Redesignates certain residential subdivisions in the land use agricultural district into the rural district, subject to certain criteria.

A BILL FOR AN ACT

SECTION 1. While Hawaii is a state committed to conserving and protecting agricultural lands, not all of the lands classified as agricultural are fit for agricultural purposes. In particular, lands with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class D and E are considered marginal and may be better suited for non-agricultural purposes.

The amount of land designated in the agricultural district far exceeds the amount of land classified for urban and rural uses combined. In 2003, an estimated 1,932,429 acres of land were in the agricultural district (forty-seven per cent), whereas, there were only 196,215 acres of urban land (five per cent) and 10,108 acres of rural land (two-tenths of one per cent). The vast amounts of land classified as agricultural stems from the State's practice of designating the agricultural classification a "catch-all" district for lands neither urban, rural, or conservation.

Of the 1,932,429 acres of designated agricultural, it is estimated that less than half of the land can actually be used for agriculture. In 1997, there were 292,107 acres used for crops. In 2002, only 211,120 acres were used for crops. This 80,987 acres decrease in the amount of land used for crops likely reflects Hawaii's decreasing dependence on agriculture as an industry.

There is a long established practice of permitting residential communities on land classified for agricultural use. Agricultural land has been and will continue to be used for residential purposes because it is relatively inexpensive, available and not suited for agricultural uses. There are many subdivisions throughout the State comprised of marginal lands, but in the agricultural district and zoned to include residential uses by the respective counties. This has lead to agricultural land values rising beyond their value for agricultural purposes. The counties have historically allowed such developments to occur on agricultural lands, with problems developing only recently.

In exchange for zoning and other entitlements, counties have imposed on developers of projects exactions such as highways or other transportation improvements, shoreline or other parks, beach access, and affordable housing. Within the recent past, developers of residential projects on agricultural lands have expended millions of dollars in construction and development costs and have sold thousands of residential lots.

In the case of the Hokulia project in South Kona, despite arguments by the developer that it had vested rights to proceed with the development based upon its reliance on the county's actions, including the requisite zoning, subdivision permits, and executed development agreements, and its substantial expenditures in reliance thereon, the circuit court of the third circuit ruled that the dwellings being constructed and planned for the project were not farm dwellings and not a permitted use in the state agricultural district. The court prevented any further construction activities and directed a reclassification of the project lands from the agricultural to the urban district.

The counties, people in business, finance, development, and the community at large are concerned that such decisions cause tremendous damage and a debilitating uncertainty to the entire State. This decision sets a precedent for litigation between and among developers, lenders, residential lot owners, construction companies, realtors, title insurers, counties, and the State; creates a chilling effect on investment within the State; and clouds the viability and legality of past permitted agricultural residential subdivisions throughout the State.

The State has suffered and will continue to suffer adverse economic effects because the uncertainties caused by such decisions have threatened jobs, will likely result in higher costs, and will discourage investment in Hawaii. Hawaii is highly dependent on outside investment and capital to ensure that its economic engine operates smoothly. Besides tourism, investment in real estate is a highly important component to a healthy state economy. Uncertainty in the real estate market will deter investment and drive up the cost of capital. With the uncertainty of development projects in Hawaii, secondary employment associated with such projects is affected, and there is less demand for materials and supplies from local businesses. Counties will be deprived of much needed property tax revenue that would help provide infrastructure and services necessary for a healthy community. The longer such uncertainty festers, the more likely and pronounced its negative effects on the State's economy.

Financial institutions believe that such decisions increases the risk associated with development in Hawaii. Mortgage lending makes home ownership possible. Lenders have made significant loans on land with residences in agricultural districts throughout the State. Decisions like the Hokulia decision invalidate lenders' longstanding interpretation of chapter 205, Hawaii Revised Statutes, and throws into doubt the legality of other dwellings. Additionally, there is great uncertainty about the reliability of permits and the requirement of administrative exhaustion that places the security of existing home loans at risk.

Realtors and title insurers believe increased prices may be necessary to compensate for the increased risks associated with making representations, disclosures, and warranties about the legality of land use entitlements for individual properties. Potentially, insurers face litigation over zoning entitlements previously issued with respect to lands and homes in the agricultural district. The Hokulia decision leaves realtors and brokers in doubt about the validity of permits and approvals previously issued for lots and homes in the agricultural district. All of these effects are likely to reduce the volume of real estate transactions and further reduce the affordable housing supply.

Developers, investors, and those seeking homes will need to carefully consider whether it is prudent to invest or undertake projects in circumstances where zoning approvals and entitlements remain open to judicial challenge for many years, even despite valid development agreements.

The legislature finds that this is an unacceptable situation. One of the key factors in adjusting to the changing socio-economic conditions is the restructuring of our land use system to distinguish between the best agricultural land (with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class A or B) and more marginal agricultural land (with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class D or E).

Accordingly, the purpose of this Act is to remove the uncertainty over past entitlement of certain subdivisions by reclassifying certain marginal agricultural lands in the agricultural district into the rural district, subject to certain terms and conditions.

SECTION 2. (a) For purposes of this Act, the term "project" shall mean any development:

(b) Lands within any project that satisfy the following criteria shall be classified as lands in the rural district as described in section 205-2, upon receipt by the land use commission of a voluntary request for such reclassification from the developer of the lands identified in such request, without need for any proceedings before the land use commission:

(c) Upon reclassification, challenges to the creation and development within the reclassified area of lots and associated infrastructure, and of single-family residences on such lots, as contemplated by county project approvals granted prior to the effective date of this Act, shall be barred.

(d) On lands moved into the rural district pursuant to this provision, the county shall not authorize, and no private landowner shall create, any lots smaller in size than the lots provided for in the project approvals granted by the county prior to the effective date of this Act.

SECTION 3. This Act shall take effect upon its approval.