your project, as well as verify with DOR they find the proposed project to be eligible. DOR has noted in their rulemaking that the Commercial Conversion program can be layered with the MFTE incentives. Please note that layering incentives requires additive affordable units for a project, i.e. for a 96-unit building approved for both Commercial Conversion and the 12-year MFTE, a total of 10 units for Commercial Conversion and 29 units for MFTE would be required.
Projects that maintain affordability throughout the required 10-year period can expect to save approximately $900 per $10,000 of construction value on the affordable housing constructed. The deferral of sales tax is only applied to the residential portions of the project in the case of mixed-use buildings, or improvements that serve both uses (e.g. an elevator used by both the residential and commercial uses in the building). Download the Sales Tax Estimated Savings Calculator to help you estimate the possible sales tax savings. The Department of Revenue will calculate the final deferred tax amount using actual construction receipts.
Conditional Commercial Conversion Contracts are valid for three years. If construction has not been completed, an applicant may request in writing an extension for one 24-month extension. For an overview of the application timeline please see the Commercial Conversion Application Timeline.
| Application Fees | |
|---|---|
| Conditional Commercial Conversion Contract | $1,000 per building |
| Final Commercial Conversion Certificate | $2,000 per building |
| Conditional Commercial Conversion Extension | $1,000 per building |
One year from the issuance of the certificate of occupancy, and each year for ten years, the property owner needs to complete annual compliance reporting. Compliance reporting will take two forms: tax reporting to the Department of Revenue, and affordable housing compliance to both the City of Spokane and the Department of Commerce. The affordable housing reporting is similar to annual reporting for a Multifamily Tax Exemption, and DOR and Commerce are currently working out the requirements.
The DOR will require that the property owner complete an Annual Tax Performance Report certifying that the property is compliant with its contract, submitted to the Department of Revenue through the MyDOR.gov portal (see details on dor.wa.gov). This is due May 31 each year for the ten-year period.
To comply with Commerce’s monitoring of the affordable housing created through this incentive, property owners will submit to the City an annual report detailing the affordable units, the household information (including tenant leases and income verification), monthly unit rent, and any changes to the building since the certificate of occupancy was issued. As of September 2024, details on this reporting are still forthcoming, but City staff recommend property owners utilize the guidelines for compliance and auditing Commerce has released concerning Multifamily Tax Exemption, you can read the MFTE Property Tax Exemption Audit Program Guide.
Compliance with the Underdeveloped Urban Land Sales and Use Tax Deferral program will be overseen by both the Department of Revenue and the Department of Commerce. One year from the issuance of the certificate of occupancy, and each year for ten years, the property owner will need to submit compliance reporting.
The city must notify the Department of Revenue if compliance with the program is not maintained. All deferred sales and use taxes would then be immediately due and payable. The DOR would assess interest at the rate provided for delinquent taxes and penalties retroactively to the date of deferral, per RCW 82.59.110.
Planning & Economic Development Department
Economic Development Team
509.625.6500
incentives@spokanecity.org
