Imposes a surcharge tax on the value of improvements to real property subject to reversion in a lease of commercial or industrial property; 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. Such concentration of ownership has and will continue to facilitate the practice by such landowners of leasing, rather than selling, their land.

Historically, such 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, but are not limited to, warehousing facilities, office and industrial parks and buildings, shopping centers and their infrastructures, parking lots and their infrastructures, automobile dealerships and their infrastructures, hotels and their infrastructures, and numerous other types of commercial and industrial buildings and facilities and their infrastructures.

During the term of such 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, but not limited to, buildings, structures, and required infrastructure.

Upon the expiration of such lease agreements, any and all of such improvements revert to the full and free ownership and control of the landowner lessors. Such 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 the improvements thereupon. No tax liability accrues to these landowners unless and until such lands and the improvements thereupon are sold in fee simple to another third party person or entity.

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

The purpose of this Act is to remedy the conclusively and clearly identified 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 of Hawaii, provided that such owner has combined aggregate holdings of at least 100,000 square feet of such 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 contemplates and 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 such 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 and operated by and in 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 demised 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 may be 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 such lease, the beneficiary landowner or fee simple lessor of such lease shall immediately pay into the treasury of the State a surcharge tax in a sum and amount equal to one hundred per cent of the fair market value of all improvements then located upon the subject property. Under no circumstances shall such surcharge tax be due or paid by any lessor landowner unless the lessor, in and of 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. Any and all such surcharge tax funds collected hereunder 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. In the event that any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity shall not affect other provisions or applications of this Act that can be given effect without the invalid provision or application.

SECTION 4. This Act shall take effect upon its approval.