In response to a policy change recently enacted by the District of Columbia's Office of Tax and Revenue (OTR) and at the request of Chairman Phil Mendelson, the D.C. Council unanimously approved emergency legislation intended to facilitate commercial-to-residential conversions. The following measures were approved at the D.C. Council's Legislative Meeting on March 4:
- PR26-0102. Residential Building Permit Classification Emergency Declaration Resolution of 2025
- B26-0149. Residential Building Permit Classification Emergency Amendment Act of 2025
- B26-0150. Residential Building Permit Classification Temporary Amendment Act of 2025
Under OTR's new policy that was issued on Oct. 1, 2024, a property owner could not request reclassification of its property from Class 2-commercial to Class 1-residential until the construction was "100 percent complete" and the building was "in actual use." Previously, owners could benefit from such reclassification earlier in the redevelopment process. The approved legislation aims to reinstate OTR's former approach to commercial-to-residential conversions. Now, a property undergoing such a conversion may be reclassified once a building permit has been issued, as opposed to when the project delivers.
OTR determines the "class" of each lot of real property in the District, which then dictates the real property tax rate applied to the property. Whether a property is classified as Class 2-commercial or Class 1-residential can have significant financial implications. Class 2 property tax rates, ranging from $1.65 to $1.89 per $100 of assessed value, are roughly double the tax rates for a Class 1 property, which range from $0.85 to $1.00 per $100 of assessed value. Improved properties that the Department of Buildings deems to be vacant (Class 3) or blighted (Class 4) are subject to even higher tax rates ($5.00 per $100 of assessed value and $10.00 per $100 of assessed value, respectively). Thus, it is critical for owners to register their properties when they become vacant to avoid additional penalties. If circumstances allow, owners should alternatively pursue an exemption from the vacant property tax rate.
According to Chairman Mendelson's introductory memorandum, OTR's updated policy had the potential to stifle residential development, particularly commercial-to-residential projects that can take years to complete. Additionally, the policy contradicted the District's efforts to revitalize downtown by incentivizing the conversion of vacant or underutilized office buildings into residential properties.
Pursuant to the emergency actions, the changes to the D.C. Code are effective immediately, but expire after 90 days. The Temporary Amendment Act (B26-0150) extends these new measures for up to 225 days, allowing the council sufficient time to enact permanent legislation.
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