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Include mixed-use buildings in new long-term rental class

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Hawaii County Finance Committee on June 18, 2024.
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June 18, 2024, 1 p.m.
Hawai‘i County Building

To: Hawai‘i County Finance Committee
      Matt Kaneali’i-Kleinfelder, Chair
      Cindy Evans, Vice-Chair

From: Grassroot Institute of Hawaii
           Jonathan Helton, Policy Researcher

RE: BILL 104 — RELATING TO THE CREATION OF A LONG-TERM RENTAL CLASS FOR REAL PROPERTY TAXES

Aloha Chair Kaneali’i-Kleinfelder, Vice-Chair Evans and other Committee members,

The Grassroot Institute of Hawaii would like to offer its comments on — and a proposed amendment to — Bill 104, draft 5, which would create a new real property tax class specifically for long-term rental properties that do not currently fall into the “affordable rental housing” class.

To qualify for the new class, a property would have to be leased for at least six consecutive months and occupied for at least 12 months by the same tenants.

Properties moving into the new class would presumably move out of the existing residential class — provided no property in the residential class valued at $2 million or more would be eligible to move, according to the bill.

Finally, the bill would set the rate of the long-term rental class at 130% of the rate of the homeowner class for the first year of its existence. At current rates, this would entail a tax levy of $7.74 per $1,000 in assessed value for the new class.

We appreciate the intent of the bill. Using the property tax to incentivize property owners to rent long-term is a good goal that could help with the county’s housing shortage. For example, an $800,000 property moving from the residential class to the long-term rental class could save about $2,700 a year.

We would caution the Council, however, against increasing tax rates on other classes to pay for whatever revenue loss could come about as a result of this bill — especially in the near term.

A higher tax rate on the residential class, for example, could unintentionally penalize long-term rental owners who did not know about the new class or who did not file for it because of special lease circumstances that could make compliance difficult.

As to our suggested amendment, we urge the Council to update the bill to make mixed-use buildings eligible for the new exemption. Anyone leasing a unit in a building with commercial uses in Hilo or Kailua-Kona would not be able to benefit from this new exemption.

This is an approach that has been replicated elsewhere. Maui County’s code states: “If a portion of the premises is used for commercial purposes, such portion of the premises will not be entitled to an exemption, but will be entitled to an exemption with respect to the portion thereof used exclusively as a long-term rental.”[1]

The Council could easily designate this language as part 5(C) of Section 4 of this bill.

Further, if the Council advances this measure, we suggest that it pass Bill 174 concurrently. That bill would protect homeowners who rent a room or a backyard cottage at market rates from losing their homeowner exemptions as a result.

Under Bill 104, homeowners who rent portions of their properties long-term would face higher taxes if they applied for the long-term rental class, which would clearly run counter Bill 174’s goal of encouraging long-term rentals. So to minimize confusion, please consider passing the bills at the same time.

Thank you for the opportunity to testify.

Jonathan Helton
Policy Researcher
Grassroot Institute of Hawaii
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[1] Maui County Code, 3.48.466 – Long-term rentals—standards for valuation, accessed Dec. 14, 2023.

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