House Advances Measure to Eliminate Tax Exemption for Real Estate Trusts

Apr 10, 2019

REITs control some of the most valuable properties in Hawaii, including the Ala Moana Shopping Center in Honolulu.
Credit Wikimedia Commons

Hawaii lawmakers are on the path to eliminating a decades’ old exemption on corporate taxes for a certain class of real estate company. Real Estate Investment Trusts, or REITs, were created in Congress in 1960 and their profits are exempt from taxes by the federal government and 49 states.

REITs function like publicly traded companies, allowing investors to purchase shares of the trust and benefit from its profits. The creation of REITs was intended to allow private citizens to invest in commercial real estate that would otherwise be financially out of reach.

Under the 1960 law that created them, REITs are required to distribute at least 90 percent of annual profits to the shareholders. In return, those profits are exempt from federal corporate taxes. The profits are instead taxed as personal income for the shareholder.

Alexander and Baldwin began as a sugar producer, controlling vast tracts of land in Central Maui. It converted into a REIT in 2017 and owns some of the most high profile properties in Hawaii.
Credit Derek van Vliet / Flickr

49 states, including Hawaii, have adopted that exemption into their state tax codes. New Hampshire is the lone exemption. Hawaii may soon join the Granite State. The state House of Representatives gave its final approval to a bill that would eliminate REIT exemption.

If that bill reaches the governor’s desk and is signed into law, REIT profits would be taxed at Hawaii’s standard corporate rate of 6.4 percent.

Chris Benjamin, the President and CEO of Hawaii-based REIT Alexander and Baldwin, says that would negatively impact economic growth in Hawaii.

“I think that it would almost certainly reduce REIT investment in Hawaii. To risk all of the hundreds of millions of dollars that these properties and owners are paying in Hawaii for the sake of an additional $2-10 million of additional revenue I think is not a wise strategy.”

A 2015 study from the state Department of Business, Economic Development, and Tourism found that Hawaii lost on average $10 million per year in revenue to the REIT exemption.

But not everyone agrees with Benjamin’s assessment. Peter Savio is a commercial real estate developer and broker in Honolulu. According to him, the tax exemption gives REITs an unfair competitive advantage over non-REIT commercial developers.

“We should tax the REITs the same as a Hawaii corporation” Savio said. By his calculations, the additional tax liability on each REIT property would not be significant enough to disincentivize any future development.

1131 Bishop Street, owned by the Douglas Emmett REIT, will be converted into affordable rental housing units.
Credit Yelp

He points out that the exemption does not affect federal tax receipts because the REIT profits are eventually taxed at the higher personal income rate. But since anyone can invest in a REIT, at least some portion Hawaii REIT’s profits are sent out of state or overseas to residents of other jurisdictions.

Savio is not swayed by the argument that $2 million in additional revenue is not worth jeopardizing economic growth, a line of reasoning he calls a scare tactic.

“It’s not about the taxes. If it is $2 million, I want my $2 million for the state. If it’s $30 million, I want the $30 million for the state. If it’s neutral, that’s fine. I still want equality. It’s just not fair to the local developers.”

SB 301 has been passed by the House of Representatives and sent to the Senate. The Senate can adopt the bill as written, or bring it to a joint committee and attempt to make changes.

Listen to the full interview with A&B's Christopher Benjamin here.

Listen to the full interview with real estate developer Peter Savio here.