Opinion: Call Hawaii the extortionate state

Canadian investors, vacationers should give state a miss until it honours NAFTA

by Adam Leamy, Northwest Public Affairs, (Originally published in Vancouver Sun, March 2, 2015)

UPDATE: Testimony against HB825 with more details on NAFTA violations

When one is sitting on a beach in Hawaii, two significant structural problems facing the state aren’t part of the view, but they exist, and they affect Canadians’ investments in the state.

The first problem is the state’s preoccupation with illegal vacation rentals it can’t seem to find. Amid years of claims that illegal vacation rentals are depriving the state of deserved revenues, Hawaiian authorities unbelievably have yet to deliver any data to quantify the problem, and — even more unbelievably — have not enforced the many statutes on the books to counter such rentals.

The second problem is the inability of Hawaiian hoteliers and condominium rental agencies to adapt to the Internet and the opportunity it provides for visitors to Hawaii to stay in legal taxpaying owner-operated condos.

These two problems collide precisely at the location of legal taxpaying vacation rental properties owned by Canadians, and increasingly preferred by Canadians who choose to visit Hawaii. Instead of enforcing existing statutes, Hawaiian legislators have unleashed a blizzard of new legislative bills requiring off-island owners of vacation rental properties to cede management and operation of their investment to real estate agents and condo rental agencies.

At the same time, the bills aim to make operating a legal vacation rental so complex and dangerous that owners abandon the market, giving Hawaiian hoteliers the accommodation monopoly they hoped legislators would create.

Legislators rush to cite “improving consumer protection” and “leveling the playing field” as the reason for their legislative approach, but that’s just a contrivance. There’s nothing to protect consumers, or that offers balance, in Hawaiian bills that nationalize private property, create a hotel monopoly, or try to stuff the Internet back into the rotary-dial age. Hawaiian condo rental agencies that can’t compete in the digital age, and hoteliers who regard consumer preference for condos cutting into a market share they feel entitled to have simply drafted bills that would serve their special interests. Legislators have obliged, introducing the bills and moving them through the legislature.

Bill HB803 requires owners to cede control of the management and operation of their Hawaiian vacation rental property to real estate agents. Bill HB958 makes it a “conclusive presumption” that owners owe taxes on their vacation rentals and they do, but this bill, with that language, eliminates the ability of owners to defend themselves in court, a right enjoyed by every other taxpayer. Bill HB825 requires operators of vacation rentals to obtain an annual license. The bill makes it abundantly clear that possession of a license is no guarantee it will be renewed, an important warning because Bill HB198 allows counties to determine the number of vacation rentals they’ll allow.

One of the bills forces owners to use Hawaiian banks for their banking services.

But It’s the penalty bill that’s most frightening. It elevates contravention of these new complex requirements for operating a Hawaii vacation rental from a misdemeanour to a class C felony. Put a foot wrong, and that’s up to five years’ imprisonment and a fine of up to $10,000. Ownership of a Hawaiian vacation rental has become a dangerous investment.

Yet Canadians have been so good to Hawaii, making huge short- and long-term investments in the state. The Hawaii Tourism Authority reports that for 2013, Canadians accounted for almost 10 per cent of state visitors, and pumped $1.1 billion into the economy. Many of the 500,000 Canadians who visit Hawaii each year like staying in condos, whose popularity with Canadians has been rising at the expense of hotels.

Coldwell Banker reports that Canadians were the top foreign buyers of Hawaiian properties in 2013, purchasing $244.6 million worth of property. Canadians have been investing in Hawaiian real estate for decades, and this cumulative Canadian cross-border investment in just this one U.S. state is in the billions.

Many of the Canadians who have invested in Hawaii have done so through the presumed opportunities and protections for cross-border investment NAFTA created when it came into force in 1994. But these Hawaiian bills ignore NAFTA and Canadians’ protections under it.

State actions requiring investors to use a Hawaiian bank, and to turn over management and control of their property to a Hawaiian agent, are fully offside with Canadians’ Chapter 11 NAFTA protections. (These include Article 1106, prohibiting any legislative provision to require purchase of local goods or services, and Article 1102: National Treatment, which provides that investments of investors must be treated the same as local investments.)

NAFTA Chapter 11 offers Canadians protection from “disguised restriction on international trade or investment.” And the Hawaiian bills are precisely that.

Hawaii’s abandonment of NAFTA is all about consequence. Hawaiian legislators have no fears that their anti-NAFTA legislation will provoke sanction. Canadian cross-border investors, having seen the state nationalize their properties by forcing owners to turn control over to others, or eliminate all but hotel rooms from the Hawaiian accommodation offering, will be in no financial state to launch a NAFTA challenge. Hawaii believes it has a free hand to violate NAFTA.

Still, Hawaii’s decision to squeeze Canadian visitors and investors does not leave Canadians without options. For now, Canadians thinking about making a real property investment in Hawaii and elsewhere in the U.S. should hold off. The actions of Hawaiian legislators to nationalize private property and the potential for their spread to other states make such investment in the U.S. by Canadians an unwise pursuit at this time.

Canadians who own property in Hawaii and in other states need to learn about the Hawaiian bills, and ensure their Canadian and U.S. tax and legal professionals apprise them of the bills’ effect on their cross-border investments. The fastest way to learn about these bills is to visit the Hawaii Rental By Owner Awareness Association website at rboaa.org, which provides a direct link to key bills.

Canadians who own property in Hawaii or other U.S. states should seek the action of federal elected officials in Ottawa to maintain their NAFTA protections. Canadian officials urgently need to have a word with their federal U.S. counterparts, officials in Hawaii, and in any other states following Hawaii’s lead in violating Canadians’ NAFTA protections.

Lastly, the 517,000 Canadians who visited Hawaii last year, including the 210,000 who enjoyed staying at a condo for all or part of their stay, should email the Hawaii Visitors and Convention Bureau at info@hvcb.org to tell them a Hawaii where hotels are awarded an accommodation monopoly adds cost, eliminates accommodation choice, is anti-consumer, and is one they will forgo for competitive and Canadian-friendly sun destinations.

These bills are moving fast. If Hawaii’s economic bullying succeeds in nationalizing Canadians’ cross-border investments with impunity, other state legislatures under similar pressure from well financed local interest groups will embrace the same easy-button approach.

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Adam Leamy operates B.C.-based Northwest Public Affairs, and owns investment properties in Hawaii.