D.C. Council Passes Office-to-Resi Tax Relief

New legislation in Washington, D.C., is set to cut the tax rate for office-to-residential conversion projects in half, reversing a tax policy instituted last fall. 

The measure, unanimously approved Tuesday by the D.C. Council, allows for office properties slated for residential conversion to be designated as a residential property once the city has issued a building permit for the project, rather than when the project is “100 percent complete” and “in actual use.” The measure, proposed by Councilmember Phil Mendelson, now heads to Mayor Muriel Bowser’s desk for approval.

The District’s tax rate for residential properties is significantly less than for commercial properties — 85 cents per $100 of assessed value, rather than $1.65 to $1.89 per $100 of assessed value, respectively. The Business Journals first reported the news. 

The legislation is a U-turn from D.C.’s Office of Tax and Revenue’s (OTR) new policy regarding building classification, which went into effect Oct. 1 alongside a number of other tax changes. Prior to OTR’s autumn rule change, conversion projects could be classified as residential properties at the point of permit issuance, granting them tax relief from the start of the project. It was not immediately clear why OTR opted to change the policy in the first place, though Mendelson’s bill claims that it could negatively impact residential development, as conversion projects often take “years to complete.”

“[OTR’s] policy contradicts the goals of the Housing in Downtown Program, which seeks to revitalize downtown by incentivizing the conversion of vacant or underutilized office buildings into residential properties,” the legislation reads.

Councilmember Mendelson was not immediately available for further comment, though he clarified to the council on Tuesday that the legislation includes a “claw-back provision,” which allows the city to reinstate the commercial property tax rate if a project does not begin construction within roughly three years.

As of early September, there were 12 conversion projects in the pipeline in Downtown D.C., according to Bowser’s office. That includes 615 H Street NW, planned for 72 units; 1625 Massachusetts Avenue NW, set to deliver 157 units; and 1825 and 1875 Connecticut Avenue NW, with 525 units expected between the two buildings. The three projects were chosen by the Bowser administration in October to receive 20-year tax abatement under the Housing in Downtown Program, 

Although their property tax bill has been delayed due to the abatement, the project at 615 H Street NW is still designated as a vacant lot, while the latter two projects are still both currently classified as commercial properties, per OTR’s assessment database.

Nick Trombola can be reached at ntrombola@commercialobserver.com.