The April 16 Honolulu Civil Beat article, “Group Opposed To Taxing Billions In Real Estate Trusts Is A Big Spender At Capital,” highlights spending by Nareit, the national association representing real estate investment trusts, during the legislative session to oppose bills that would impose an additional state tax on REITs, but it leaves readers asking, why?

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First, many inaccurate claims about REITs have been made by those trying to repeal the deductions REITs receive for being required to distribute their profits to shareholders, instead of keeping them, like other companies. But it’s difficult to explain why these claims are inaccurate without the public understanding what a REIT is, why REITs were created and how they operate.

Congress created REITS in 1960 to give everyone, regardless of income level, an opportunity to invest in real estate.

Explaining REITs can be a challenge because most people aren’t aware of them, or the range of benefits REITs deliver to communities in which they invest. To educate everyone who has a stake in this issue, especially the general public, is costly.

Educating the public requires professional communications support, including website development, paid advertising and creating fact sheets and informational graphics. Then, this outreach must be delivered through the news media and other channels the public turns to for information. Nareit also spent time preparing testimony for and following the hearings on the anti-REIT bills that the legislature considered this year.

In addition, inaccurate claims about REITs are continually being raised by those advocating for more taxes on REITs, and claims already debunked often reappear, requiring information and facts about REITs be reiterated on an ongoing basis.

The recent expansion of Ala Moana Center was funded by REITs.

Linny Morris

The April 16 article provides an example of one of the most egregious inaccuracies: that REITs pay no taxes. In fact, the retail sales from REIT properties in Hawaii generated an estimated $207 million in state general excise tax, according to a 2016 study. REIT-owned properties also were responsible for $150 million in property taxes in 2017.

The state Department of Taxation has stated publicly the maximum tax revenue Hawaii will gain if the Legislature repeals the deductions REITs receive for the dividends distributed to shareholders is $2.2 million the first year and less than $10 million each following year. However, DoTax also noted the total could be less as this estimate does not represent the deductions REITs can take if this new tax law went into effect.

Moreover, federal rules require REIT-owned hotels to pay an extra layer of GET above what non-REIT hotels pay. The ten largest REIT-owned hotel properties in Hawaii, by themselves, account for at least $16 million in additional GET revenue per year.

If this proposed additional tax on REITs is implemented, it would make financial sense for REIT-owned hotels to change their ownership status and become owned by non-REITs, eliminating the extra layer of GET to the state’s detriment.

Does it really make sense to pass a bill repealing the REIT deduction to possibly gain less than $10 million in corporate income tax, but jeopardize $16 million in GET?

While REITs already make a significant contribution in both state and county taxes, they deliver many other benefits, as well. REITs generate jobs and the economic multipliers attendant to job creation, which provides a significant stimulus to the local economy.

Jobs And Revenue

To take just one example, the recent REIT-funded expansion of Ala Moana Center alone created an estimated 11,600 construction jobs and brought in approximately $146 million in additional state GET revenue in 2016.

Since completion, estimates show the increased retail sales produced some $33 million in GET revenue for the state, along with an additional 3,000 new non-construction jobs.

It is critical for the general public to learn the facts about REITs.

REITs, unlike other businesses, provide investment to Hawaii consistently, whether the economy is strong or weak. Federal rules require REITs to buy and hold properties, not flip them for a quick profit. And these same rules mandate that REITs receive income from rents, which makes REITs contributors to developing affordable rentals needed in Hawaii.

For all these reasons, it is critical for the general public to learn the facts about REITs. Statewide educational initiatives are a big investment. But such efforts are worth the cost if they accurately inform all those who could be adversely affected by this proposed legislation that will harm Hawaii’s economy and reinforce the state’s image as a bad place to do business.

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