A bill that would make Hawaii only the second state in the nation to pass a tax on a fast-growing type of property ownership known as real estate investment trusts is making surprising progress in the Legislature.
REITs are now estimated to own more than $18 billion in real estate in Hawaii. That’s the highest amount per capita in the United States, according to legislative testimony. REITs have snapped up many of the state’s marquee properties.
Since 2014, supporters of a REIT tax have made little progress in the Legislature, stymied by some of the biggest real estate interests in Hawaii and elsewhere.
But this session has been different.
Senate Bill 301, which would impose a 6.2 percent corporate income tax on REITs, has passed the full Senate with a near unanimous vote. And it’s been approved by three House committees.
But the full House must still pass the measure — and the Senate and the House would still have to agree on a single version of the bill — before it heads to the desk of Gov. David Ige. The Senate’s chief budget writer believes Ige is opposed to the tax.
Supporters call the proposed new tax an equity issue. Opponents call it foolhardy and short-sighted.
The only other state that has passed a REIT tax is New Hampshire. That was more than 50 years ago.
Hundreds of local church parishioners, a bevy of progressive activist groups and about a dozen owners of small businesses in the state have allied in opposition to the owners of some of Hawaii’s premiere real estate, including Ala Moana Shopping Center, Hilton Hawaiian Village and the International Market Place.
They are charging that the offshore real estate owners operating as REITs are tax dodgers who need to be compelled to pay more into state coffers.
“Corporations that make profits here using our resources should pay taxes here, it’s that simple,” said Sen. Sharon Moriwaki, a member of the Senate Ways and Means Committee who co-sponsored the legislation. “It’s about time the state started to get our fair share for our people. Our people are hurting.”
Lining up in opposition are an army of REIT executives.
There’s Michigan-based Taubman, owner of the International Market Place in Waikiki, Virginia-based Park Hotels and Resorts, which owns Hilton Hawaiian Village, Maryland-based Host Hotel & Resorts, which owns the Hyatt Regency on Maui, and Canada-based Brookfield Property Real Estate Investment Trust, which owns the Ala Moana Center.
One of the REITs, Alexander & Baldwin, is among Hawaii’s biggest landowners and an original Big Five company, with local roots dating back to the 1860s.
All have testified against the measure, warning that Hawaii’s proposal would be inconsistent with federal tax law and could have a chilling effect on investment.
Dara F. Bernstein, senior vice president and tax counsel for the National Association of Real Estate Investment Trusts, said if the law passed, “REITs would start looking out of state.”
“It would send a negative signal to other companies: Be careful of investing here; the tax system could change,” she said.
The proposed legislation is “whackadoodle” and out of line with federal tax law, said Paul Brewbaker, a local economist.
The bill’s ultimate prospects are uncertain.
In addition to passing the Senate, the bill has passed through three House committees — Economic Development and Business, Consumer Protection and Commerce and Finance.
But according to Senate Ways and Means Chairman Donovan Dela Cruz, a critical decision-maker in budget negotiations, there is some concern that any extra revenue the measure might produce for the state could be offset by a longer-term negative effect on the local economy.
Dela Cruz also said that Ige has said he does not support the measure. A spokeswoman for Ige said the governor would not comment on specific bills at this point in session.
REITs were created by Congress in the 1960s to democratize real estate ownership by allowing small investors to own a share of investment-grade properties.
They are securities that operate under a complex set of rules that require them to distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends. REITs are allowed to deduct those dividends from their taxable income, legally avoiding federal taxes.
Shareholders, meanwhile, are taxed on dividend income in their own home states or countries, not in the places where the income was generated.
For the most part, that means not in Hawaii.
In the past decade, as stock market investments have soared, REITs have become gargantuan.
The market capitalization of the industry grew five-fold from 2008 to 2018, reaching more than $1 trillion last year. That means they have vast amounts of capital to invest, and they are making purchases all over the country.
Only one state, New Hampshire, taxes REITs. In 1970, the state enacted an 8.2 percent business profits tax, and included the income of real estate investment trusts within it. The state taxes on the “entity” level and considers taxing one business but not another a form of unfair discrimination.
“I can understand Hawaii’s point of view on this,”said Joe Lofrano, an official at the New Hampshire Department of Revenue Administration. “They aren’t getting money from it. Hawaii’s infrastructure is probably falling apart because they aren’t getting any revenue from it. (REITs) are out-of-staters and they are not paying tax.”
REITS arrived in Hawaii in a big way in a short time.
In 2003, a Massachusetts-based REIT, HRPT Properties Trust, bought about 200 acres of industrial and commercial property east of the airport from the Damon Estate, an old family trust established by the son of a missionary, Samuel Mills Damon.
More than 180 long-established small businesses operated on leased land on the property.
Soon afterward, tenants were reporting their rents had doubled or tripled and some said they would be forced out of business. By 2009, the conflict had turned into a bitter legal battle, covered closely by local newspapers.
Michael Fergus, a local real estate developer and accountant, had long been aware of REITs. In fact, he had invested in them in the past. But what happened in Mapunapuna was the first time he had heard of the negative consequences of REIT ownership in Hawaii.
The area “went from being owned by a relatively benevolent group that cared about the leaseholders to the current guys, who were super-aggressive on rents and were driving people out of Mapunapuna, driving them out of business,” Fergus recalled.
“I thought, ‘These guys are just shipping money out of Hawaii.’”
In the next 15 years, more and more Hawaii real estate was purchased by REITS.
“All of a sudden the local business community said, ‘Wow, this is having a big impact,’” said Peter Savio, who develops affordable housing projects.
“There’s tremendous demand for our real estate. Most of it is not owned locally anymore. When I was a child, every office building, every shopping center, every hotel, every industrial part, was locally owned,” he said.
It chafed many local businesspeople to realize that while they were required to pay corporate income tax to the state, REITs are not.
“If we have to be owned by mainland businesses, we should at least make them pay taxes,” Fergus said. “How can we survive as a state if people who own all the real estate aren’t paying taxes? It’s nuts.”
Advocates for REITs note the trusts do pay taxes, including general excise taxes and property taxes, and that their commercial tenants generate hefty GET taxes. They also say their investments expand business opportunities and create thousands of jobs.
But some local business people said it wasn’t enough.
In 2014, Fergus and Savio began lobbying for passage of a bill that would force REITs operating here to pay taxes on their corporate profits. Until this year, bills were proposed, but made minimal headway before dying.
Early this year, Fergus and his allies decided to expand their outreach. They approached community groups and asked for a meeting to explain the legislation and get their support.
Evelyn Azcon Hao, a retired elementary school principal who serves as president of Faith Action for Community Equity, an alliance of churches and progressive community groups, was inclined to listen.
“They’ve been around, they’re locals,” Hao said. “They’re kamaainas.”
They met at Church of the Crossroads in Honolulu, and Hao said she found the discussion eye-opening.
“I never knew anything about it,” she said. “The surprising thing is not too many people know about this concept of ‘REITs.’ It was new. We had to educate ourselves.”
The issue also aligned with her concerns about the growing gap between the rich and poor in Hawaii.
At Kuhio Elementary, where she had served as principal, more than 80 percent of the students qualify for free or reduced-price lunches. When the shabby apartment buildings where they lived were renovated and rents rose, the families lost their homes, causing the children’s school performance to suffer.
It bothered her that the owners of Hawaii’s most famous properties were profiting without paying the same income tax that a local privately-owned company would pay.
“We are all doing our fair share,” she said. “This doesn’t seem right.”
In the next months, Hao placed more than 150 calls and emails to friends explaining the legislation to them. Some 18 religious groups are part of their confederation, including St. Elizabeth’s in Kalihi, St. John Vianney in Kailua, Temple Emanu-El on the Pali Highway and My-Ryang Sa Buddist Temple in Palolo Valley.
“They were all shocked,” she said. Some began circulating petitions. Hundreds of state residents signed on in support of SB 301, including members of the Sierra Club and the League of Women Voters.
The bill would require REITs to pay state corporate income taxes on their full income, without deducting the dividends they pay to shareholders. An amendment would direct 10 percent of the tax money into economic development in the state. It’s not clear how much money the bill would produce for the state.
The groundswell of support for the measure came as a surprise to Sen. Gilbert Keith-Agaran, vice chair of the Senate Ways and Means Committee, and a co-sponsor of the legislation. He is still considering the issue himself and doesn’t know if the bill will pass or not, but he thinks it is hitting a nerve.
“Throughout the country, policymakers need to look at whether there is some of kind of equity question,” Keith-Agaran said. “If we pass this, will it be a trend?”
Fergus hopes the movement to tax REITs will go national.
“The REITs are afraid of this spreading all over the country,” he said.
REIT backers meanwhile, are also waiting and watching.
“We’re hopeful that it won’t pass, that the legislature once again won’t pass it,” said Bernstein, the REIT trade group official, who is monitoring the situation carefully from Washington D.C.
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