As short-term vacation properties continue to pop up in Hawaii neighborhoods outside of tourist areas, critics lament how hard it is to go after property owners who illegally rent homes to visitors.

But the experience of Kauai shows that bringing charges against alleged scofflaws is just the first step in a process that can take years to resolve.

The Garden Isle has taken an aggressive stand against short-term rentals, but is now mired in dozens of contested cases, said county Planning Director Michael Dahilig. Some still-active cases date back to 2015.

Although Kauai generally allows vacation rentals in designated areas and has grandfathered in hundreds more, the county has aggressively gone after alleged illegal rentals. The result: dozens of contested cases clogging the Kauai Planning Commission’s docket. Airbnb

Advocates for Kauai’s property owners say their clients are simply exercising their rights to due process.

Nonetheless, key legislators are taking a hard look at Kauai’s experience as they draft bills to address illegal short-term vacation rentals. And the result could be tougher laws for the property owners — something that Kauai’s planning director is pushing for.

Measures to regulate vacation rentals are nothing new. Popular online sites like Airbnb and VRBO have come under fire for making it easy for property owners to turn properties zoned for long-term residential use into short-term rentals for tourists.

According to Airdna, a website that tracks data from Airbnb, there were recently about 4,700 active rentals on Oahu, including about 3,800 whole-home rentals.

A variety of interest groups have clamored for changes.

Hawaii hoteliers say illegal vacation rentals create unfair competition. Housing advocates say every vacation rental in an area zoned for residential use means one less home for working residents who face a shortage of housing. And labor groups describe a double whammy: Short-term rentals don’t support hotel jobs and take away potential housing for hotel workers.

The iconic Hanalei pier on the north shore of Kauai. Hanalei has been transformed by vacation rentals, turning a small community where everyone knew each other into a place where local residents may have a different neighbor every week. Alana Eagle/Civil Beat/2018

Last year’s legislative efforts focused on the potential tax revenue produced by the short-term rentals and whether to let online brokers like Airbnb serve as collectors for the state’s excise and hotel taxes. None of that legislation was approved, but the bills are still pending, carried over from the last session.

In addition, the hotel industry is pushing for new legislation this session aimed primarily at amending state tax statutes. This includes provisions that would let vacation rental brokers like Airbnb act as tax collection agents, but also create reporting requirements and other safeguards to make sure the rentals aren’t illegally operating in residential areas.

What’s entirely new this session are proposals to go beyond amending the state tax code and instead expand the power of the counties to regulate short-term rentals. They include tougher penalties for people operating unpermitted vacation rentals and tools to make it easier to impose the penalties.

WAM committee Hearing Senator Glenn Wakai.
Sen. Glenn Wakai, chairman of the Senate Committee on Economic Development, Tourism, and Technology, has reached out to counties for input on measure to address short-term vacation rentals Cory Lum/Civil Beat

The proposals have come at the request of Sen. Glenn Wakai, chairman of the Senate  Economic Development, Tourism, and Technology Committee, and Rep. Richard Onishi, chairman of the House Tourism Committee. Their committees are likely to hear bills involving short-term vacation rentals, and their support is therefore key.

Wakai and Onishi asked the county planning directors for input that the legislators can use to draft bills, and Dahilig wrote a letter in response. A draft Senate bill incorporates several of Dahilig’s proposals.

Wakai said it’s been important to gather insights from the neighbor islands because “we don’t want to be imposing Oahu-centric ideas.”

Kauai’s experience, Wakai said, suggests that property owners may be using the administrative hearing process to “game the system,” paying attorneys to delay the government from shutting down unpermitted rentals that Dahilig said can generate as much $10,000 a day.

Fines may be equally ineffective, Wakai said.

“A $1,000 fine,” he said, “is just the cost of doing business.”

Kauai Disputes Date Back A Decade

Kauai’s fights over vacation rentals appear rooted in a law dating back to 2008. That’s when Kauai adopted ordinances allowing short-term rentals only in “visitor designated areas,” although about 450 properties operating outside the zones were grandfathered in, Dahilig said.

Grandfathering in the properties was more than simply a nice gesture, according to Gregory Kugle, a Honolulu attorney who represents some of the Kauai landowners in contested cases. Before the law changed, he said many landowners “had ordered their lives around this perfectly legal use of their properties, paying increased taxes and providing good local jobs.”

Michael Dahilig, director of Kauai’s Department of Planning and Permitting, is asking the Legislature to give the counties the power to impose tougher penalties for unpermitted vacation rentals. Kauai County

So when the county changed the law, he said, “it was constitutionally required to protect vested property rights by allowing existing transient vacation rentals to continue as ‘nonconforming uses.’”

Still, Kugle said, some residents weren’t happy with neighbors operating outside of the visitor-designated areas and complained to politicians and the county planning department, which started taking action against the landowners.

The property owners asking for contested case hearings are simply exercising their rights, Kugle said.

Kauai now faces a morass of cases. Of the Kauai Planning Commission’s 34 active contested cases, Dahilig said, 32 involve short-term rentals. That’s compared to about one contested case every one to two years before Kauai started cracking down on the short-term rentals, said Kaaina Hull, Kauai’s deputy planning director.

Under state law, citizens facing a penalty brought by a government agency can go to court only after they’ve exhausted the agency’s administrative process. Litigants can, however, appeal some interim decisions before the whole administrative process is completed.

One challenge facing Kauai, Dahilig said, is that its Planning Commission is composed of volunteers who don’t have much time to dedicate to complicated contested cases.

Kauai’s move to hire a hearing officer to speed contested cases along also has gotten bogged down. Several landowners have sought to disqualify the officer, citing conflicts of interest, Planning Commission documents show. The dispute over the hearing officer in one case has been going on since September 2016 and is now on appeal to the state Circuit Court. Meanwhile, proceedings on the merits of the case are on hold.

Dahilig describes such interim appeals to the Circuit Court as stalling tactics, but Kugle said there are legitimate questions about the officer’s selection and conflicts of interest.

Tough New Measures Proposed

Whatever the case, Dahilig has asked lawmakers to change the law to give the counties more power. Under his proposal, counties could take enforcement actions straight to court rather than first going through the contested case process. Dahilig also has asked the Legislature to make it easier for the planning departments to obtain an order to shut down a rental before a court rules on the merits of the case.

Under Dahilig’s proposal, property owners also would have to “disgorge” to the government any profits resulting from “any violation of county ordinances or rules” after the property owner was notified to correct or cease the violation.

To encourage private parties — such as disgruntled neighbors or housing advocacy organizations — to file “citizen suits” to enforce the zoning ordinances, Dahlig has proposed that property owners found to have violated the laws would have to pay the costs of bringing the action, including legal fees.

If notified that a property wasn’t authorized to be a short-term rental, online brokers like Airbnb would have to remove ads for the property or pay a fine of up to $100,000 under Dahilig’s proposal.

Online brokers could be authorized to collect taxes from rentals for the Hawaii Department of Taxation, but the department would have to share information about rental properties with the counties to help them enforce the zoning laws, Dahilig suggested.

Planning Acting Deputy Director Kathy Sokugawa during Board of Education meeting held at Farrington HS. 2 nov 2016
Honolulu Department of Planning and Permitting Acting Deputy Director Kathy Sokugawa supports some stricter measures. Cory Lum/Civil Beat

In a separate letter to Wakai and Onishi, Kathy Sokugawa, acting director of Honolulu’s Department of Planning and Permitting, said she supported some of the proposals in Dahilig’s letter, including the provisions concerning disgorgement of profits and the sharing of information by the Department of Taxation.

Previous efforts to regulate short-term rentals have met fierce opposition from property owners and online brokers. But it’s too early to tell how those groups will respond to the latest push.

A draft bill contains many of Dahilig’s proposals, as well as provisions allowing brokers to serve as tax collection agents. The measure was not in final form or posted on the Legislature’s website late Tuesday.

Kugle said he hasn’t had time to read Dahilig’s proposal. And Matt Middlebrook, Airbnb’s public policy manager, said he wants to see the draft bill before he comments on it.

“I’m not going to speculate on potential legislation that I’ve not had a chance to look at,” Middlebrook said.

Angela Larson, who represents the Hawaii Vacation Rental Owners Association, said draconian measures against short-term vacation rentals would hurt a lot of people. Many of the group’s 550 members can’t cover expenses — mortgage payments, property taxes, maintenance expenses — unless they rent to tourists, she said. The going rate for monthly rentals isn’t as high, she said, and some property owners would have to work multiple jobs to make as much money as they’re earning through short-term vacation rentals.

Ultimately, she said, shutting down the vacation rentals will hurt the state’s economy.

“Hawaii is going to feel it financially if they do that,” Larson said.

Advocates of tougher laws, however, say the economy is already suffering, and not just because of lost hotel revenue, according to Kekoa McClellan, Hawaii spokesman for the American Hotel &  Lodging Association.

“We believe that the explosion of illegal short term rentals is a cause of the affordable housing crisis on Oahu,” McClellan said.

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