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Viable Economy Threatened With Lack Of Investment

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By Lowell L. Kalapa

A perplexing problem for local officials is the growing number of visitor properties that are either being converted to or constructed as time share accommodations where a room is sold to an investor for a specific time period like a week or a month.

The investor can then use that accommodation for that time period every year. Interest in time share accommodations has grown over the past few years largely because big hotel chains have diversified their hospitality portfolios with time shares. Because there is a large company behind these offerings, investors appear to be a lot more confident in purchasing these units as they have the confidence that the time share won’t go out of business overnight. Further, because these companies have arrangements with other properties, owners also have the option of using other properties throughout the world in exchange for their time share at their home property.

But county lawmakers are wary of this phenomenon because they don’t believe that time shares, which are being used in lieu of a hotel stay, are paying their fair share of the transient accommodations tax (TAT). Since there is no room rate on which to impose the 7.25% TAT, the legislature, in its infinite wisdom, devised a formula based on the maintenance charges paid by owners of time shares. This, county officials argue, produces a lot less TAT revenues than if the accommodations had been rented as a traditional hotel room where the room rate would have been what the market could bear. 

As a result, at least two counties have moved in the direction of creating a separate classification for time shares with one county imposing a much higher property tax rate on that category than on any other category including hotel/resort properties. In the rush of greed to squeeze more revenues out of this type of transient accommodation, local officials seem to have overlooked the fact that time shares are probably the trend of the future and are necessary if Hawaii is to upkeep its visitor plant to remain competitive with other destinations.

As Hawaii’s visitor plant ages, no new hotels are being built, that is in the traditional sense. That is because no one can attract the multi millions of dollars it takes to construct a hotel of any respectable size. And what is currently built and operating is beginning to show its age. The most recent new hotel construction is somewhere between fifteen and twenty years old.

Like new construction, it will cost millions of dollars to renovate and update these older properties. Amassing that kind of capital or borrowing incurs tremendous costs. A more viable alternative is to get a number of investors to come up with the capital to undertake the renovations. It is like selling stock in a company, a whole bunch of investors purchase shares, providing the company with the capital it needs to produce the product it makes. 

Those weeks of a time share that an investor buys are like shares of stock, and the capital that is paid for the week of time share becomes available to pay for the construction or renovation of the property. While some may hold out hope that large hotel chains will plunk down millions of dollars to renovate or construct a new hotel property, that probably will not be the case in the future, especially in Hawaii where the business environment is known not to be “friendly.”

And what about the poor counties who claim they are not getting their “fair share” of the TAT so that they can maintain the county infrastructure that visitors utilize? One must remember that the proceeds of the TAT are not only given to the counties, put a good part of it goes toward the marketing of Hawaii to attract visitors to Hawaii. When one considers that a purchaser of a time share has already been “sold” on Hawaii and will return year after year, there is no need to market Hawaii to those time share owners.

Perhaps what makes more sense is to turn over all of the TAT revenues realized from time share owners to the counties instead of dividing it up like the TAT revenues from traditional hotel rentals where some of it goes to marketing and paying for the convention center debt and the rest is given to the counties.

This makes more sense than trying to set up a distinct and discriminatory class of property for the purpose of slapping time share units with a higher property tax rate, an action that begs a legal challenge.

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