Planned tax break helps development in Waikiki

By Kelly Yamanouchi
Advertiser Staff Writer

State lawmakers plan to take another stab at passing a tax credit to spur resort development in Waikiki.

Many of Waikiki's hotels were built decades ago and can no longer compete against newer, higher-end facilities elsewhere. Advertiser library photo • Dec. 6, 2001

Aging Waikiki, where last year the hotel industry operated more than 50 percent of all state hotel units, is in dire need of an upgrade.

Many hotels were built decades ago and they no longer can compete against newer, higher-end accommodations in Hawai'i and elsewhere.

Owners of older hotels have spurred a string of conversions to condominiums as they cash in on a hot residential market. That trend has some industry officials concerned about the loss of visitor accommodations as well as resulting declines in tourist expenditures and hotel room tax revenue.

There is, too, the broader issue of Waikiki's need for better visitor attractions and improved hotels with guest rooms equipped with up-to-date technology.

"There's no question that there's a lot we need to do to make Waikiki competitive," said Rick Egged, president of the Waikiki Improvement Association.

The tourism industry backs the extension of the construction and renovation tax credit as a means of encouraging hotel owners to upgrade their aging properties.

But Egged said the association would likely pursue the tax credits only if an agreement can be reached with the Lingle administration, thus avoiding another veto.

A tax credit amounting to 10 percent of construction costs passed in a special session after the Sept. 11 terrorist attacks. The tax break, aimed at helping the industry and the state's economy, expired this year. A smaller credit will be in place until the end of 2005.

Last session, Lingle said the state could no longer afford the hotel tax credit, which cost the state $6.4 million in fiscal 2002 and an estimated $14 million this year. She said the credit was "open-ended" with no ceiling on its cost to the state.

The governor also took issue with a proposed expansion of the tax credit to cover commercial construction in a resort area, saying that the provision would cause an unanticipated drain on state tax revenues.

Lingle's tourism liaison, Marsha Wienert, said she had no comments on the governor's position on resort redevelopment tax credits for next session since the administration's legislative package has not been finalized.

Rep. Jerry Chang, D-2nd (Hilo), said he plans to propose the same tax-credit legislation sent to Lingle last year. The bill would extend the tax break for seven more years with an 8 percent credit in the first three years and 4 percent credit afterward. The measure would provide for no cost cap and would include retail and other commercial development.

"We'll start with that and see where it goes," Chang said. Without such incentives, he said, "we're going to be stuck with the same type of facilities and hotel rooms."

"We need to pass something soon."

Last session, Outrigger Hotels & Resorts was the most visible backer of a hotel redevelopment tax credit. The hotel chain wanted the credit to benefit its Waikiki Beach Walk, a Lewers Street hotel, retail and entertainment redevelopment project.

Outrigger chief executive David Carey said the company would still support and benefit from a hotel construction and renovation tax credit. But for the hotel rooms in the Waikiki Beach Walk project, "it's too late," he said.

"We've had to move with the assumption that there is no tax credit," he said.

Revised plans for the project now call for a tower with a maximum of 400 condominium units instead of 890 hotel rooms. Other buildings in the project will likely include time-share units.

Outrigger has enlisted Eastdil Realty to help raise capital for the project, which would start in 2005, later than planned, with both of its two phases completed in 2008.

Tax credits could increase the project's budget or accelerate its timing, he said. But without at least a 10 percent credit, Carey said he does not plan to change the plans to include hotel units.

As for the chances that the state would pass a new hotel tax credit as high as 10 percent, Chang said: "I wouldn't bet on it."

Another vocal supporter of the credit last year, House economic development chairman Brian Schatz, D-25th (Makiki, Tantalus), acknowledges the uphill battle of passing another tax-credit measure.

"It's going to be difficult for those industries that are currently thriving to ask for government subsidies," he said. "I think the hotel renovation construction tax credit falls in that category. It's going to be very tough for us to justify."

Schatz said one of the biggest boosts to Waikiki will be the redevelopment of the International Market Place, an aging conglomeration of carts and shops that embodies the kitsch of Hawai'i's past.

"You sort of walk through and say, 'I could get a candle or I could get a switchblade,' " Schatz said. "It feels old, and there's some, sort of, interesting aspects to it but it's really not a very exciting retail tourist experience."

But when the International Market Place is remodeled by landowner Queen Emma Foundation from 2005 to 2007, "it's going to increase the quality of the visitor experience, and it looks fun enough that you would want to go in there yourself," he said.

Some suggest there are other ways beyond tax credits to spur redevelopment in Waikiki. Carey pointed to government-backed urban renewal financing for resort development, a device used by other jurisdictions.

Wienert said some cities have taken creative approaches using U.S. Department of Housing and Urban Development money to assist with hotel development and redevelopment or have sold general obligation bonds for properties adjacent to city-owned convention centers.

Those are options for the city, she said. "It makes sense. There seems to be a lot of money out there on the federal level."

Mayor Jeremy Harris is said to be preparing his budget next year with an eye to including more capital improvement projects for Waikiki.

Reach Kelly Yamanouchi at 535-2470 or kyamanouchi@honoluluadvertiser.com. Advertiser staff writer Sean Hao contributed to this story.