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Pu'u 'O'o crater floor continues to erupt lava as Hawaii Senate floors get some heat from vacation rental owners

Hawaii crater floor continues to erupt lava while Senate's floors get some heat from vacation rental owners

The purpose of Senate Bill 2089, which calls for any non-resident (out of island) owner who rents out their vacation accommodation in Hawaii to employ a property manager, is supposed to be for Hawaii to ensure it collects taxes from short term rentals.

But are they going about it the right way? Are they only after taxes or something more?

While Hawaii aims at ensuring it gets its taxes, we’ve been hearing from many owners who do pay their taxes on time and employ local Hawaiians to help them manage their rental business. They express fear of overhead costs associated with employing a property manager approved by the real estate commission. There has long been bad blood between individual owners and property management companies. One vacation rental owner shared her experience of hiring a prominent management company in Hawaii:

On almost ALL of my monthly revenue reports, they took more money than they were entitled to take. Instead of 45%, they would take 47% or 48%. When I questioned them, they always paid me back very quickly and apologized. However, never, ever was an error in my favor…always theirs. They were totally skimming off the top and I’ll bet they did it to all the owners and nobody bothered to double check their math. They would frequently upgrade angry guests who booked “parking lot view condos” to my oceanfront condo for $135/nt!! I was sick of getting ripped off by them and having my condo trashed by guests who couldn’t even afford the Motel 6! So I fired them. I don’t ever want to go back to them…ever!

Her next statement is even more telling:

The other management company I used, Luxury Kauai, didn’t bother to pay my taxes for an entire year! Guess who got stuck paying the interest and penalties?

This defeats the stated purpose of the Bill – for Hawaii to collect tax revenue accordingly.

Writing for Maui News, Adam Yanow, a vacation rental owner from California, expressed his frustration with management companies which he sees as the force behind SB2089. Fearing foreclosure, Adam writes:

This is just another attempt by rental managers to increase their profit margin at our and our guest’s expense…. I, for example, am at least 20 percent underwater on my mortgage already due to the recession. This bill will force me into foreclosure.

The Senate Committee set a 48 hour period to deliberate on the Bill with added amendments, which is set for tomorrow March 6th. Amendment 6 again asserts the preeminence of a middleman in the vacation rental business by requiring

advertisements for every transient accommodation located in the State to include the name and phone number of a local point of contact for each transient accommodation, and establishing fines for noncompliance.

This would interject a middleman and consequently increase overhead costs, effectively ending the practice of vacation rentals by owner if you are running the rental as a non-resident.

Amendment 7 comes closest to a compromise. It states,

Permitting nonresident owners who obtain an annual tax clearance … to be exempt from the mandatory employment of a licensed real estate broker or salesperson or condominium hotel operator proposed by this measure.

However, there is no clear understanding what it takes to qualify for the exemption. While this gesture is viewed as a possible workaround for those non-residents targeted by Bill 2089, the amendment raises many new questions, mainly, What are the costs – both financial and labor?

Many vacation rental owners feel there are already sufficient measures in place at the local level to address taxation. In the words of Senator Baker, these measures “strengthen enforcement of tax laws and enhance consumer protection in the State’s transient vacation rental market….”

It seems the only proponents of the bill are those who will directly benefit financially from the Bill’s passage:

the City and County of Honolulu Department of Planning and Permitting; Maui Hotel & Lodging Association; Condominium Rentals Hawaii; Poipu Beach Resort Association; West Hawaii Property Services, Inc.; Waikoloa Vacation Rental Management; and four individuals.

On the other hand, testimony in opposition came from

Hawaii Vacation Rental Owners Association; The Travel Group; Trading Places International; Hanalei Bay Resort; Makana Mai Ka Lani; Hot Spot Tax Services; Sunshine & Rainbows, LLC; Humiston and Company, CPAs; and numerous individuals.

An analysis of testimonies of those in favor of the measure and those opposed turned up interesting findings.

Total votes to support – 28

Total votes to oppose – 706

1 vote to defer from Mike McCartney – Pres & CEO Hawaii Tourism Authority

Among these votes, the vast majority of those supporting only voted without adding comments or documentation. Those opposed were very detailed and fact oriented.

Gregory Kugle, who has been representing the Hawaii Vacation Rental by Owners Association, authored a letter in opposition to the bill on constitutional grounds. In part, he states:

The Constitution prohibits discrimination against non-residents through the Equal Protection, Privileges and Immunities and Commerce Clauses…. The statute is unconstitutional if it is not necessary to further a compelling state interest. Under the Commerce Clause, the inquiry is whether the law regulates evenhandedly with only incidental effects on interstate commerce, which means different treatment of in-state and out-of-state economic interests. “If a restriction is discriminatory, it is virtually per se invalid.”

Citing what he calls a “fatal flaw” in the Bill, Kugle writes,

it impermissibly infringes on the four Counties’ home rule powers, each of which can differently define transient accommodations for purposes of their zoning laws. In addition, property owners are statutorily exempt from using a licensed realtor when renting their own property.

Despite all this, the Bill may still pass. If it does, we can expect to see drastic changes in the Hawaiian vacation rental space that may include foreclosures, sales, and even a possible impact on tourism. This, in turn, might cause a drop in revenue for the Aloha State.

Who would be willing to invest in real estate in Hawaii if private property owners are not given a choice of how to run their businesses?

Eliminating competition usually results in price fixing. Are tourists of the Aloha state ready to bite a drastic price increase?

Comments on: "What is Senate Bill 2089 after and who is behind it?" (14)

  1. Excellent article!

  2. I’ve heard there’s some legislative battle over vacation rentals in Hawaii?…

    Are you talking about vacation rental owners being pushed to go through a management company? If so more info could be found here: http://blog.rentini.com/2012/03/05/sb2089-set-to-pass-unless-opposition-shows-their-numbers/…

  3. Bonnie Aitken said:

    I am sure the Hawaiian people will not want their tax dollars spent on legal fees to defend the state against the coming legal battle that will happen should the legislators pass this bill. I guess the govenor can still save the state from this.

  4. Pat Starkie said:

    I cannot believe what I am hearing, but someone on Homeaway.com posted that it passed. Unbelievable!!!

    • @Bonnie – this is very sad. These statistics are insane, none of the politicians have listened to what homeowners said:

      Report adopted; Passed Third Reading, as amended (SD 1).
      Ayes, 24;
      Aye(s) with reservations: Senator(s) Espero, Gabbard, Nishihara, Ryan .
      Noes, 1 (Senator(s) Slom).
      Excused, 0 (none).
      Transmitted to House.

      Just to compare what testimonies counted for:

      Total votes to support – 28
      Total votes to oppose – 706

    • @pat – yes, simply unbelievable! I am reaching out to the locals and see if we can get some journalism involved.

  5. m marty said:

    So those of us that registered with the taxation department and pay all our taxes on time and in full, hire locals to help run the place and we pay her extremely well too, are to be punished because there are a number of others that have failed to forward their taxes! Go after those idiots and leave me alone! OR who is it in the real estate industry in Hawaii that is in bed with the politicians? I’LL WALK AWAY FROM MY UNIT because my opinion of property manegment companies…..well lets just say they have to look up to see the shoe soles of a used car salesman! Those of you that chose to use a managment company…..good luck. I have proof, they rent units out and dont tell you and keep the money ( happend on the big island) and also I know a fellow that goes to Hawaii 12 – 20 times a year, stays in condos and pays $0 because his buddy is a property manager, he lets him stay in units in betweeen bookings…and they dont clean it afterward either! (Maui) Sorry if I appear very angry but I waited my entire life to buy a condo in Hawaii and it is effectively being taken away and I did everything right!

    This is just simply DISGUSTING!

    • Wow, Marty, management companies renting out people’s homes and keeping it a secret while pocketing the money – letting friend’s stay in homes for free between bookings!!!? That’s a shocker! Thanks for sharing – mind if I use your story for my next post?

    • vadimosya said:

      Marty, what a story! Do you mind to copy it into the most recent blog here: http://blog.rentini.com/2012/03/09/sb-2089-progresses-through-the-house/

      We will make sure it makes its way to journalists who can create some buzz about it, so those in Hawaii Senate will hear real life stories!

  6. [...] rental sites like Rentini are worried that the new bills will affect the future of their business in Hawaii. Houses will have to be taken [...]

  7. [...] rental sites like Rentini are worried that the new bills will affect the future of their business in Hawaii. Houses will have to be taken [...]

  8. [...] rental sites like Rentini are worried that the new bills will affect the future of their business in Hawaii. Houses will have to be taken [...]

  9. [...] rental sites like Rentini are worried that the new bills will affect the future of their business in Hawaii. Houses will have to be taken [...]

  10. Li Youn said:

    Bills SB2089 HB1707 HB1706 HB2078 all share the same idea. To force out-of-islander owners to hire Property Managers to manage at 25% to 50% commission. The State of Hawaii is telling investors to buy in Hawaii but don’t expect to make any money.

    Investors! Do your homework and read these bills carefully before you decide to invest in Hawaii.

    There’s a petition going around to raise awareness and to stop these bills

    http://www.thepetitionsite.com/502/718/414/stop-property-management-lobbyists-from-taking-local-jobs/#13328034048991&action=udata&udata=false

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