Knowledge is Wealth!
So would be a round-trip time-travel ticket to 1986 when the DPP (Department Planning and Permitting) first started issuing NUCs (Non-conforming Use Certificates) for homes and condos outside of resort areas – as a temporary solution – in order for them to legally engage in B&B (Bed & Breakfast) and TVU (Transient Vacation Unit) rentals; collectively known as STR (short term rentals) businesses. During the Honolulu Board of Realtors Agent Forum on July 11th, addressing Bill 89 – the City Council’s solution for the contentious and prolific STR businesses – Timothy Hiu, Deputy Director of the DPP, in so many words, explained that no one could have imagined back in 1986 that a permanent solution would turn out to be such an epoch “kicking the can down the road” event playing out all the way to 2019, 33 years later. Since 1986, both sides of the debate became growingly more polarized and basically divided between those who economically depend on income from STR business activities and those who are vociferously complaining – especially – about “unhosted” TVUs, violating their right to live in a peaceful environment. The latter constituency, in favor of regulation, no doubt has found strong allies with the hospitality industry who have also somewhat suffered from the approximate unregistered 10,000 STRs (STRs mostly paying the lower “residential” property taxes – the hotels are “crying foul”) available at any time on Oahu. To put it into perspective, there are about 31,000 hotel rooms on Oahu so 10,000 STRs represent a minority but formidable competitor of the hospitality industry.
What are the basic highlights of Bill 89? (signed into law on June 25th by Mayor Kirk Caldwell)
- Allows a limited number of new B&Bs in non-resort areas under a new initial registration process and yearly renewal requirements.
- Initial registration for the above will not be able to take place until October 2020.
- Continues to prohibit Transient Vacation Units (“unhosted” rentals) in non-resort areas, unless the dwelling has a NUC.
- Regulates hosting platforms e.g. Airbnb, Expedia, VRBO etc., requiring monthly reports to be filed with the DPP and shared with the City Council.
- Illegalizes any type of short-term rentals advertising which are not in compliance with zoning regulations as provided in Ordinance 19-18 (Bill 89 basically amends the ordinance)
- Starting August 1st, provides a method to fine violators of the above advertising prohibitions in an amount of $1,000 for the initial violation plus $1,000 per day until the ad is stopped. Recurring violations will cost $5,000 and $5,000 per day respectively (ouch!)
- Would allow an additional 1,715 properties on Oahu to rent out individual rooms in their residences (not the entire home). Though this seems to be an increase by approximately 800 from the current permits (NUCs), it is far shy of the approximate 10,000 current unauthorized STRs. Note that Timothy Hui specifically said this number (1,175) could rise in correlation to the DPP proving its ability to successfully regulate the STR industry.
- Existing NUCs would not be transferable upon sale of a property (this would be a big shock to investors who purchased a home thinking they could sell the NUC along with the home at a later date – their property values just decreased).
- By the City & County of Honolulu STR is defined as less than 30 days so, basically, if a vacation rental advertises for a 30 days or more rental term then it is allowed. For those that think the strong regulation-hospitality alliance won with Bill 89 then think twice. This effectively kicks a lot of teeth out of this bill as Oahu is now going to have an abundance of over 30 day rentals available.
- Allows for special resort districts such as Waikiki which would permit any building in that zone, assuming the AOAO (Association of Apartment Owners) permits it, to allow apartment owners to participate in STR activities (no NUC necessary). Furthermore Section 21-5 of Bill 89 contains somewhat cryptic wording that will allow some other buildings within 3,500 feet of the resort zone which are zoned A-1 (low density) and A-2 (medium density) apartment zoning to also participate in STR activities (more on this important point below).
For investors looking to invest in buildings in and outside of the designated resort zones such as Waikiki, the last bullet point above deserves some deeper delving into. The somewhat complicated wording in Section 21-5 mentioned above is important enough to include here: (click to expand)
In addition to buildings that fall within 3,500 feet distance of the resort zone e.g. Waikiki (basically the areas Makai of Kuhio Ave) the important other qualifier to allow STRs – in specific buildings – states, “the resort district and the A-1 or A-2 district, as applicable, were rezoned pursuant to the same zone change application as part of a master-planned resort community.” What this basically means and Timothy Hui confirmed, is that in Waikiki many buildings Mauka of Kuhio Ave could also qualify to allow STRs without NUCs (again, assuming the AOAO allows it). It basically depends on how the particular building was originally zoned. If resort then probably OK and if the building used to be a hotel then most certainly OK (see procedure below to confirm before purchasing).
Waikiki Resort Zone Map (click to expand)
To definitively find out if any particular building you are interested in qualifies for STRs and is within the 3,500 foot distance from the designated resort area e.g. Waikiki, there is a “Zoning Verification” procedure through the DPP involving paying $150 fee for each tax map key (each building address). If interested please do not hesitate to contact me, Damon Rhys, and I would be more than happy to assist with the process, represent you in the transaction including researching possible STR income (no guarantees but can research revenues of STRs in the same building you are interested in*) and placing you with a reputable STR manager that will work hard to keep your STR unit booked at the highest occupancy rate possible (at Sachi Hawaii we have an entire department dedicated to STR management).
How will this affect Real Estate and prices here in Hawaii? Overall it will not have such a big impact but could create some serious investment opportunities for the savvy investor. If this describes you please contact me, Damon Rhys, I would very much like to assist and help you implement some good strategies*. With any new regulatory bill such as Bill 89, there are bound to be some clear winners and losers with some opportunities arising as a result:
Losers and Possible Outcomes:
- Those running illegal vacation rentals will have to switch to 30 day plus rental period probably advertising now at a lower rate.
- Lower rents will mean a significant number of the 10,000 unauthorized STR owners will face having to sell their homes.
- Some buildings described in section 21-5 above, just outside the resort zones e.g. Waikiki, though their AOAO allows STRs, will no longer be able to do so until October 2020 and even then the possibility of getting one of the limited quota of permits will be low. Prices in these buildings may decrease as a result.
Winners and Possible Outcomes:
- Hospitality industry will see higher occupancy rates which will naturally raise nightly hotel rates. It will become more expensive for tourists to stay in Hawaii but they will probably still come all the same.
- Demand from investors buying buildings in the special resort areas e.g. Waikiki and those qualified buildings that are just outside of the resort area, will increase. Property values may rise in these areas as a result.
- In the correctly zoned areas (special resort, qualified buildings just outside (as per section 21-5 above), TODs (transit-oriented development) areas), opportunities for small property owners to sell or develop their property will be abundant. On as little as 2,500 SQF, up to 15 apartment units are allowed to be developed with no parking requirements (TOD areas).
As for that round-trip time-travel ticket to 1986, I would sell everything I have in 2019 and buy as many gold bars as I could possibly carry on the time-trip ship. After doing the due diligence in 2019 identifying the good buildings for STRs – in both the Waikiki resort area and the qualifying buildings just outside – I would cash in the gold bars (around $400/oz in 1986) and buy up as many STR apartments as possible in my parents name. Of course I would make them agree to create an irrevocable trust bequeathing it all to me (I would also hold the properties under an LLC so as to avoid having to pay taxes upon their passing! :))
Knowledge is Wealth! Call Me!
Aloha!
Damon
*Disclaimer: Any opinions expressed in this newsletter are that of Damon Rhys only and do not necessarily reflect the views of his brokerage firm, Sachi Hawaii Pacific Century Properties. Though knowledgeable including Management Science / Quantitative Economic Decision Science & Master (MPIA) Degrees from the University of California, Damon Rhys is a licensed Realtor in the state of Hawaii. He is not a licensed Financial Advisor. For any specific investment decisions, it is advised that one consults with a licensed financial advisor.