STAND. COM. REP. NO. 526

Honolulu, Hawaii

RE:    S.B. No. 600

Honorable Colleen Hanabusa

President of the Senate

Twenty-Fourth State Legislature

Regular Session of 2007

State of Hawaii

Madam:

     Your Committees on Economic Development and Taxation and Commerce, Consumer Protection, and Affordable Housing, to which was referred S.B. No. 600 entitled:

"A BILL FOR AN ACT RELATING TO LEASEHOLD CONVERSION,"

beg leave to report as follows:

     The purpose of this measure is to exempt from taxation, one hundred per cent of the capital gains realized during taxable years 2008-2012, from a sale of the leased fee interest in condominium units to an association of apartment owners or residential cooperative corporations.

     Testimony in support of this measure was received from the Hawaii Association of REALTORS; Hawai‘i Legislative Action Committee of the Community Associations Institute; Hawaii Council of Associations of Apartment Owners; Hawaii Independent Condominium and Cooperative Owners; Monarch Properties; Kuilima Estates West; Kuilima Estates East; Association of Apartment Owners at the Lauloa Condominium, and at the Diamond Head Beach Hotel and Residences Condominium; and two individuals.  The Department of Taxation (Department) and the Tax Foundation of Hawaii submitted comments.

     Your Committees received a revenue impact statement from the Department that the revenue loss would be approximately $900,000 annually.  However, the fiscal impact statement did not specify the methodology used to determine the loss.

     Your Committees find that in 2004, the City and County of Honolulu's Leasehold Task Group was charged with finding voluntary solutions that would allow apartment owner-occupants to acquire their leased-fee interest.  One of the recommendations of the Task Group was for tax legislation that would motivate lessors to sell their leased-fee interest to lessee owner-occupants, and specifically, that would exempt the lessor's sale proceeds from the capital gains tax.  This would also avoid a 1031 tax-deferred exchange, which is both time consuming and expensive, and therefore out of the reach of some lessors.

     Your Committees note that the Department's revenue loss is quite modest, and have heard in testimony that the State will benefit from the increased sales of leasehold property by way of increased conveyance tax fees and income taxes on commissions earned by the brokers involved in such transactions.  More importantly, these sales could result in voluntary conversion of leasehold to fee simple ownership for residential lessees throughout the State, preventing the anticipated displacement of many older residents whose leasehold terms will soon expire.

     Your Committees believe that this will be the only opportunity to be fee simple homeowners for many residents faced with an increasingly expensive and competitive housing market, and it is the intent of your Committees to support this modest option.

     As affirmed by the records of votes of the members of your Committees on Economic Development and Taxation and Commerce, Consumer Protection, and Affordable Housing that are attached to this report, your Committees are in accord with the intent and purpose of S.B. No. 600 and recommend that it pass Second Reading and be referred to the Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committees on Economic Development and Taxation and Commerce, Consumer Protection, and Affordable Housing,

____________________________ BRIAN T. TANIGUCHI, Chair

____________________________ CAROL FUKUNAGA, Chair