HB1741 HD1

SECTION 1. The legislature finds that Hawaii cannot close its housing shortage without a large increase in homebuilding, especially in formats that add meaningful unit count in already-urbanized areas. In Sheetz v. County of El Dorado (144 S. Ct. 893 (2024)), the United States Supreme Court held that legislatively imposed land-use permit conditions—including impact fees—must satisfy the two-part tests of essential nexus and rough proportionality. These constitutional limits require a publicly available record that identifies the specific, project-related impact being mitigated and caps any exaction at an amount proportionate to that impact. Yet many jurisdictions adopt inclusionary or other development exactions based on generalized affordability goals or regional "housing need" tallies rather than a quantified, project-caused impact and proportional remedy, an approach that misstates causation and is legally vulnerable under Sheetz v. County of El Dorado unless the county's record identifies a project-caused impact and a proportionate remedy.

The legislature further finds that because inclusionary mandates operate as permit-linked exactions, they must satisfy constitutional essential nexus and rough proportionality. The assumption that new market-rate housing causes unaffordability and therefore must be offset by a surcharge on that same housing is contradicted by the preponderance of evidence. In most cases, adding homes lowers rents and prices through filtering and moving chains, so imposing a surcharge on by-right, non‑luxury projects rests on a flawed methodology and risks suppressing production and increasing prices. Income-restricted housing is an important component of overall affordability, but it should be funded transparently by the government rather than by loading undisclosed costs onto new homebuyers through mandates embedded in private development.

The legislature also finds that workforce mandates have repeatedly failed to deliver housing at scale in Hawaii and, in practice, have deterred feasible projects, particularly multifamily apartments and condominiums, while shifting production toward higher-price, lower-density product. Experience from other jurisdictions likewise shows that when not narrowly tailored, inclusionary mandates reduce overall supply and increase the share of luxury units. Exceptions may be appropriate where new development is low-density and requires extensive infrastructure, where development is visitor-serving and increases local workforce demand tied to tourism, or where the product is luxury and does less to relieve price pressures.

Accordingly, the purpose of this Act is to:

(1) Treat county inclusionary mandates as housing affordability impact fees;

(2) Require a straightforward, professional study showing feasibility and market prices or rents with and without any inclusionary mandate across common prototypes; and

(3) Adopt a dual compliance framework under which non-luxury, by-right housing is protected by a no-price-increase or full-offset standard, while luxury housing and projects that receive discretionary increases in entitlements may be subject to proportionate inclusionary mandates supported by a needs assessment study.

This Act does not apply to resort or vacation-rental construction and does not limit actions of the Hawaii housing finance and development corporation or Hawaii community development authority.

SECTION 2. Chapter 46, Hawaii Revised Statutes, is amended by adding a new section to part VIII to be appropriately designated and to read as follows:

"§46- Inclusionary mandates; housing affordability impact fee; needs assessment study. (a) Any county inclusionary mandate shall be deemed a form of development exaction and shall be treated as a housing affordability impact fee pursuant to this part. No county shall adopt, amend, or enforce an inclusionary mandate applicable to residential or mixed-use development unless the county council has first approved, by ordinance or resolution, a needs assessment study that:

(1) Complies with this section and section 46-143; and

(2) Includes the analyses described in subsection (b).

(b) In addition to the requirements of section 46-143, the needs assessment study required by this section shall:

(1) Disclose data sources and methodology;

(2) Analyze various representative market-rate prototypes commonly produced in the county, including single‑family, duplex, townhome, condominium, and apartment formats;

(3) Evaluate each compliance option, such as on-site units, off-site units, in-lieu fees, or land dedication;

(4) For each representative market-rate prototype, state principal assumptions for prices or rents, costs, financing, and target returns, and show feasibility and market-rate prices or rents with and without the inclusionary mandate; and

(5) Publish a residential nexus and affordability-gap analysis and summary tables of results.

(c) No county shall adopt, amend, or enforce an inclusionary mandate on a residential or mixed-use residential project that does not receive a discretionary increase in density, floor area ratio, or height and is not a luxury residential project, unless the county makes written findings demonstrating compliance with essential nexus and rough proportionality and satisfies at least one of the following:

(1) A needs assessment study approved by the county finds that the requirement will not increase the price of market-rate dwelling units nor suppress feasible production for the applicable prototypes; or

(2) The county concurrently adopts incentives, including off-site infrastructure and property tax and fee waivers, that fully offset all compliance costs, including the fair market value of any required land or units and any quantifiable lost revenue or density, such that there is no net price increase or feasibility suppression.

(d) For a luxury residential project, or for any residential project that receives a discretionary increase in maximum allowable density, floor area ratio, or height, a county may adopt or enforce an inclusionary mandate only if:

(1) A needs assessment study approved by the county establishes essential nexus and rough proportionality between the requirement and the development's impacts; and

(2) The requirement does not exceed the lesser of:

(A) The full mitigation cost for attributable workforce-housing demand; or

(B) One hundred per cent of the net land-value increment conferred by the discretionary approval; provided that this subparagraph shall not apply to luxury residential projects that do not receive a discretionary increase.

Enforcement under this subsection shall apply prospectively to applications determined complete after approval of the study.

(e) Notwithstanding any other law to the contrary, any inclusionary mandate enacted before the effective date of this Act shall be unenforceable with respect to applications deemed complete on or after the effective date of this Act until a needs assessment study is conducted pursuant to this section and section 46-143. Once a needs assessment study demonstrates compliance with subsection (c), enforcement of an inclusionary mandate may resume prospectively for applications deemed complete thereafter, including any enforcement taken pursuant to the findings under subsection (d).

For any inclusionary mandate adopted or enforced pursuant to subsection (d), the requirement to establish an essential nexus and rough proportionality shall be presumed satisfied if the inclusionary mandate is based on a county‑commissioned financial feasibility study or nexus analysis that is no more than five years old at the time the mandate is adopted or enforced. This presumption shall be rebuttable only by clear and convincing evidence demonstrating that the existing study's methodology is flawed or the resulting inclusionary mandate exceeds the actual cost of providing the required housing.

(f) Each county shall provide a clear process by which an applicant may contest the application of an inclusionary mandate or any findings made under this section, including a determination under subsection (c)(1).

(g) This section shall not apply to:

(1) Projects located on lands classified within the agricultural district or conservation district pursuant to chapter 205;

(2) Resort or vacation-rental construction, including any dwelling unit or building that is used, intended, designed, or marketed, or that may be used for transient accommodation purposes, including hotels, timeshares, resort condominiums, transient vacation units, or other transient accommodations as defined by county ordinance or chapter 237D;

(3) Conditions required by federal or state funding or financing programs, voluntary commitments not required by county law, or generally applicable impact fees unrelated to inclusionary obligations; or

(4) Projects undertaken by, or subject to approvals, permits, exemptions, rules, or actions of, the Hawaii housing finance and development corporation under chapter 201H or Hawaii community development authority under chapter 206E.

(h) For purposes of this section:

"Federal Housing Finance Agency conforming-loan limit" means the one-unit conforming-loan limit published annually by the Federal Housing Finance Agency for the county.

"Inclusionary mandate" means any county requirement that a development provide or fund below-market-rate dwelling units on site or off site, pay an in-lieu fee, dedicate land, or comply with equivalent exactions tied to permits, approvals, or development agreements.

"Initial monthly contract rent" means the first base rent stated in the lease at initial occupancy, excluding promotional concessions and separately metered utilities.

"Initial sales price" means the first bona fide arm's‑length sale price recorded against the unit or lot, net of seller credits and excluding optional upgrades not required for certificate of occupancy.

"Luxury residential project" means a residential or mixed‑use residential project in which, at initial sale or initial lease, any of the following apply:

(1) Ownership units: a majority of the dwelling units have a published initial sales price that exceeds one hundred twenty-five per cent of the Federal Housing Finance Agency conforming‑loan limit for a one-unit property in the county on the date of building-permit application;

(2) Rental units: a majority of the units for rent have a published initial monthly contract rent that exceeds two hundred per cent of the United States Department of Housing and Urban Development fair market rent for a unit of the same bedroom count in the county for the applicable fiscal year;

(3) Density: the project's net residential density is less than ten dwelling units per acre; or

(4) Building type: a majority of the project's dwelling units are single-family detached dwellings.

"Net land-value increment" means the increase in residual land value attributable to a discretionary approval, calculated using the same pro-forma assumptions (costs, prices or rents, and target returns) used in the study conducted pursuant to section 46-143, and equal to residual land value with the discretionary approval minus residual land value under base zoning.

"Net residential density" means dwelling units per acre measured on the net residential site area as defined by county ordinance; provided that if "net residential site area" is not defined by ordinance, "net residential site area" excludes public rights-of-way dedicated with the project and areas required to be reserved as public open space or protected natural-resource buffers.

"Single-family detached" means a dwelling unit in a freestanding building designed for occupancy by one household, not attached to any other dwelling unit by a common wall or floor or ceiling.

"Transient accommodations" has the same meaning as in section 237D-1.

"United States Department of Housing and Urban Development fair market rent" means the value published by the United States Department of Housing and Urban Development pursuant to title 24 Code of Federal Regulations part 888 for the county and bedroom count."

SECTION 3. New statutory material is underscored.

SECTION 4. This Act shall take effect on July 1, 3000.

HOUSE OF REPRESENTATIVES	H.B. NO.	1741
THIRTY-THIRD LEGISLATURE, 2026		H.D. 1
STATE OF HAWAII