New Washington law authorizes tax breaks for affordable housing built on state land

OLYMPIA – Washington’s Department of Natural Resources wants to help solve the state’s housing crisis by offering state land for affordable residential development.

A bill signed into law this year established tax exemptions for construction of affordable housing on public lands. The bill picked up support across the aisle, including a co-sponsorship from local Rep. Suzanne Schmidt, R-Spokane Valley.

The department oversees about 7,000 acres of what it calls “transition lands” – parcels scattered across the state that aren’t viable for logging due to nearby development. More than 3,000 acres of those transition lands are located in cities or urban growth areas zoned for residential construction.

One such parcel of state-owned land is located in Spokane, off South Inland Empire Way across from a Yoke’s Fresh Market. The 39-acre site lies in an area zoned for residential construction and could become home to an affordable housing development with capacity for roughly 200 single-family units under the newly signed state law.

The law, sponsored by Rep. April Connors, R-Kennewick, exempts developers from the state’s 12.84% leasehold excise tax when they commit to renting or leasing units built on transitional lands to low- and moderate-income households.

The Legislature has done some work to address the state’s housing crisis, Connors said in a committee hearing, but it’s lagged to address the need for low-income affordable housing. Washington will need to find a way to build 1.1 million new homes over the next 20 years if it wants to meet projected population growth and demand, according to the state Department of Commerce.

“I think it’s really important for this community to remember that this bill does not affect anything that’s located outside of the urban growth area,” Connors testified. “This really is land that could benefit the state of Washington in affordable housing.”

Under the new law, the Department of Natural Resources won’t be the developer for any of the transitional land housing projects, but it will lease the land and work to facilitate construction. Revenue collected from the leases will go to support K-12 education in Washington.

Developers of transitional lands must show that built housing serves low- and moderate-income residents in order to receive the tax exemption. The housing will also be required to be affordable for at least 20 years following construction.

Commissioner of Public Lands Hilary Franz, who is running for Congress in Western Washington this year, told The Spokesman-Review that the Department of Natural Resources began working to address the statewide housing crisis after the height of the COVID-19 pandemic.

“In much of Washington state, even a stable job with good pay doesn’t mean you can afford a home or afford the rent,” Franz said. “We’ve seen this just with many of our new employees as we have been hiring. A good government salary used to be able to afford a home or afford rent in our more rural communities like Colville or Omak … but now they are struggling to find affordable housing.”

Today, nearly 30,000 Washington residents are unhoused, Franz said. And another 2 million people are burdened by rising housing costs.

“I’m pretty confident the real numbers, actually, are much higher,” Franz said.

Although Franz will vacate her post overseeing 6 million acres of state land at the end of the year, she said she plans to hand over the reins for the affordable housing project to her successor. Building new housing nearby to existing infrastructure is the most sustainable way to do it, Franz said, because it prevents the conversion of forests, wildlife habitat and farmland into residential land.

“This housing crisis is one of the most important issues that the state of Washington is facing,” the commissioner added. “Building housing near our critical amenities like jobs, schools and hospitals is crucial so that we’re not having more and more people looking for homes that are affordable where they need to drive to and from work and other critical services.”

The cost of land accounts for 25% of any affordable housing project, said Krosbie Carter, housing policy adviser with the Department of Natural Resources.

Transition lands in Washington have sat vacant for years. The 3,000 acres of transition lands fit for housing are spread out over 37 potential development sites across the state. Pick any five of those sites and develop them, Crosby said, and you’d be looking at accommodating the construction of between 500 and 800 new homes.

“We aren’t able to just sell it off or give it away for free like other agencies or local municipalities,” Carter said. “It’s just sitting there.”

Right now, the only parcel of transition land being actively developed in the state is a 28-acre plot in Lacey, a suburb of Olympia in Thurston County. The Department of Natural Resources is working with housing nonprofit Habitat for Humanity on the project. When complete, the parcel will be home to 150 new housing units.

“There were concerns about development from the neighbors at the Lacey site,” Carter said. “But there was also the realization that DNR developing this with a partner is better than us selling it off to a private developer and having them put in, you know, unaffordable housing.”

The biggest hurdle for the Lacey development right now is a $2.2 million sewer extension.

Earlier this year, the Department of Natural Resources filed a $2 million capital budget funding request with the state Legislature for money to pay for construction feasibility studies on transitional lands. The request was denied, but the state agency plans to try again next year, Carter said.

“Our hope is to find money to develop these sites and take the infrastructure barrier off of the affordable housing developers,” Carter said. “When you’re doing affordable housing, every cost that developer pays in the beginning is going to be put on the end user. We want to find a way to take that burden off of those households.”