Landlords may lose tax break on military rentals
By Andrew Gomes
Advertiser Staff Writer
State lawmakers are considering cutting off general excise tax exemptions for some Hawai'i rental housing operators that rent to military personnel.
The idea, aimed at military housing that was privatized in recent years, could provide the state millions of dollars during a budget crisis by some estimates, and address what one state senator said has been an unexpected consequence of such rental projects that stand to reap state tax exemptions for more than 50 years.
"It's potentially a lot of money," said Sen. Norman Sakamoto, who chairs the Senate Education and Housing Committee that on Wednesday advanced three bills that would restrict the tax exemption.
The Hawai'i Housing Finance and Development Corp., a state agency overseeing affordable-housing regulations, in recent years has approved more tax exemptions for private landlords renting to military personnel, though the value of such exemptions has not been calculated.
A key issue raised by the bills introduced by Sakamoto is whether military personnel, who receive a housing allowance if they rent a privately owned residence, should qualify as affordable-housing tenants under state law.
State law provides landlords a general excise tax break if they offer a certain number of units at affordable rents to tenants meeting certain income limits.
For instance, a project with at least 60 percent of units rented to tenants earning no more than 140 percent of a county median income can qualify for the tax break, as can a project renting 20 percent of units to tenants earning no more than 50 percent of the median income.
Tax exemptions are provided only on affordable tenant rents.
The bills would primarily affect landlords by forcing them to pay general excise tax on rent paid by military personnel, but also could make it more difficult for military personnel to find affordable housing.
Sakamoto said he supports the military, but believes it is unfair that a military member may qualify for affordable housing when a civilian earning less than or as much as the military member with a housing allowance can't.
"Why should we not have an even playing field?" he said.
Senate Bill 2592 would mandate that military housing allowances are counted toward income.
Monthly military housing allowances range from $1,572 for lower-rank individuals up to $3,201 for senior-most officers with dependents.
The federal government considers the housing allowance part of a military member's gross income, though it's not taxable income as an allowance as opposed to a wage or salary.
HHFDC, the state's affordable housing agency, excludes the allowance in calculating gross income of tenants, just as it excludes other government assistance such as Section 8 federal housing vouchers.
Another target of SB 2592 would require that affordable-housing tenants be "domiciled in the state" for landlords to receive the tax exemption. Technically under federal law, most military personnel in Hawai'i are domiciled in other states.
The state Department of Taxation noted that the bill conflicts with federal tax rules that exempt nonprofit rental housing operators from general excise tax on rental income regardless of a tenant's residency. The department also said it's unclear whether the bill's residency requirement would unconstitutionally discriminate against certain tenants.
Two other bills, SB 2594 and SB 2595, propose changes to state affordable-housing law that would have similar effects defining income and residency to exclude military personnel and disqualify landlords from the tax break.
HHFDC opposes all three bills. The agency said if a military housing allowance is counted toward income, then so should other forms of government assistance such as Section 8 vouchers.
Karen Seddon, HHFDC executive director, said in an interview that she's aware of only one project currently that would be affected by the bills, but added that under the law she could not disclose the name of the project.
She said another area of state affordable-housing law not addressed by the bills permits tax exemptions for projects supported by the government including privatized military housing on federal property.
HHFDC suggested that if lawmakers intend to restrict general excise tax exemptions with changes to income and residency requirements, then government-assisted and other eligible projects should be treated equally.
The only affordable-housing operator to testify on the bills was Ford Island Housing LLC, which stands to lose its tax exemption if the bills become law. The company, an affiliate of Texas-based Hunt Development Co., operates the 1,446-unit off-base Pu'uloa Housing Project at Iroquois Point and Pu'uloa.
The housing project had been owned by the Navy until 2003 when Ford Island Housing was given a lease to manage the homes for 65 years in return for renovating them.
When construction was completed last year, the company sought and received a general excise tax exemption on a portion of its rental income from the project, which is about 50 percent occupied by military personnel.
Under HHFDC rules, Ford Island Housing pays general excise tax only on rent from tenants who earn more than 140 percent of Honolulu's median income.
Craig McGinnis, Ford Island Housing vice president, submitted written testimony that urged Senate Housing Committee members to hold the bills.
"(Ford Island Housing) believes that with the income limits imposed by its current GET exemption, the Pu'uloa Housing Project is an excellent model for the preservation of affordable workforce housing in Hawai'i," he said in the statement.
Another opponent of the bills is the Chamber of Commerce of Hawaii. Charles Ota, the group's vice president for military affairs, said the income and residency requirements proposed would unfairly disqualify most military personnel from affordable housing.
"The fact that the (federal) government provides housing for the military member should not be held against the military member," he said.
Supporting the intent of the bills was the Hawaii Family Forum, a nonprofit network of more than 250 Christian churches, and affordable housing advocate Nani Medeiros.
Other private operators of military housing in Hawai'i include Forest City Military Communities Hawaii, which is handling the construction and renovation of about 7,000 homes for the Navy and Marine Corps, and Actus Lend Lease LLC, which is building or improving 7,945 homes for the Army.
The privatization partnerships were sought by the Department of Defense as a way for private firms to finance the huge expense of improving old military housing stock.
Sakamoto said the privatization deals dating back seven years or so clearly involved a general excise tax exemption on construction, but he didn't recall the issue of tax breaks on tenant rents being discussed.
Some committee members expressed reservations about two of the bills, but voted to pass all the measures unanimously . Sakamoto also voluntarily removed effective dates on the bills to encourage more discussion. The bills were referred to the Senate Ways and Means Committee, which has not yet scheduled a hearing on the bills.