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This guide is to assist you in navigating the sometimes confusing short-term vacation rental market in Honolulu, which allow for rentals from just 1 day, just like a hotel (also referred to as transient vacation units). The vast majority of these condos are in Waikiki and are popular among investors as well as 2nd home buyers looking to generate income when not vacationing in Hawaii.

This guide highlights some of the things you should know about short-term vacation rental condos in Honolulu.

 

 Requirements to Run a Short-Term Vacation Rental Business
1 (and only 1) of these 3 criteria must be met for an owner to legally be allowed to run a short-term vacation rental business in Waikiki:
1) Parcel is zoned ‘Resort Hotel’,
2) owner holds a valid nonconforming use certificate (NUC), or
3) property has a current active hotel operation and the property is also exempt from requiring owners to hold a valid NUC (exempt buildings are determined by the Department of Planning & Permitting. This branch has an unofficial document created by their staff around year 1990, which highlights buildings that are exempt – we have reviewed this document. The document has not been used for enforcement purposes, but if there was a complaint or inquiry about any particular property, they would use it as a resource for their investigation).

Note: if the association of a condo changes their house rules to require minimum rentals of 30 days or longer, then an owner of a unit that fits criteria 1, 2 or 3 from the above would not be allowed to run short-term vacation rentals.

Hotel Definition: Building that contains lodging and/or dwelling  units offering transient accommodations, and a lobby, clerk’s desk or counter with 24 hour clerk service, and facilities for registration and keeping of records relating to hotel guests.

Unit Classification (for real property tax purposes)
Each unit, within a building, will, for tax purposes, be classified as either ‘Residential’ or ‘Hotel & Resort. An owner running a short-term vacation rental business is required to update the Real Property Assessment Division of such short-term rental activities (by filling out the Declaration Regarding Condominium Use), so the real property tax division can properly classify  the unit as “Hotel & Resort” . If the unit is already classified as “Hotel & Resort” – upon taking ownership – the owner does not have to fill out the Declaration Regarding Condominium Use.

However, according to the Revised Ordinances of Honolulu Section 8.7.1(h),  if an owner holds a valid NUC then the property shall be classified based on the underlying zoning. In other words, an owner of a condo in Waikiki on a parcel zoned “Apartment” with a valid NUC, can keep the “Residential” classification, thus paying the much preferred “Residential” tax rate.

If an owner of a unit classified as “Hotel & Resort” does not run short-term vacation rentals, then the owner can file for an exemption to get re-classified as ‘Residential’ if either:
1) The owner claims the unit as Permanent Residence (must occupy as primary residence at date of assessment, Oct. 1st, and  intent to occupy unit at least 270 days in a given calendar year) by filing the “Homeowner Exemption” prior to September 30th of a given year and the reclassification to ‘Residential’ should take effect the following fiscal year, if granted, or
2) The owner files the ‘Declaration Regarding Condominium Use’ prior to September 30th of a given year and the owner only engages in rentals that are 30 days or longer. The reclassification should take effect 2 fiscal years later. Example: if an owner files the ‘Declaration Regarding Condominium Use’ September 2016, then the re-classification to ‘Residential’, if granted, will take effect fiscal 2018, which runs July 1st 2018 – June 30th 2019).

Note: If a unit is classified as “Residential”, but the parcel is zoned “Resort Hotel” then a new owner who is not planning to run short-term vacation rentals is at “risk” the Real Property Assessment Division will re-classify the unit to “Hotel & Resort” for the following fiscal year, thus exposing the owner to a much higher real property tax rate. Therefore, such owner should make sure to file the Homeowner Exemption (if intension is to be primary residence) or file the Declaration Regarding Condominium Use if the owner’s intension is to run rentals 30 days or longer or simply keep unit vacant or use as owner’s 2nd home. Both forms are linked to in the previous paragraph.

Taxes (Honolulu County)
Property Taxes
A unit classified as ‘Hotel & Resort’ is taxed 1.29% of assessed value, whereas a unit classified as ‘Residential’ is taxed either:
1) The “Residential” tax rate, which is 0.35% of assessed value for owners who can claim the homeowners exemption (irrespective of assessed value) or properties assessed at less than $1,000,000 for owners who cannot claim the homeowners exemption, or
2) The “Residential A” tax rate, which is 0.6% of assessed value when the property is assessed at $1,000,000 or more for owners who cannot claim the homeowners exemption.

On October 1st of a given year, the tax office determines the unit’s classification, which applies for the following fiscal year. Example 1: October 1st, 2016 the classification is determined for fiscal year 2017 (July 1st 2017 – June 30th 2018).

Rental Income Taxes
All short-term rental income is subject 2 separate tax components:
a) GET – general excise tax – of 4.5% (applies to all rentals).
b) TAT – transient accommodation tax – of 9.25% (applies to all rentals less than 180 days).

Waikiki Business Improvement District (annual charge)
This association levies an annual fee on all units classified as “Hotel & Resort” in Waikiki only and will show on the property tax bill.
PS! You may have seen the Aloha Ambassadors in yellow shirts walking around Waikiki. They represent an example of what the funds are used for.

The calculation various each year, but here is a recent example:
District 1: $0.46 / $1,000 of assessed value – Kuhio Ave, Kalakaua Ave and all streets in between.
District 2: $0.1533 / $1,000 of assessed value – Streets towards the ocean side of Kalakaua Ave, but before Ala Moana Blvd area.
District 3: $0.115 / $1,000 of assessed value – Ala Moana Blvd area.

Nonconforming Use Certificate (NUC)
AN NUC  is a certificate, which allows an owner to run a short-term vacation rental business, despite a parcel not being zoned ‘Resort Hotel’. Up until year 1986 the Department of Planning & Permitting in Honolulu would issue NUC’s. When the department ceased to issue these certificates, a number of owners who had previously been issued such certificates had them grandfathered in. Owners have since been able to keep their certificate, subject  to ongoing renewal every even numbered calendar year. Should an owner be late in filing for a renewal with the Code Compliance Branch, the certificate is lost for good. As of writing, there are around 600 nonconforming certificates issued for a small group of buildings across Waikiki and about 100 certificates for properties outside Waikiki (mainly on Oahu’s North Shore and Kailua). 

 Financing
Banks will typically not lend on a property if it lacks a full kitchen. Typical requirements to be considered a full kitchen includes a full size refrigerator, a sink and a minimum of 2 burner built-in cooktops. Some lenders will also require a freezer with its own door and a full size oven.

Local banks in Hawaii frequently change their appetite for lending on short-term vacation rental condos and their willingness to lend also depend on the property in question. In many cases, there is at least 1 local bank prepared to lend, subject to the unit having a full kitchen. Mainland lenders are typically not very likely to lend on short-term vacation rental condos, unless you have a special relationship with your bank.

Banks typically required the cash down payment be 30% or more and the overall loan terms may not be as attractive as terms offered by conventional financing. Therefore, if you need financing, it may be worthwhile to speak with a lender early in the process and establish a) can you get a loan on building(s) of interest and b) what are the expected loan terms and upfront costs associated with the loan.

Property Management
Hotel Operation, 3rd Party Rental Agency or Owner Managed
Hotel Operator
Pros: Strong marketing presence and name recognition, potentially making it easier to charge a higher daily rental rate and keep a higher occupancy rate. Very familiar with managing rentals in building.
Cons: Typically charges a higher management fee (~50% on gross rental income is common) and an owner is subject to the hotel operator’s requirements, such as keeping unit up to a certain standard, which may on occasions require remodel / upgrade work at the owner’s expense, potential longer lock-in periods (an owner may not easily be able to pull out of a contract with the hotel operator).

3rd Party Rental Agency
Pros: Typically charges a lower management fee (~20 – 25% is common) and may be more flexible on the unit’s standard and overall less restrictions.
Cons: Marketing efforts may not have as great a reach, potentially making it difficult get top $ rental income and leading to a lower occupancy rate.

It is not always clear-cut whether a hotel operator or 3rd party rental agency offer the most attractive setup for an owner. Therefore, each unit and / or building needs to be analyzed on a case by case basis. A few buildings also have restrictions on usage of 3rd party rental agencies.

Owner Managed Rentals
If an owner’s primary residence is on Oahu, the owner may manage his / her rentals, without using a licensed rental agency (subject to each condo’s governing documents). If an owner lives on another Hawaii island, the US mainland or in another country, the owner is not allowed to be the point of contact for the rentals. However, the owner may, in such case, designate a person who lives on Oahu, to act as the on-island agent. The owner is also required to designate a person to be the point of contact for emergencies and support with collection of taxes.  These roles can be managed by the same person and he / she does not have to be a licensed real estate agent.

Illegal Vacation Rentals – Fines & Enforcement
The Department of Planning & Permitting’s Rules Relating to Administration of Codes spells out that daily fines for running an illegal vacation rental range from $50 – $1,000 per According to the Code Compliance Branch this is procedure:
Almost all inspections for illegal short term (less than 30 days) transient vacation rentals are complaint driven.  When the inspector conducts a site visit, he/she will attempt to gain access to the unit and interview the occupant.  If it is determined that non-permitted (illegal) transient vacation rental operations are being conducted, the inspector will immediately issue a Notice of Violation (NOV).  Typically, the inspector will allow 30 days to correct the violation without the referral for a Notice of Order (NOO), which imposes the civil fine.  However, if the violation is recurring, the inspector will immediately refer the NOV for an NOO with immediate imposition of civil fines (usually $1,000 initial fine and if not corrected, addition civil fine will be assessed at a rate of $1,000 per day until the violation is corrected.  Regarding the use of vacation rental websites proactively, the inspector will include the research of the website to add to the preponderance of evidence to support the enforcement action taken.  However, at the present time, the DPP does not surf the net to identify listings of vacation rentals (e.g. VRBO, AirB&B, etc.) to conduct neighborhood sweeps to identify properties where illegal vacation rentals are being conducted.”

For properties zoned apartment, an inspector from the Commercial, Multi-family Code Enforcement Branch will conduct any potential inspection and take enforcement action as appropriate.

The following is a list of the condos in Waikiki that currently allow short term vacation rentals.

Parcel Zoned "Resort Hotel" (with hotel operations)

Bamboo,Ilikai apartments, Luana Waikiki, Pacific Monarch, Regency on Beachwalk, Ritz-Carlton Waikiki, Trump Tower Waikiki, Waikiki Beach Tower, Waikiki Grand Hotel, Waikiki Shore,

Parcel Zoned " Resort Hotel (no hotel operation)

Ilikai Marina, Imperial Hawaii Resort, Kuhio Village, Tradewinds Plaza, Aloh aSurf Hotel, Hawaiian Monarch, Island Colony, Palms at Waikiki, Royal Garden at Waikiki,

Parcel Zoned "Apartment" (with hotel operations & owners are exempt from having nonconforming use certificates.

Waikiki Banyan, Waikiki Sunset,

Parcel Zoned "Apartment" (no hotel operation and no exemption from  NUC's)

444 Nahua, Diamond Head Beach Hotel, Four Paddle, Hawaiian King, Royal Kuhio, Waikiki Lanais, Waikiki Marina Condominium, Waikiki Park Heights, Ala Moana Hotel Condo, Executive Centre,

 

Disclaimer: The information in this article is deemed reliable, but not guaranteed, and should not be relied upon in deciding to purchase or sell. Always verify any and all information before making a decision to purchase or sell. Also, keep in mind; rules, regulations, tax rates, tax laws, zoning laws, governing documents in buildings etc are subject to change.