Imposes a surcharge tax on the value of improvements to real property subject to reversion in a lease of commercial or industrial property. Requires the tax proceeds to be dedicated to public education and affordable housing.

A BILL FOR AN ACT

SECTION 1. The legislature finds that the fee simple ownership of commercial and industrial land in Hawaii will continue to be held by a very small group of estates, trusts, and individuals. This concentration of ownership has and will continue to facilitate the practice by these landowners of leasing, rather than selling, their land.

Historically, these landowners have entered into ground lease agreements with persons and corporations that require the lessees to construct improvements on the land upon which intrastate and interstate commerce is conducted. These improvements include warehousing facilities, office and industrial parks and buildings, shopping centers, parking lots, automobile dealerships, hotels, and numerous other types of commercial and industrial buildings and facilities and their infrastructure.

During the term of these lease agreements, the landowners require that their ground lease lessees pay all property taxes due on the land and any other taxes that may become due. Lessees also pay each and every cost associated with the development and improvement of the land, including buildings, structures, and required infrastructure.

Upon the expiration of these lease agreements, any and all of the improvements revert to the full and free ownership and control of the landowner lessors. These landowners are thus enriched through the capture of tax-exempt-on-receipt assets. These landowners are then free to use and lease to other third parties both the land and its improvements. No tax liability accrues to these landowners until the lands and its improvements are sold in fee simple to a third party.

The legislature finds that these landowners and lessors are enriched in very substantial economic terms upon these reversions. Further, the legislature finds that the state treasury has been retrospectively and will be prospectively unfairly deprived of hundreds of millions of dollars of collectable tax revenues not levied upon the improvements at the time of their receipt, and that only the landowners and lessors are benefited by this deprivation.

The purpose of this Act is to remedy the unfair deprivation of tax revenues that has been and is being suffered by the state treasury and the vast majority of the working and retired taxpayers of the State.

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

§   -1 Definitions. As used in this chapter, unless the context clearly requires otherwise:

"Aggregate holdings" means the cumulative number of square feet of commercial and industrial property owned by a lessor in the State.

"Expiration" means the date or time at which the lease or ground lease expires under the terms of the lease.

"Fair market value" means the money value determined to be the tax assessed value of improvements as the same is derived by the various county real property taxing authorities.

"Fee owner," "landowner," "fee simple owner," "beneficiary landowner," "lessor," and "fee simple lessor" mean the lawful fee simple owner, heirs, successors, assigns, and subsidiaries of commercial or industrial real property located in the State, provided that the owner has combined aggregate holdings of at least 100,000 square feet of property and which property has been or is being leased to a third party ground lease lessee.

"Infrastructure" means above ground and underground improvements that are made to provide access and services to structures constructed or contemplated to be constructed on leased property.

"Lease" and "ground lease" mean a document that enables the lease of real property, improved or unimproved, to a ground lease lessee for a period that exceeds twenty years.

"Lessee" and "ground lease lessee" mean an entity or person that leases commercial or industrial property from the fee owner lessor of the property.

"Lien" means the placement and recordation of a security interest by the State upon real property.

"Public education system" means the public schools funded by the State.

"Reverted improvements" mean any structures and any infrastructure that revert to a lessor upon the natural expiration of a lease.

"Structures" mean a building or buildings, of any dimension, or any other improvements that are constructed on leased property.

"Surcharge tax" means a tax levied by the State on a transaction under this chapter.

"Taxable basis" means the fair market value of commercial or industrial property on the date upon which a reverted improvement is acquired by a lessor.

§   -2 Rules. The department of taxation shall adopt rules pursuant to chapter 91 as necessary to implement this chapter.

§   -3 Applicability. This chapter shall apply to all

commercial and industrial ground leases that were in existence on or before January 1, 1980.

§   -4 Priority. In the event that this chapter conflicts with any other law, this chapter shall prevail.

§   -5 Surcharge tax. In the tax year of the invocation of any reversion clause in any commercial or industrial ground lease of land at the expiration of a lease, the beneficiary landowner or fee simple lessor of the lease shall immediately pay into the treasury of the State a surcharge tax in an amount equal to one hundred per cent of the fair market value of all improvements located upon the subject property. Under no circumstances shall the surcharge tax be due or paid by any lessor landowner unless the lessor, itself or through its agents, heirs, assigns or subsidiaries, owns more than one hundred thousand square feet of aggregate holdings of commercial or industrial real property in the State.

§   -6 Surcharge tax added to basis. Any surcharge tax paid and collected hereunder shall accrue to or be calculated by a beneficiary landowner or lessor as an additive to the taxable basis to the property used to determine the amount of tax due and payable upon the subsequent sale of the reverted improvements.

§   -7 Surcharge tax lien. Any and all surcharge taxes due and unpaid hereunder shall create a lien on the subject improvements and on the land thereunder in favor of the State.

§   -8 Surcharge tax dedicated to public education and affordable housing. All surcharge tax funds collected under this chapter shall be dedicated in their entirety and appropriately budgeted by the legislature to support the funding of the public education system and publicly sponsored affordable housing opportunities for residents of the State."

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