On May 8, the City Council unanimously approved Bill 7, a private-sector solution to increase Oahu’s supply of rental housing by incentivizing small-property owners to develop affordable units via various zoning waivers. Unfortunately, three last-minute changes were made that could significantly hurt the goal of producing 500 rental units per year.
Prior drafts of the bill focused on having tenants who earned 100% or less of Honolulu’s area median income (AMI) without any rent restrictions. The reason for this was that the private rental market would regulate rents without the need for artificial limits based on the location and size of the units and the lack of amenities compared with other rental units. The city’s Department of Planning and Permitting (DPP) agreed with this approach and approved the previous bill drafts, which did not include a rent limitation.
Another reason for not including rent caps is that there is no public financing involved. There are forgone fees for various items but no financing provided by the federal, state or county governments.
One of the primary reasons for not including a rent restriction was to encourage small landowners to redevelop their lands to increase the supply of badly needed affordable rental housing. They are not experienced developers and view any restriction on their right to redevelop and rent their properties with some suspicion. Our view is that market forces will obviate the need for any rent restrictions so should not have been included in Bill 7 — one less roadblock in the decision-making process for a small landowner.
This reaction from small landowners has been borne out in the meetings Hawaii’s four major banks have held for customers since Bill 7 became law. The banks understand the great impact the law could make toward more affordable rentals and want to do their part in encouraging these developments. But when the restriction on rents is explained, some of the landowners have opined that government has no right to rental rate limitations if there is no government financing.
The second last-minute change was to impose a draconian penalty of 10 times the amount of the real property tax for the years of noncompliance of terms, even if the violation was inadvertent. This replaced a penalty that was geared to the repayment of fees and taxes, which made more sense since it matched the violation with the benefit received – made the “punishment fit the crime,” so to speak. Both the city’s DPP and the Real Property Tax Division had agreed with the earlier penalty provisions. This should be changed to not discourage small landowners from redeveloping their properties.
The third last-minute change was to limit the use of Bill 7 on state Department of Education (DOE) lands to faculty housing, instead of opening them up to general-public affordable rentals. We have a chance to not only help with the retention of teachers, whose No. 1 problem is finding affordable housing, but also to help the rest of Oahu find affordable rentals. The DOE has the land — so why not let it develop affordable rentals if it so chooses? The DOE can give a preference to its teachers before renting to the general public if it wants. Why waste such a valuable asset — available land — and why not help the DOE financially if it so chooses this option?
These are minor changes in the big picture, but they should be made to remove obstacles to development under the new law. With the private sector ramping up to move “Bill 7 projects” to building permit submittals and loan commitments, it is to the community’s benefit that the City Council address these housekeeping issues. If not, our community risks losing a fair number of small landowners from helping with the rental housing shortage for Honolulu’s low-wage earners.
Marshall Hung is a retired real estate developer; Mel Kaneshigea is a retired executive from Outrigger Hotels; and Newton J.K. Chung is retired from Hawaiian Dredging Construction Co. They are advisers to the city on affordable rental housing development.
