What is a REIT?
REIT stands for Real Estate Investment Trust. REITs are companies that provide a way for anyone, including Hawai‘i residents, to own professionally managed, income-producing real estate—just like the way mutual funds let small investors to buy stock in a corporation. Many local people own REITs, either as individual investors or through mutual funds and employer or union pension plans. If you invest in a mutual fund or retirement plan, chances are you own REIT stock and receive REIT dividends.
How many Hawai‘i residents actually invest in REITs?
Available data shows 44% of Hawai‘i households own REIT stock through their retirement savings and other investments. Unlike ownership in family-owned businesses, anyone can buy shares in publicly traded REITs or in mutual funds that own REIT stock. Bank of Hawaii and First Hawaiian Bank hold millions of dollars in shares of REITs on behalf of their clients. Hawai‘i pension plans, like those of Queen’s Health System and Hawaiian Airlines, Inc. have allocated millions of dollars in their portfolios to REITs. The State of Hawai‘i Employee Retirement System also invests in REITs to fund the pensions for local government retirees throughout the islands.
What benefits do REITs provide for Hawai‘i residents?
REIT investments help communities grow through development of workforce rental housing, medical facilities, shopping centers and commercial buildings that improve our quality of life. REIT-owned property, like Ka Makana Ali‘i, provide gathering places for the community to celebrate culture and family. REITs own high-quality office and retail space, which provide a favorable environment for many locally owned businesses, including dentists, doctors and restaurants, to operate and grow. REITs must be widely-held, long-term real estate owners who are not in the business of flipping properties, which helps stabilize local property values, as well as rent prices for their tenants.
How are REITs helping address Hawaii’s affordable housing challenges?
REITs are providing affordable housing for Hawai‘i’s working families. Douglas Emmett, a REIT operating in Hawai‘i, recently announced the creation of 500 affordable workforce rental units at 1132 Bishop Street for people making 80-120% of the median area income. They already provide nearly 500 workforce rental units at Moanalua Hillside Apartments in Aiea and Waena Apartments in downtown Honolulu. Another REIT also built Hale Mahana, a new University of Hawaii off-campus housing community offering affordable living options for students.
The Nareit Hawaii Community Giving Initiative is also dedicated to supporting forward thinking initiatives that will supplement and create affordable housing solutions for Hawai‘i. Since the initiative started in November 2018, REITs doing business in Hawai‘i have already donated $350,000 to local non-profits who are building affordable housing developments throughout the Hawaiian Islands, with more donations to come in the future.
How do REITs contribute to the economy in Hawai‘i?
Public REITs have access to global capital markets, which provides them with funding to invest in Hawai‘i. This is especially important when the state’s economy is soft or in a recession. Because REITs invest continuously, even during recessions, this has kept thousands of Hawai‘i construction workers employed during slow periods (i.e. projects like the expansion of Ala Moana Center and the redevelopment of the International Market Place). The construction industry relies on the jobs REITs create when they purchase, develop and maintain their properties.
To take just one example, the recent REIT-funded expansion of Ala Moana Center alone created an estimated 11,600 construction jobs and brought in an estimated $146 million in state GET revenue in 2016. Since completion, estimates show the additional retail sales produced some $33 million in GET revenue for the state, along with an additional 3,000 new non-construction jobs.
How do REITs operate in Hawai‘i?
Unlike partnerships or other businesses, federal law requires REITs to distribute at least 90% of their taxable income to shareholders as dividends to shareholders. Most REITs distribute 100%. This income is taxed at the stakeholder level by the IRS and the shareholders’ state of residence.
Do REITs pay taxes?
Yes, REITs pay hundreds of millions in taxes to the State of Hawai‘i and counties, including general excise and property taxes. REITs also pay corporate taxes on all profits that are not distributed as dividends to their shareholders.
Why do people say REITs don’t pay corporate income tax?
In exchange for the requirement that REITs distribute nearly all of their taxable income as dividends, and for meeting other requirements, federal law allows REITs to deduct these dividends (called the “dividends paid deduction”), if it is paid out as dividends to shareholders. By law, REITs cannot be closely-held family businesses, but must be widely held, and they must be long-term holders in real estate. While those dividends are not taxed at the corporate level in Hawai‘i before distribution, they are taxed as income the shareholders receive. That means Hawai‘i residents would be taxed twice on any shares of Hawai‘i REITs they own. If REITs retain any taxable income, they pay corporate tax just like other corporations. Nearly all states with a corporate income tax, including Hawai‘i, currently follow the same tax model as the federal government, which means REITs don’t pay state corporate taxes on amounts distributed to their shareholders.
How much revenue will Hawai‘i gain if state lawmakers change REIT corporate tax laws?
The Hawai‘i State Department of Taxation (DoTax) income projections show a repeal of the dividends paid deduction will NOT produce a windfall of corporate tax revenue for state coffers. According to DoTax, the current bills, if passed by the legislature, would only generate $2.2 million in the first year and $10 million at most in following years. DoTax representatives also testified in recent legislative hearings that REITs could use other applicable tax deductions, which may actually result in a net revenue loss for the state.
Are there any other significant ramifications from passage of a REIT corporate tax bill?
Repealing the deduction for the dividends REITs pay their shareholders will likely put at risk $16 million or more of hotel General Excise Tax (GET) state revenue. Because federal tax law prohibits REITs from operating hotels, hotel REITs pay Hawai‘i more GET than a non-REIT hotel owner pays. Essentially, REIT hotel owners must lease their hotels to a third party or for-profit, subsidiary corporation whose rent to the REIT is subject to additional GET not faced by non-REIT hotel owners.
Available data shows REIT-owned hotels pay the state of Hawai‘i an additional GET of about $16 million annually, considerably more than the “possible” $10 million increase in corporate tax projected by DoTax. If this change in law were to occur, hotel-owned REITs would review their form of ownership and operation in Hawai‘i, and the State could lose as much as $6 million.
What could happen to Hawai‘i’s economy if the legislature changes REIT corporate tax laws?
Companies, including REITs, re-think their business plans when their costs increase. They may shift investment to other states where they can get a better return on their money. That means REITs would spend less money to improve and maintain Hawai‘i properties or sell properties to investors with significant capital reserves, often tax-exempt organizations like pensions or university endowments. Over time, this could adversely impact Hawai‘i’s competitiveness both for tourists and other business investment, resulting in a shrinking economy. Decreasing investment in Hawai‘i would reduce the size of the tax base and generate less future tax revenue.
How could the local construction industry be hurt by changes to REIT corporate tax laws?
If these bills are passed, it will discourage future investment in Hawai‘i construction projects, which directly impacts construction jobs. Repealing the dividends paid deduction could decrease or halt REIT investment on new construction and/or renovation work, which would impact the number of jobs for construction workers. OP Trust, an investor in the REIT that owns Ka Makana Ali‘i, has stated in testimony to the legislature that if this bill is passed, they will pull out of investing in Phase 2 at Ka Makana Ali‘i, which could result in a loss of anticipated construction jobs.
Are any REITs headquartered here in Hawai‘i?
Yes, Alexander & Baldwin is a local REIT based in Hawai‘i.