Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Commerce, Consumer Protection, and Housing, to which was referred S.B. No. 1793 entitled:

begs leave to report as follows:

The purpose of this measure is to encourage the sale of leased fee interests in multi-family residential leasehold properties or units by exempting fifty per cent of the sale proceeds from income taxes.

The Hawaii Council of Associations of Apartment Owners, Hawaii Independent Condominium and Cooperative Owners, and Monarch Properties, Inc. testified in support of this measure. The Department of Taxation opposed the measure. The Hawaii Association of Realtors and Tax Foundation of Hawaii presented comments on the measure.

With the recent repeal of the City and County of Honolulu's mandatory condominium leasehold conversion law, condominium owners who wish to purchase the properties under their units will no longer be able to compel the sale of the leased fee interest, and instead will have to rely upon the voluntary offering of the fee interest by owners who lack significant incentives to sell. This measure would establish an incentive for lessors to sell their interest by providing, for a limited period, an exemption from income taxes on fifty per cent of the income received on the sale of the leased fee interest to the lessee.

Your Committee finds that this measure will provide lessors who wish to minimize the tax consequences of selling their real property with an alternative to executing a Section 1031 property exchange. Additionally, the real estate activity encouraged by this measure will generate revenues for the State through conveyance tax fees and taxes on broker commissions. Finally, this measure will facilitate fee simple ownership for condominium owners who have invested substantial sums in their homes through the payment of mortgages, property taxes, and maintenance fees, and who seek the security of owning the fee interest in their homes.

Your Committee has amended this measure:

As affirmed by the record of votes of the members of your Committee on Commerce, Consumer Protection, and Housing that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1793, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1793, S.D. 1, and be referred to the Committee on Ways and Means.