SB1462

PART I

SECTION 1. Chapter 201, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§201- Limited-profit housing council. (a) There is established the limited-profit housing council within the department of business, economic development, and tourism for administrative purposes, to oversee and administer the establishment and governance of limited-profit housing associations in the State.

(b) The council shall consist of the following members:

(1) State auditor or the auditor's designee, who shall serve as the chair;

(2) The director of the department of business, economic development and tourism or the director's designee;

(3) The attorney general or their designee;

(4) The commissioner of financial institutions or their designee;

(5) The director of taxation or their designee;

(6) The chairs of the standing committees of the senate and house of representatives with subject matter jurisdiction over housing or their designees;

(7) A representative from the city and county of Honolulu's office of housing with experience in affordable housing development;

(8) A representative from the county of Maui's housing division with experience in affordable housing development;

(9) A representative from the county of Kauai's housing agency with experience in affordable housing development; and

(10) A representative from the county of Hawaii's office of housing and community development with experience in affordable housing development.

(c) Meetings shall be open to the public and subject to chapter 92. The chair shall determine how often the council shall meet; provided that the council meets at least once a calendar year.

(d) The department shall provide administrative support to the council and hire an administrator without regard to chapter 76, who shall be responsible for the day-to-day operations of the council.

(e) The council may adopt rules under chapter 91 necessary to establish and govern limited-profit housing associations in the State."

PART II

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

LIMITED-profit housing associations

§ ‑1 Purpose. The purpose of this chapter is to create long-term affordable housing in the State through the establishment of limited-profit housing associations. Every limited-profit housing association shall have the primary purpose of providing long-term affordable housing in the State. This includes devoting and reinvesting its assets, including its shareholders' equity, to generate affordable housing and regularly auditing its business operations to ensure that it is aligned with this primary purpose. This chapter authorizes a designation and code of conduct for an association to offer entrepreneurs and investors a sustainable option to develop long-term affordable housing in the State.

§ ‑2 Definitions. As used in this chapter:

"Contractor" means any general engineering, general building, or specialty contractor, any subcontractor, or any person, who by oneself or through others offers to undertake, or holds oneself out as being able to undertake, or does undertake to alter, add to, subtract from, improve, enhance, or beautify any realty or construct, alter, repair, add to, subtract from, improve, move, wreck, or demolish any building, highway, road, railroad, excavation, or other structure, project, development, or improvement, or do any part thereof, including the erection of scaffolding or other structures or works in connection therewith.

"Financial relationship" means a relationship between a person and a contractor, where:

(1) The person is, or has been within the last three years, an employee of a contractor, its parent company, or its subsidiaries;

(2) The person is related by blood, marriage, or adoption to; is a party to a civil union with; is a reciprocal beneficiary or household member of; or resides with a contractor or an officer or director of a contractor, its parent company, or its subsidiaries; or

(3) The person or an association of which the person is a director, officer, or manager or in which the person owns beneficially or of record five per cent or more of the outstanding equity interests or the outstanding shares of a contractor, its parent company, or its subsidiaries.

"Limited-profit housing association" or "association" means a domestic corporation, incorporated under chapter 414, that is approved by the limited-profit housing supervisory board to practice as a limited-profit housing association and whose status as a limited-profit housing association has not been terminated as provided in this chapter.

"Limited-profit housing council" or "council" means the council established pursuant to section 201- .

"Limited-profit housing supervisory board" or "supervisory board" means the county-level board established pursuant to section 46- .

§ -3 Establishment; standards of conduct; termination. (a) A domestic corporation, incorporated under chapter 414, may establish itself as a limited-profit housing association upon approval from its limited-profit housing supervisory board. If a corporation that is not a limited-profit housing association is a party to a merger, consolidation, or division, or is the exchanging corporation in a share exchange, and the surviving, new, or any resulting corporation in the merger, consolidation, division, or share exchange is to be a limited-profit housing association, then the plan of merger, consolidation, division, or share exchange shall not be effective unless approved by the supervisory board.

(b) The corporation shall, upon approval of its limited-profit housing association status, include in its articles or amend its articles to include a statement that the corporation's primary purpose is to provide long-term affordable housing in the State and that the corporation shall devote its assets, including its shareholders' equity, to generate affordable housing and regularly check and monitor its business operations to ensure that it is aligned with this primary purpose.

(c) All directors and officers of an association shall be independent of and shall have no financial relationship with any contractors.

(d) The director of an association shall not be personally liable for monetary damages for any action taken as a director if the director performed the duties of the director's office in compliance with the general standards of conduct pursuant to section 414-221.

(e) The officer of an association shall not be personally liable for monetary damages for any action taken as an officer if the officer performed the duties of the position in compliance with the general standards of conduct pursuant to section 414-233.

(f) An association that is noncompliant with this chapter shall, upon proper notice, have its status as a limited-profit housing association revoked by its supervisory board.

(g) An association may elect to terminate its status as a limited-profit housing association and cease to be subject to this chapter upon approval from its supervisory board. If a plan of merger, consolidation, division, or share exchange would have the effect of terminating the status of a corporation as a limited-profit housing association, the plan shall not be effective unless it is approved by its supervisory board.

§ -4 Leasehold purchase prices; rental prices. (a) Limited-profit housing associations shall only charge a fixed price for the use of its affordable housing units. The fixed price shall be at a level neither higher or lower than necessary to cover the costs for constructing and operating the building, while considering the actual and reasonable costs of managing the affordable housing units, including the formation of reserves. The fixed price shall be based on the following factors:

(1) Construction expenses, including the financing of the affordable housing units;

(2) Operating expenses and management costs; and

(3) Replacement reserves.

(b) If a tenant or buyer of an affordable housing unit that is built by an association disagrees with the cost of the affordable housing unit, they may have the amount of the fixed price reviewed by a court of law.

§ -5 Asset management. (a) The revenues generated by a limited-profit housing association shall be reserved and placed in a revolving fund where the moneys shall be used only for limited business activities as provided under section -6.

(b) The association may only distribute its profits once a year. The profit distributed may not exceed the permissible interest rate for shareholder equity as determined by the council.

(c) The dividend paid to a member or shareholder that withdraws from the association shall be only the amount of the nominal value of the member's or shareholder's capital contribution.

§ -6 Limited business activities. (a) Limited-profit housing associations shall primarily construct and manage affordable housing. Additional primary activities of an association include the large-scale renovation and management of the affordable housing of other limited-profit housing associations. All activities performed under this subsection shall be performed under the name of the association.

(b) An association may conduct other secondary business activities, including:

(1) The construction of public housing, private homes, and homes built for third parties;

(2) The construction of commercial premises, garages, and parking lots;

(3) The construction of community facilities for the residents of its affordable housing projects and the residential public in general;

(4) Improvements in the general housing environment of the State;

(5) Special renovation activities, including urban renewal, sanitation, and renovation for third parties;

(6) Legal transactions relating to the affordable housing units owned by the limited-profit housing association;

(7) Bank transactions relating to the construction of affordable housing;

(8) The purchase of building materials and furnishings; and

(9) Participation in other limited-profit building associations, loan associations, and building societies;

provided that the scope of these activities is connected and related to the primary business activities described in subsection (a).

(c) An association may, with written approval from its limited-profit housing supervisory board, perform other housing-related services.

(d) Any interruption in building activities by an association shall require the explicit permission of its limited-profit housing supervisory board.

§ -7 Records; annual report. (a) Limited-profit housing associations shall undergo an annual audit by an independent auditor to ensure that they are aligned with the purpose and requirements of this chapter. The independent auditor shall not only conduct a financial audit, but also a performance audit that is aligned with the auditing guidelines that are approved by the limited-profit housing council to ensure that the use and management of the association's resources and capital comply with the purpose and requirements of this chapter.

(b) Each limited-profit housing association shall submit a copy of its annual audit to the limited-profit housing supervisory board within five working days of its receipt. Upon review of the annual audit, the supervisory board may order the association to perform remedial actions that are deemed just and proper.

(c) The association shall prepare an annual report that includes the annual audit of the association, any orders from the supervisory board, and any actions planned or taken in response to orders from the supervisory board. The association shall post a draft of its annual report on the public section of its website, or make it otherwise available to the public, for a sixty-day public comment period prior to final publication of the annual report. The deadline for commentary shall be published in a publicly accessible manner.

(d) The final draft of the annual report shall also include formal responses to all questions, concerns, comments, and suggestions raised through the public comment period required under subsection (c) and shall be sent to each shareholder of the association within one hundred twenty days following the end of the fiscal year.

(e) A limited-profit housing association shall post its most recent annual report on the public portion of its website, if any, except that any proprietary information included in the annual report may be omitted from the annual report as posted. If the association does not have a public website, it shall deliver a copy of its most recent annual audit upon request and without charge to any tenant or buyer who requests a copy."

SECTION 3. Chapter 46, Hawaii Revised Statutes, is amended by adding a new section to part I to be appropriately designated and to read as follows:

"§46- Limited-profit housing supervisory boards; oversight. (a) Each city and county or county shall, by ordinance, establish a limited-profit housing supervisory board that provides oversight to each limited-profit housing association that is located within that city and county or county. Each supervisory board shall consist of the following members:

(1) A representative from the city and county or county's office of housing, who shall be the chair;

(2) A representative from the city and county or county's redevelopment agency created pursuant to section 53-2, if any;

(3) A representative from the city and county or county's real property tax division; and

(4) The city and county or county auditor, or their designee.

(b) Limited-profit housing supervisory boards:

(1) Shall review and approve or deny a petition from a domestic corporation, incorporated under chapter 414, to practice as a limited-profit housing association within sixty days of receipt and shall secure any additional information that it deems necessary to determine whether the corporation is qualified to practice as a limited-profit housing association; provided that approval or denial of a petition shall be in conformance with the rules adopted by the limited-profit housing council pursuant to section 201- ;

(2) Shall review the annual audits from the associations under its authority to ensure the associations' compliance with chapter ;

(3) May investigate any association under its authority to ensure that the association is compliant with chapter ;

(4) May, upon proper notice, order just and proper sanctions against an association, including remedial action to remove or cure any defects, withholding of public funds, and revocation of a domestic corporation's status as a limited-profit housing association; and

(5) May, upon the request of an association under its authority, terminate the association's status as a limited-profit housing association; provided that the request shall, at the minimum, include a plan of merger, consolidation, division, or share exchange that outlines the proper transfer or liquidation of the association's assets."

SECTION 4. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235- Exclusion of income earned by a limited-profit housing association. Notwithstanding any law to the contrary, all income earned from a limited-profit housing association that would otherwise be taxed as ordinary income shall be excluded from taxation under this chapter for Hawaii income tax purposes; provided that any income that is not used for primary business activities under section -6(a) shall be subject to this chapter if the limited-profit housing association is unable to verify that the income has been properly utilized in five years for the primary business activities of the association.

SECTION 5. Section 23-94, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) This section shall apply to the following:

(1) Section 235-4.5(a)--Exclusion of intangible income earned by a trust sited in this State;

(2) Section 235-4.5(b)--Exclusion of intangible income of a foreign corporation owned by a trust sited in this State;

(3) Section 235-4.5(c)--Credit to a resident beneficiary of a trust for income taxes paid by the trust to another state;

(4) Sections 235-55 and 235-129--Credit for income taxes paid by a resident taxpayer to another jurisdiction;

(5) Section 235-71(c)--Credit for a regulated investment company shareholder for the capital gains tax paid by the company;

(6) Section 235-110.6--Credit for fuel taxes paid by a commercial fisher;

(7) Section 235-110.93--Credit for important agricultural land qualified agricultural cost;

(8) Section 235-110.94--Credit for organically produced agricultural products;

(9) Section 235-129(b)--Credit to a shareholder of an S corporation for the shareholder's pro rata share of the tax credit earned by the S corporation in this State; [~~and~~]

(10) Section 209E-10--Credit for a qualified business in an enterprise zone; provided that the review of this credit pursuant to this part shall be limited in scope to income tax credits[.]; and

(11) Section 235- -- Exclusion of income earned by a limited-profit housing association."

SECTION 6. Section 247-3, Hawaii Revised Statutes, is amended to read as follows:

"§247-3 Exemptions. The tax imposed by section 247-1 shall not apply to:

(1) Any document or instrument that is executed prior to January 1, 1967;

(2) Any document or instrument that is given to secure a debt or obligation;

(3) Any document or instrument that only confirms or corrects a deed, lease, sublease, assignment, transfer, or conveyance previously recorded or filed;

(4) Any document or instrument between husband and wife, reciprocal beneficiaries, or parent and child, in which only a nominal consideration is paid;

(5) Any document or instrument in which there is a consideration of $100 or less paid or to be paid;

(6) Any document or instrument conveying real property that is executed pursuant to an agreement of sale, and where applicable, any assignment of the agreement of sale, or assignments thereof; provided that the taxes under this chapter have been fully paid upon the agreement of sale, and where applicable, upon [~~such~~] the assignment or assignments of agreements of sale;

(7) Any deed, lease, sublease, assignment of lease, agreement of sale, assignment of agreement of sale, instrument or writing in which the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof are the only parties thereto;

(8) Any document or instrument executed pursuant to a tax sale conducted by the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof for delinquent taxes or assessments;

(9) Any document or instrument conveying real property to the United States or any agency or instrumentality thereof or the State or any agency, instrumentality, or governmental or political subdivision thereof pursuant to the threat of the exercise or the exercise of the power of eminent domain;

(10) Any document or instrument that solely conveys or grants an easement or easements;

(11) Any document or instrument whereby owners partition their property, whether by mutual agreement or judicial action; provided that the value of each owner's interest in the property after partition is equal in value to that owner's interest before partition;

(12) Any document or instrument between marital partners or reciprocal beneficiaries who are parties to a divorce action or termination of reciprocal beneficiary relationship that is executed pursuant to an order of the court in the divorce action or termination of reciprocal beneficiary relationship;

(13) Any document or instrument conveying real property from a testamentary trust to a beneficiary under the trust;

(14) Any document or instrument conveying real property from a grantor to the grantor's revocable living trust, or from a grantor's revocable living trust to the grantor as beneficiary of the trust;

(15) Any document or instrument conveying real property, or any interest therein, from an entity that is a party to a merger or consolidation under chapter 414, 414D, 415A, 421, 421C, 425, 425E, or 428 to the surviving or new entity;

(16) Any document or instrument conveying real property, or any interest therein, from a dissolving limited partnership to its corporate general partner that owns, directly or indirectly, at least a ninety per cent interest in the partnership, determined by applying section 318 (with respect to constructive ownership of stock) of the federal Internal Revenue Code of 1986, as amended, to the constructive ownership of interests in the partnership; [~~and~~]

[[](17)[]]Any document or instrument that conforms to the transfer on death deed as authorized under chapter 527[.];

(18) Any document or instrument conveying real property, or any interest therein, to a limited-profit housing association; and

(19) Any document or instrument conveying real property, or interest therein, by a limited-profit housing association."

PART III

SECTION 7. (a) There is established a working group to examine:

(1) The feasibility and implementation of various non-federal incentives to construct long-term affordable housing units in the State, including but not limited to long-term bank mortgages at reduced interest rates, subsidies based on income limits, repayable and nonrepayable construction grants, and other forms of competitive financing; and

(2) Proposed guidelines for a limited-profit housing association to determine:

(A) The below-market leasehold and rental prices of its affordable housing units; and

(B) Its annual permissible interest rate for shareholder equity.

(b) The working group shall consist of the following members:

(1) The commissioner of financial institutions, who shall serve as the chair;

(2) The director of finance;

(3) The chairs of the standing committees of the senate and house of representatives with subject matter jurisdiction over state funds;

(4) A representative from the city and county of Honolulu's department of budget and fiscal services;

(5) A representative from the county of Maui's department of finance;

(6) A representative from the county of Kauai's department of finance; and

(7) A representative from the county of Hawaii's department of finance.

Working group members may recommend additional members with appropriate special expertise to the working group, for approval by the chair.

(c) In its recommendations of subsection (a)(1), the working group may consider the formation of a program to administer the competitive financing incentives for the construction of long-term affordable housing in the State. In its recommendations of subsection (a)(2), the working group shall consider any existing guidelines relating to limited-profit housing associations.

(d) The working group shall present a report of its findings and recommendations, including any proposed legislation, to the limited-profit housing council for public comment. Thereafter, the limited-profit housing council shall submit a report of its findings and recommendations, including any proposed legislation, to the legislature no later than twenty days prior to the convening of the regular session of 2024.

(e) The members of the working group shall serve without compensation but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties.

(f) No member of the working group shall be subject to chapter 84, Hawaii Revised Statutes, solely because of the member's participation in the working group.

(g) The department of commerce and consumer affairs shall provide administrative and clerical support required by the working group.

(h) The working group shall be dissolved on December 31, 2023.

SECTION 8. (a) There is established a working group to study and recommend recordkeeping and auditing standards that define, report, and assess the overall housing development performance for limited-profit housing associations that accurately reflect:

(1) The profitability of the association;

(2) The expediency of the management of the affordable housing units; and

(3) Compliance with chapter , Hawaii Revised Statutes.

(b) The working group shall consist of the following members or their designees:

(1) The director of taxation, who shall serve as the chair;

(2) The city auditor of the city and county of Honolulu;

(3) The county auditor of the county of Maui;

(4) The legislative auditor of the county of Hawaii; and

(5) The county auditor of the county of Kauai.

Working group members may recommend additional members with appropriate special expertise to the working group, for approval by the chair.

(c) In drafting the proposed standards, the working group shall examine any existing recordkeeping and auditing guidelines for limited-profit housing associations. The working group shall also consider the establishment of a limited-profit housing association auditing board to review and enforce the proposed standards. The working group may consider existing statutory language, including chapter 514B, Hawaii Revised Statutes.

(e) The members of the working group shall serve without compensation but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties.

(f) No member of the working group shall be subject to chapter 84, Hawaii Revised Statutes, solely because of the member's participation in the working group.

(g) The department of taxation shall provide administrative and clerical support required by the working group.

(h) The working group shall be dissolved on December 31, 2023.

PART IV

SECTION 9. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 10. This Act shall take effect upon its approval; provided that part II of this Act shall take effect on January 1, 2024.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	1462
THIRTY-SECOND LEGISLATURE, 2023
STATE OF HAWAII