SB3312

PART I

SECTION 1. The legislature finds that the State faces an ongoing and severe housing shortage that has contributed to rising housing costs, population displacement, and economic inequity. The construction of new housing is constrained by limited land availability, high construction costs, and regulatory barriers, particularly in urban and transit-oriented areas where residential demand is greatest.

The legislature also finds that the State has experienced a sustained decrease in demand for commercial office and retail properties, resulting in underutilized or vacant buildings that diminish economic activity and neighborhood vitality.

The legislature further finds that converting vacant or underused commercial properties into residential housing represents an efficient, sustainable approach to increasing the State's housing supply while revitalizing communities and making better use of existing infrastructure. Similar efforts in other jurisdictions, including the Commonwealth of Massachusetts' Commercial Conversion Program, demonstrate the value of a structured, competitive process for an initial round of tax credits, in which developers must first obtain certification as qualified conversion projects; submit comprehensive documentation of project readiness, financing commitments, and eligible development costs; and then compete for a limited pool of credits based on clear preference criteria.

The legislature further finds that commercial-to-residential conversions present a critical opportunity to expand the supply of homes that are affordable to residents having moderate incomes, not only to create additional units but also to ensure that those units remain accessible to Hawaii's workforce and families. To advance this goal, the legislature intends that projects assisted under this program include binding affordability requirements that target households earning no more than eighty per cent of the applicable area median income for rental units and no more than one hundred twenty per cent of the applicable area median income for owner-occupied units.

The legislature believes that these affordability thresholds will help align new units with the needs of teachers, health care workers, public employees, service workers, and other essential members of Hawaii's communities who are being increasingly priced out of the housing market. By tying incentives to clear affordability targets, the program will ensure that public resources are used to produce housing that serves residents rather than speculative or luxury developments.

Accordingly, the purpose of this Act is to establish a program and income tax credit to incentivize the conversion of commercial properties into residential properties.

PART II

SECTION 2. Chapter 201, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part . qualified conversion projects

§201-A Definitions. As used in this part, unless the context otherwise requires:

"Affordable housing unit" means a residential unit that is:

(1) Rented to a household earning no more than eighty per cent of the area median income, as determined by the United States Department of Housing and Urban Development; or

(2) Sold to a household earning no more than one hundred twenty per cent of the area median income, as determined by the United States Department of Housing and Urban Development.

"Department" means the department of business, economic development, and tourism.

"Developer" means any person, partnership, corporation, firm, nonprofit or for-profit entity, or public agency determined by the department to:

(1) Be qualified by experience, financial responsibility, and support to construct housing of the type described and of the magnitude encompassed by the given project;

(2) Have submitted plans for a qualified conversion project adequately meeting the objectives of this part, the maintenance of aesthetic values in the locale of the project, and the requirements of all applicable environmental statutes and rules; and

(3) Meet all other requirements the department deems to be just and reasonable, and all requirements stipulated in this part.

"Development cost" means an expenditure directly related to the construction or substantial rehabilitation of a qualified conversion project, including the cost of site assessment and the remediation of hazardous materials; provided that development cost shall not include costs for the purchase of the property.

"Qualified conversion project" means the rehabilitation of a commercial property, including commercial centers, office parks, and commercial buildings, for primary multi-unit residential use or mixed-use, which may include retail or other commercial uses; provided that:

(1) After conversion, the project contains no fewer than two residential units; provided further that the project may be a mixed-use development that includes commercial uses in addition to residential units if the building is primarily residential;

(2) Upon completion of the rehabilitation, the project contains at least fifty per cent affordable housing units to be sold or leased; provided further that:

(A) Affordable housing units offered for rent remain affordable housing units for a period of not less than fifteen years after completion of the conversion; and

(B) Affordable housing units offered for sale remain affordable housing units for a period of not less than thirty years after completion of the conversion;

(3) Prior to conversion, the building was nonresidential real property, as defined in section 168 of the Internal Revenue Code, all or a portion of which was leased, or available for lease, to office tenants; and

(4) The building was initially placed in service at least five years before the beginning of the conversion.

"Substantial rehabilitation" or "substantially rehabilitated" means the necessary major redevelopment, repair, and renovation of a property, as determined by the department, including site assessment and the remediation of hazardous materials, but excluding the purchase of the property.

§201-B Program for qualified conversion projects. (a) The department shall establish a program for qualified conversion projects, which shall be administered by the department. The purpose of the program shall be to assist in the conversion of commercial properties into residential properties.

§201-C Certification. (a) In administering the program established under section 201-B, the department:

(1) May certify one or more housing development projects as a qualified conversion project:

(A) Upon timely receipt of a project proposal from a developer requesting the designation as a qualified conversion project; provided that the project proposal shall be submitted in a form and with any information prescribed by the department, supported by independently verifiable information, and signed under the penalties of perjury; and

(B) If the department determines that the project, together with any municipal resources committed to the project, shall have a reasonable chance of increasing residential growth, diversifying housing supply, supporting economic development, and promoting neighborhood stabilization as advanced in the proposal for a qualified conversion project;

(2) Shall certify prior to construction that the proposed project meets the definition of a qualified conversion project and the requirements pursuant to paragraph (1);

(3) Shall evaluate the project proposal and either grant or deny certification of the designation as a qualified conversion project no later than ninety days from the date of its receipt of a complete project proposal. Approval of a project due to the department's failure to act within ninety days shall not constitute approval by the department of any tax incentives provided under section 235- ;

(4) May impose a fee for the processing of applications for the certification of any project under this section; and

(5) Shall identify the development costs and certify prior to construction that all or a portion of the qualified conversion project costs are for construction or substantial rehabilitation.

(b) The department shall review at least once every two years each pending certified qualified conversion project not yet completed.

(c) The department shall review each certified qualified conversion project upon completion, certify that the project is consistent with the requirements of this section, including all qualified conversion project requirements, and confirm the development costs.

§201-D Revocation of certification. (a) The department may revoke certification of a project if the department determines, after an independent investigation, that:

(1) Representations made by the developer in its project proposal are materially different from the conduct of the developer subsequent to the certification, and the difference frustrates the public purposes that the certification was intended to advance; or

(2) The project no longer meets the requirements of this section.

(b) Upon revocation, the State may bring a cause of action against the developer for the value of any economic benefit received by the developer prior to or subsequent to the revocation.

(c) A revocation shall take effect on the first day of the taxable year in which the department determines that a material breach commenced.

§201-E Tax incentive program. (a) There shall be established a tax incentive program for certified qualified conversion projects. After certification by the department upon the completion of the project, pursuant to section 201-C(c), the department, in consultation with the department of taxation, may award a tax credit available under section 235- of not more than ten per cent of the development cost allocable to total units in a project, as determined by the department, to the developer of a qualified conversion project.

(b) The amount of the credit awarded shall be based on the following factors:

(1) The municipality's need for residential development and a diverse housing supply;

(2) The extent to which the certified qualified conversion project will encourage residential development, expand the diversity of the housing supply, support neighborhood stabilization, and promote economic development in the zone; and

(3) The percentage of affordable housing units contained in the certified qualified conversion project.

(c) The department may limit a credit available to a certified qualified conversion project under section 235- to a dollar amount or in any other manner deemed appropriate by the department.

§201-F Annual report. (a) Not later than twenty days prior to the convening of each regular session, the department shall submit a report to the legislature detailing the findings of the department's review of all certified qualified conversion projects evaluated in the prior fiscal year, including projects evaluated prior to construction, while the project is pending, and upon completion.

(b) The report shall include:

(1) A list of qualified conversion projects that received certification;

(2) Information about each qualified conversion project, including the site address, project developer, range of rents of the residential units, type of residential units, number of each type of residential unit, number of affordable rental units for persons whose income is not more than eighty per cent of the area median income, and the number of affordable owner-occupied units for persons whose income is not more than one hundred twenty per cent of the area median income; and

(3) The total amount of development costs for which a tax credit was issued or reserved pursuant to section 235- for each certified qualified conversion project the year the credit was issued and the completion or estimated completion year of the certified qualified conversion projects.

§201-G Rules. The department shall adopt rules in accordance with chapter 91 to implement this part."

PART III

SECTION 3. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235- Qualified conversion project tax credit. (a) There shall be allowed to each taxpayer subject to the tax imposed under this chapter, a qualified conversion project tax credit that shall be applied against the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(b) The qualified conversion project tax credit shall be based on development costs incurred by a developer for a qualified conversion project and equal to the amount certified by the department of business, economic development, and tourism pursuant to part of chapter 201.

(c) In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for costs incurred by the entity for the taxable year. The costs upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined by rule.

(d) The director of taxation:

(1) Shall prepare any forms that may be necessary to claim a tax credit under this section;

(2) May require the taxpayer to furnish reasonable information to ascertain the validity of the claim for the tax credit made under this section; and

(3) May adopt rules under chapter 91 necessary to effectuate the purposes of this section.

(e) If the tax credit claimed by the taxpayer under this section exceeds the amount of the income tax payments due from the taxpayer, the excess of credit over payments due shall be refunded to the taxpayer; provided that the tax credit properly claimed by a taxpayer who has no income tax liability shall be paid to the taxpayer; and provided further that no refunds or payments on account of the tax credit allowed by this section shall be made for amounts less than $1. All claims for the tax credit under this section, including amended claims, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(f) If at the close of any taxable year during the five‑year period after a credit is claimed under this section, the qualified conversion project used to claim the credit no longer fulfills the requirements of part of chapter 201, the credit claimed under this section shall be recaptured. The amount of the recaptured tax credit shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs under this subsection.

(g) For the purposes of this section:

"Developer" has the same meaning as defined in section 201‑A.

"Development cost" has the same meaning as defined in section 201-A.

"Qualified conversion project" has the same meaning as defined in section 201-A."

PART IV

SECTION 4. There is appropriated out of the general revenues of the State of Hawaii the sum of $10,000,000 or so much thereof as may be necessary for fiscal year 2026-2027 to establish and administer the program for qualified conversion projects pursuant to part II of this Act.

The sum appropriated shall be expended by the department of business, economic development, and tourism for the purposes of this Act.

PART V

SECTION 5. New statutory material is underscored.

SECTION 6. This Act shall take effect on July 1, 2026; provided that part III shall apply to taxable years beginning after December 31, 2025.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	3312
THIRTY-THIRD LEGISLATURE, 2026
STATE OF HAWAII