— We saw it coming, on April 26, 2022, Mayor Blangiardi signed into law the final version of the controversial Bill 41 (CO 22-7). We documented the audacity of earlier versions of the bill here.
In short, the three most significant changes are:
- 1) Rental terms of less than 90 days (formerly 30 days) in residential neighborhoods are illegal. Enforcement with hefty fines starts on 10.23.2022.
- 2) Short-term rental properties (with rental terms of less than 90 days) must be registered and are subject to additional restrictions and requirements, including a $1K initial registration fee, and a $500 annual renewal fee.
- 3) Waikiki Banyan and Waikiki Sunset units are allowed as STRs even without NUCs.
See related article: Guide to Condotels in Waikiki, Honolulu | Short-Term Rental Condos
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Which Properties Can Legally Advertise And Rent For Less Than 90 Days Per Tenant?
Rental terms of less than 90 days per tenant are limited to specific properties that are within one of these four categories:
1) Properties zoned “resort mixed-use” or “resort.” – This category includes the following legal STRs in Waikiki: Ilikai; Ilikai Marina; Waikiki Shore; Waikiki Beach Tower; Trump Tower; Ritz-Carlton; 2465 Kuhio; Marine Surf; Pacific Monarch; Bamboo; Luana; Regency On Beachwalk; Waikiki Grand Hotel; Cabana at Waikiki; Imperial Hawaii Resort; Kalakauan; Kuhio Village; Niihau Apartments; Royal Aloha; Seashore; Tradewinds Plaza;
also, in Ko Olina: Ko Olina Beach Villas; at Turtle Bay: Ocean Villas at Turtle Bay; and in Makaha: Cottages at Mauna’Olu.
2) Individual properties with a NUC (Non-Conforming Use Certificate). – See all legal STR properties with NUCs: 793 NUC properties. The city stopped issuing NUCs in Sept. 1990.
3) The condo building is grandfathered as a “non-conforming hotel” and exempt from the NUC requirement. – This category includes the following legal STRs in Waikiki: Aloha Surf; Hawaiian Monarch; Island Colony; Palms at Waikiki; Royal Garden at Waikiki;
also, outside of Waikiki in urban Honolulu: Ala Moana Hotel; Executive Centre.
4) Select properties allowed under Bill 41 within the “apartment precinct” and zone “A-1” and “A-2.” – This category includes the following legal STRs in Waikiki: Waikiki Banyan; Waikiki Sunset.
Also, in Ko Olina (subject to respective house rules): Kai Lani; Coconut Plantation; Ko Olina Kai Golf Estates; and the western sections of Ko Olina Fairways and Ko Olina Hillside Villas.
In addition, at Turtle Bay: Kuilima Estates.
That’s the universe of Oahu’s legal short-term rental properties.
See related article: Waikiki Condotel Reality: Cash Flow vs Lifestyle
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Will The City Allow Special Rental Term Exceptions?
Some rental terms shorter than 90 days in residential neighborhoods may be allowed for temporary contract workers, traveling nurses, buyers and sellers waiting to close on new homes, others whose homes are undergoing renovations, and other special cases e.g., off-island family members who care for loved ones. This is subject to an application and approval process which the city will clarify before 10.23.2022.
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How Will The City Enforce The Rules?
Since 2019 when CO 19-18 (Bill 89) took effect, the city planned to hire seven more city inspectors. But due to a lack of funds, the inspectors never got hired. Hence the enforcement of CO 19-18 (Bill 89) was largely non-existent.
This time the city appears committed to hiring additional staff to aggressively monitor rental ads and wiping out illegal rentals. We will see how effective the DPP code enforcement will become.
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Will The New Rules Accomplish The Stated Goals Of Freeing Up Housing Stock And Improving Housing Affordability?
Bill 41 supporters forcefully argued that rental restrictions are needed to “get tourists out of residential neighborhoods” and to “increase Oʻahu’s housing supply by inducing owners to convert their short-term rentals to long-term rentals for local residents.” This is supposed to “improve housing affordability (!?)”
“Extraordinary claims require extraordinary evidence.” ~ Carl Sagan
That sounds like a classic case of fluency heuristic. It’s an idea that can be explained simply and is easy to believe even though the simple-sounding idea is nonsense. E.g., building a train will not fix traffic congestion. Some will opt to take the train which will incentivize others to drive by car. It’s a variant of Parkinson’s Law applied to urban traffic. Dig a hole deep enough on the beach next to the ocean and it will fill up with water.
Then what results can we reasonably expect?
- “Get tourists out of residential neighborhoods.” – It remains to be seen if Lanikai or the North Shore will indeed become less crowded with fewer rental cars.
- “Increase Oʻahu’s housing supply… and improve housing affordability.” – Sounds like a noble goal we can rally behind, but will Bill 41 do the trick?
Perhaps enforcing the existing CO 19-18 (Bill 89) could have shut down some illegal STRs in residential neighborhoods. Regretfully, the DPP claimed to be overworked, understaffed and proved to be ineffective. Will Bill 41’s tighter restrictions and additional requirements help ease the DPP’s challenges?
Just to be clear, I’m against illegal STRs in residential neighborhoods and fake 30-day rental contracts. But changing the threshold from 30 days to 90 days also comes with drawbacks.
As far as Bill 41 improving affordability? It is likely to disappoint and prove to be a misfit, a square peg in a round hole. It’ll do diddly squat to counteract the lack of affordable housing. We shall compare notes in the fullness of time. Housing values will remain what they have always been, elevated.
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What Are The Legal Challenges To The New Rules?
Some legal experts are objecting to the bill based on two concerns:
A) Could it be government overreach and illegal taking of long-standing constitutional property rights? The city modified the Land Use Ordinance and changed the definition of a Transient Vacation Unit from 30 to 90 days without protecting property owners’ continued lawful use of their property.
Both the Hawaii and Federal constitutions protect a pre-existing lawful use as a vested property right which cannot be taken away without due process of law.
H.R.S. Section 46-4(a) prohibits counties from using their zoning powers to adopt ordinances that prohibit “the continued lawful use” of a purpose for which the property was used at the time the ordinance was adopted.
Section 20 of the Hawaii Constitution, prohibits “damage” to property value and use without just compensation. Rentals offering stays between 30 and 90 days have been legal for decades. Private property owners expended substantial time, effort, and money acquiring and investing in monthly rental properties. Bill 41 severely damages, if not effectively destroys, the reasonable, investment-backed expectations of these property owners with no opportunity to continue the use through nonconforming use permits.
B) Could unfair favoritism establish hotels as a privileged class? That may have been one of the original primary hidden goals of Bill 41. Because hotels are not subject to the new regulation.
Bill 41 inappropriately penalizes legal short-term rentals in resort zones with the undue burden of excessive registration fees, additional restrictions, and administrative requirements while hotels are exempted.
Proponents of Bill 41 were pandering to the masses by promising to crack down on illegal short-term rentals in residential neighborhoods.However, penalizing legal B&Bs and TVUs in resort zones does nothing, zippo, zilch to advance the official stated goals.
— Attorneys are reviewing lawsuit precedents such as this one and preparing for legal actions. Stay in the know and sign up for our Blog updates.
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What’s Next?
Bill 2 (CO 22-6) took effect on March 28, 2022.
Sellers of residential real property must provide to the buyer this Short-term rental (STR) disclosure form stating whether or not the property may be legally used as a STR.
1) If the residential real property is being used as a short-term rental, the Seller shall provide the following evidence of legal use as a short-term rental to the Buyer before the execution of a real estate purchase contract by the Buyer:
- The applicable government permit number, the NUC number, or the short-term rental registration number; and
- Tax clearance certificates evidencing the current payment status of GET, TAT, and OTAT.
Further, within 7 days after the closing of the sale, the Seller must email the DPP (Department of Planning and Permitting) the completed form with supporting documentation to STR@honolulu.gov.
2) If the Seller discloses that the property being sold may not be legally used as a STR, then the Seller only needs to check box #2 on the form and provide it to the Buyer.
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Bill 4 (2022) is currently being deliberated.
Bill 4 proposes a separate property tax classification for B&Bs and TVUs that operate outside of the ‘resort mixed-use’ and ‘resort’ zone.
The city’s goal is to increase tax revenue by collecting a higher property tax from STRs that should not be classified as ‘residential’ or ‘residential A.’
Stay tuned for what the revised property tax rate will be.
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The Silver Lining
No doubt, Mayor Blangiardi’s stated intent to crush illegal short-term renting in residential neighborhoods is reflected in the recent legislation. Not stated is that Bill 41 and Bill 4 will blatantly benefit the hotel industry at the expense of legal STRs.
This new dynamic seems to confuse some real estate investors in assessing the risk/reward balance of STR properties.
I have been an outspoken fan of legal STRs for wealth creation. We have assisted many buyers of legal STRs over the years. Congratulations to you if you bought the right property for the right reasons.
However, if you have been waiting on the sideline for the outcome of Bill 41 and Bill 4, don’t fret any longer. Because life is pretty simple if you focus on what’s important.
Here are two reasons why the future profit potential for legal STRs looks bright:
- Hawaii will always be a top tourist destination for the ones that can afford it.
- Bill 41’s attempt to shut down illegal STRs will bring a net benefit to legal STRs.
See related article: How To Improve Your Hawaii Condotel Rental Income
That’s why I just bought another legal Waikiki STR property just a couple of months ago. The glass is half full. Will you move forward this year and fulfill your dreams? You deserve it. ~ May you live well and prosper.
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