The following testimony was submitted Feb. 7, 2023, by the Grassroot Institute of Hawaii to the Senate committees on housing, water and land, and government operations.
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Feb. 7, 2023
11:15 p.m.
Conference Room 225 & Videoconference
To: Senate Committee on Housing
Senator Stanley Chang, Chair
Senator Dru Mamo Kanuha, Vice Chair
Senate Committee on Water and Land
Senator Lorraine R. Inouye, Chair
Senator Brandon J.C. Elefante, Vice Chair
Senate Committee on Government Operations
Senator Angus L.K. McKelvey, Chair
Senator Mike Gabbard, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: SB865 — RELATING TO HOUSING
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on SB865, which would establish the ALOHA homes program to facilitate the development and lease of low-cost homes for Hawaii residents.
The proposal before the committee accurately identifies many of the causes of the state’s housing crisis and makes a laudable attempt to eliminate some of the barriers to affordable housing.
In particular, this bill would create thousands of leasehold housing units,[1] which would help ease the demand for housing in Hawaii.
However, we have concerns about the possible unintended consequences of this bill. Among them are:
>> Public sector projects cost more
The bill optimistically posits that the ALOHA Homes program would not end up costing Hawaii’s taxpayers, but there is no guarantee that the plan would be economically sustainable without substantial infusions of taxpayer funding, as its supporters intend.
Our experience with the Honolulu rail project is sufficient to demonstrate that projected costs on public works projects do not necessarily reflect actual costs. In any government project, costs are likely to exceed original estimates.
For example, housing constructed pursuant to SB865 would be subject to HRS 104, which requires the use of prevailing wages,[2] which would raise costs higher than projects built in the private sector.
Additionally, Hawaii “encourages” the use of project labor agreements on projects worth at least $25 million,[3] and this has been demonstrated to raise the cost of government contracts by 12% or more.[4]
So what happens if the construction and maintenance costs of the ALOHA homes outstrip projections? Either the prices of the home leases will go up, undermining the intent of providing low-income residents with low-cost homes, or Hawaii taxpayers will end up footing the bill.
Given that construction costs alone in Honolulu are generally 38% higher than on the mainland,[5] the only responsible option is to plan for higher-than-expected costs for this project.
Both of these factors would add to construction costs, making it harder for ALOHA homes projects to pencil out.
However, if legislators choose to move forward with this proposal, we suggest taking out the Chapter 104 requirement to use prevailing wages, since it would allow more flexibility to potentially use less expensive labor, which could translate into lower lease prices.
>> 99-year leases
One of our greatest concerns is the 99-year leases that are at the heart of the ALOHA homes program.
Buying a 99-year lease means that one day the leaseholders will no longer have the right to occupy their units. In essence, the leases trade temporary stability for long-term headaches concerning transfer and value. This makes leasehold properties less valuable and less desirable than comparable properties that could be purchased fee simple.
Another strike against leasehold units is that in some instances they cannot be borrowed against for a loan, which takes away the ability of their occupants to borrow against the properties to start a business, invest or otherwise contribute to the local economy.
One of the reasons that home ownership is considered a path to upward mobility is because it creates equity. But the ALOHA homes program is not providing people with the advantage of home ownership. It is simply providing them with shelter and robbing them of the opportunities and financial security that flow from home ownership.
The example of the Hawaiian Home Lands program with its 99-year leases should be enough to demonstrate that leaseholds create administrative headaches for both the government and the lessees. What they don’t create is intergenerational wealth, though we acknowledge that this proposal would nonetheless add to Hawaii’s housing stock.
>> Traps the tenant
Another concern is that under the ALOHA Homes plan, the leaseholders face strict limits on their ability to sell their leases.
This bill says the state would be entitled to 75% of any profits from the sale of the leases to other parties. In addition, if the leaseholders did want to sell, the state would get the right of first refusal. Moreover, the price at which a leaseholder could sell, either to the state or another buyer, would be fixed according to a formula determined by the state.
There also would be limits on the ownership of other real property while one is the leaseholder of an ALOHA home.
This all means that anyone who leases an ALOHA home would be trapped in the property, unable to sell it without taking a loss.
If enacted into law, the bill would incentivize holding on to the leasehold for as long as possible over purchasing another property — even when the “need” for an ALOHA home has passed.
Thus, the ability of the program to address perpetual shortages in affordable housing would be limited to the state’s ability to build new homes.
For this reason, we recommend removing the requirement that the state is entitled 75% of the profits when lessees sell their leases to other parties. This would allow the leaseholders the flexibility to leave their units while building equity with which to move up the housing ladder, start a business or invest in our economy.
>> No incentive to improve the property
Property improvements generally are made by owners who hope to profit from the increased value they create. However, because the ALOHA homes program would not allow the lessees to profit from the sale of their properties, there would be no incentive to improve the units.
When improving and caring for a property is disincentivized, repairs and maintenance often fall by the wayside. Therefore, ALOHA homes units could eventually fall into disrepair.
The effect would be similar to that of rent-controlled apartment buildings in New York and San Francisco, where the lack of financial incentive to spend on upkeep has resulted in neglected, deteriorating buildings — with their physical state matching their reduced and restricted market prices.
To address this potential problem, the bill includes a requirement that each development establish an operating and maintenance program, along with the funding to cover that cost.
This requirement would further increase the price of each project, and it is not clear if this would even help much, since tenants still would not have any incentive to upkeep their units, which they do not own, over the long term.
To put it bluntly, the ALOHA homes program risks becoming another government housing project in the worst sense of the term.
Allowing the homes to be sold one day fee simple would at least create an incentive to invest in the maintenance of the property.
>> Does not provide rentals
The ALOHA homes program would have a limited effect on the amount of housing available and would not lower the cost of rent, since no new rentals would be added to the housing stock. Thus, while the intent of SB865 is to address Hawaii’s lack of affordable housing, the bill overlooks a significant factor in the housing market — rentals — especially for those who cannot make use of the program.
>> Suggestions
Hawaii has the most restrictive barriers in the nation to the creation of housing,[6] so we urge lawmakers to reduce those regulations regardless of the outcome of this bill.
We also recommend creating some mechanism by which the properties could be sold fee simple, perhaps at the end of the leasehold period. We also recommend changing references to “owners” in the bill to “leaseholders,” which is more technically correct.
Additionally, the section should be deleted that allows the state for the purpose of building ALOHA Homes to take private property through eminent domain. This would otherwise present a grave worry to private landowners across the state.
We also applaud the bill’s exemption from the general excise tax in Section 3, and impact fees in Section 4, since these exemptions would at least help lower the price of the units.
Finally, we are open to further discussions about options that could improve on the ALOHA Homes model.
Thank you for the opportunity to submit our comments.
Sincerely,
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] Stanley Chang, “ALOHA Homes: An Innovative Solution to Hawaii’s Housing Shortage,” Presentation at the Hawaii State Capitol, Nov. 16, 2018, video at 30:06.
[2] SB1_SD1 of 2021, p. 13 which states, “Development shall be subject to chapter 104.”
[3] “Council approves PLAs despite many concerns,” Grassroot Institute of Hawaii, Oct. 9, 2019.
[4] “Honolulu City Council’s PLA proposal is pilau,” Keli’i Akina, Grassroot Institute of Hawaii, Oct. 20, 2019; Paul Bachman and David G. Tuerck, “Project Labor Agreements and the Cost of School Construction in Ohio,” The Beacon Hill Institute, May 2017, p.1; and Vince Vasquez, Dr. Dale Glaser and W. Erik Bruvold, “Measuring the Cost of Project Labor Agreements on SchooL Construction in California,” National University System Institute for Policy Research, 2011, p. 10.
[5] “ENR Square Foot Costbook 2019 Edition,” Engineering News-Record, 2018, p. 174.
[6] Carl Bonham, Justin Tyndall and Rachel Inafuku, “Measuring the Burden of Housing Regulation in Hawaii,” The Economic Research Organization at the University of Hawaii, April 14, 2022.
