Real Estate Investment Trusts in Hawaii: Analysis and Survey Results

From DBEDT, September, 2016

EXECUTIVE SUMMARY Act 239, SLH 2015 (SB0118 SD1 HD2 CD1) required the state Department of Business, Economic Development and Tourism (DBEDT), with the assistance of the state Department of Taxation (DOTAX), to study the impact of real estate investment trusts (REITs) in Hawaii. The Hawaii State Legislature appropriated $100,000 for the study. Due to budget restrictions, $90,000 was approved and released by Governor David Ige. A contract was awarded to SMS Research in mid-December 2015 and the study started in January 2016.

The study included four surveys in order to collect data to address the 13 categories of analysis required by Act 239. Responses addressing the data requirements identified in Act 239 are in Appendix C of the report. The four surveys were:

(1) Survey of Hawaii Resident Taxpayers;

(2) Survey of Hawaii Investment and Financial Companies;

(3) Survey of Real Estate Related Companies Located in Hawaii;

(4) Survey of Industry Experts and Other Stakeholders.

An interim report was submitted to the legislature in December 2015. The interim report included the literature review of REITs, the estimated number of REITs operating in Hawaii, their total asset value, estimated amount of dividend income exempted from the state corporate income tax, and the estimated amount of state taxes foregone. This final report includes updates of the estimated numbers and the results from the surveys.

A summary of the results are as follows: 

• 42 REITs were identified operating in Hawaii (37 via US Securities and Exchange Commission filings, 3 more via Costar, a commercial real estate database, and 2 via surveys). 
• Only one REIT had its main office in Hawaii in 2014 
• Total assets for the REITs identified in 2014 in Hawaii were estimated at $7.8 billion at cost basis (10-k filings). However, this amount may be incomplete and does not reflect the current market value of the properties. 
• 50.8% of the assets were in the retail industry and 24.7% were in hospitality related industries. 
• Hawaii dividend income exempted from corporate income tax was estimated to be $720.6 million in 2014.
• Estimated net income for REITs with property in Hawaii increased 2.6 times between 2012 and 2013, from $79.9 million in 2012 to $208.8 million in 2013, and by over 3 times between 2013 and 2014, from $208.8 million to $720.6 million. 
• Estimated corporate income tax revenues foregone by the State of Hawaii, due to the REIT dividend paid deduction (DPD), were approximately between $0.3 million for 2009 and $36 million for 2014 ($35 million accounting for offsets from state taxes paid by Hawaii residents for REIT dividend income). 
• The average amount in corporate income taxes foregone by state between 2009 and 2014 was estimated at approximately $9.6 million per year. 
• The retail sales from REIT properties in Hawaii (50.8% of the total REITs) generated about $207 million in State General Excise Tax (GET) in 2014. 
• The survey results showed that between 1.8% (direct investment) and 12.8% (indirect investment) of Hawaii households receive income from REIT dividends, which is between 8,114 and 57,698 households. 
• Additionally, between 0.5% and 3.0% of Hawaii taxpayers invest in REITs with property in Hawaii. This results in a total of between 2,254 and 13,523 household investors in REITs with property in Hawaii. 
• The resident taxpayer survey showed that the average REIT investment for Hawaii based REIT investors was $12,861 for households with incomes below $100,000 and $42,048 for households with incomes of $100,000 and above. 
• The “Married Filing Separately” category had by far the highest average investment in REIT, at $81,748, while the “Single” category had the lowest average investment at $10,124. 
• REITs indicated that, if the DPD were repealed, real estate investment in Hawaii would decrease by between 11% and 30 % within five years. In contrast, a majority of non-REIT real estate companies indicated there would be no change in real estate investment within five years of repealing the DPD.

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