Honolulu’s CO 19-18 (Bill 89) – Economic Impact And The Path Forward – North Shore, Waikiki Banyan & Waikiki Sunset

Update 10.13.2022: Federal Judge Watson ruled that the DPP and the City and County of Honolulu shall not implement and enforce changing minimum rental terms from 30 days to 90 days. All STR rule updates are here –> Bill 41 (CO 22-7) – Oahu’s New Short-Term Rental Rules 2022 – Legal STR Properties

Update 4.26.2022: Bill 41 (CO 22-7), Oahu’s latest updated short-term rental rules take effect 10.23.2023, prohibiting rental terms of less than 90 days (formerly 30 days) in residential neighborhoods. Existing rentals must comply by 4.23.2023. Also, STR properties (rental terms of less than 90 days) must be registered with a $1K initial registration fee, and a $500 annual renewal fee. All Waikiki Banyan and Waikiki Sunset condos are legal STRs subject to the terms of Bill 41. More here –> Bill 41 (CO 22-7) – Oahu’s New Short-Term Rental Rules 2022 – Legal STR Properties

Update 2.10.2020: New DPP declaratory ruling: B&Bs and TVUs are allowed at Kuilima Estates East & West, pursuant to CO 19-18. That’s because Kuilima Estates is within 3,500 feet of a resort zone district of greater than 50 contiguous acres and was rezoned to A-1 Low-Density Apt District (Zone Change Application #71/2-33) as part of the rezoning of the Turtle Bay master-planned resort.

Update 10.22.2019: The Waikiki Banyan AOAO has obtained a ‘Stipulation to Stay Proceedings’ with the DPP. That means that Waikiki Banyan non-NUC units can continue renting on a short-term basis until the conclusion of the Waikiki Banyan AOAO case that was filed on 8.1.2019. The administrative process including any appeals might take a couple of years to resolve.

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— Last week, a reporter from KITV Channel 4 News called to get some information for a story she was working on about homeowners that are economically impacted because they could no longer do short-term renting. She found the article Bill 89 – New Short-Term Rental Rules For Oahu and was not sure what my position was regarding the new law. She thought we might have some clients that were blindsided and are now stressed as a result.

She admitted she barely skimmed the article and did not actually read it, claiming “nobody has time to read long articles anymore.”  – We hope that at least you still find our articles helpful. We will continue to write useful stuff.

I explained to the reporter what I expressed in the article: “I’m neither for or against the law. However, I recommend following the law. We don’t have clients that are surprised about short-term rental restrictions. The rules had been the same for decades. The only immediate change is the imminent threat of enforcement. Hawaii Living has been educating property owners on real estate matters since day one. Anybody that claims they didn’t know simply didn’t ask the right questions. The information is readily available on our site.”

I sensed that the reporter was looking for a more dramatic story portraying immediate economic suffering by unsuspecting property owners. I was unable to assist and politely suggested she might need to ask someone else.  

The Tyranny Of Small Decisions

Changes can create unintended consequences. And a series of small rational decisions can sometimes lead to monumental and unpredictable negative results. It’s called the tyranny of small decisions.

That’s the same principle behind slow environmental pollution that becomes harder to reverse. It’s also the principle when governments try to fine-tune tax laws around the edges and end up with an unbelievably bloated and complex tax code.

It’s what can cause people to slowly gain weight, one innocent little sugary snack at a time. And why people can get into financial trouble with credit card impulse shopping that slowly mushrooms out of control.

The same principle created the proliferation of thousands of illegal short-term rentals. Hosting platforms like Airbnb and VRBO tweaked their service offerings, improving user experience, lowering the trust threshold, reaching critical mass, and transforming entire residential neighborhoods. Easy. Convenient. Practical. And lucrative. What could go wrong?

Regardless of what triggered short-term rental regulation, the threat of imminent enforcement indeed has economic consequences.

Economic Ripples - whitewash

Economic Ripples From CO 19-18 (Bill 89)

It is impossible to accurately predict the long-term economic impact. There are too many unknown variables. It’s been 3 months and counting since CO 19-18 (Bill 89) was signed into law on 6/25/2019. Today we analyze what transpired so far.

Homeowners who had gotten spoiled with collecting short-term rental income are now exercising any of the following options:

  1. Continuing as before and taking a chance until receiving a citation. Once a citation is received, the owner stops or modifies their advertising but continues with servicing the existing future bookings. As of the date of this writing, we are not aware that anybody paid a fine yet.
  2. Some owners are selling their investment properties, and some are aggressively buying legal short-term rentals. Our Condotel Guide shows the entire list of legal condotels. Attractively priced Honolulu homes and condos are being bought by savvy buyers with a long-term vision.
  3. Some are opting to use their property for personal enjoyment.
  4. Some switch to long-term renting with 30+ day rental terms per tenant.
  5. Some have found creative ways to continue circumventing the law. E.g., some batch multiple short-term bookings into extended 30+ day rental slots. Not legal, just harder to catch.

People are wondering if Oahu property values will drop. We are not privy to the future, but an investor stampede exiting Hawaii real estate is unlikely. In five years from now looking back, the effects of the law on Oahu’s property values in the aggregate might barely show as a blip on the chart.

However, here are the notable exceptions:

  • North Shore

Reportedly 25% of all North Shore homes have been involved in illegal short-term renting prior to the new law. Sales inventory has increased recently. We expect that North Shore home prices will soften and create excellent buying opportunities for the foreseeable future.

Most other residential neighborhoods show a minimal effect as a direct result of the law so far.

The ‘Hawaii Vacation Rental Owners Association’ filed a lawsuit with the U.S. District Court on August 2, 2019. Their attorney Greg Kugle calls the ordinance “fatally flawed” and claims “its impact will be immediate and devastating on the owners and operators of legal rental properties on Oahu.” And, “the regulations violate the search and seizure, due process, property, privacy and free speech clauses of the United States and Hawaii Constitutions.”  The lawsuit seeks a TRO to prevent the DPP from enforcing the new law.

10.4.2019 update: The 8.2.19 ‘Hawaii Vacation Rental Association’s’ lawsuit has been settled. The judge’s order and dismissal is summarized here.

  • Waikiki

The vast majority of legal condotels are in Waikiki. Some of these are selling faster with noticeable price increases. Waikiki NUC units have all been gobbled up including the most recent NUC unit sale at a whopping $750K at the Waikiki Banyan.

For the first time in decades, NUC units are now being valued at a premium for their scarcity. And non-NUC units are being discounted. Some of the more dramatic price differentials are developing at the Waikiki Banyan and Waikiki Sunset. Here is why:

  • Waikiki Banyan & Waikiki Sunset

Our Guide to Condotels organizes all legal short-term rental condo buildings into five categories. The fourth category shows:

D)  Parcels zoned ‘Apartment’ – with hotel operation. But not grandfathered as a non-conforming hotel.  = The individual unit must have a NUC, otherwise no short-term renting.

This category includes only two buildings, the Waikiki Banyan, and the Waikiki Sunset.

Both buildings have been operating as a hotel outside of the ‘Resort Mixed Use’ zone with an ongoing 24-hour front desk easily meeting today’s LUO’s hotel definition for decades. But they did not meet the old definition at the time Waikiki was rezoned. Hence, they had not been grandfathered as a ‘non-conforming hotel’ and have not been exempt from the NUC requirement in 1989.

Up until the law took effect on August 1st, 2019, Aqua-Aston managed a large number of the 876 Waikiki Banyan units and the 435 Waikiki Sunset units. Only 197 Waikiki Banyan units and 256 Waikiki Sunset units have NUCs. All others are not permitted as TVUs.

On 7.23.2019, Aqua-Aston mailed letters to about 100 Waikiki Sunset owners and more than 100 Waikiki Banyan owners of condos without NUCs alerting them that as of 8.1.2019, Aqua-Aston will cease renting their units to comply with the new law.

With one week notice to owners, the Aqua-Aston Waikiki Banyan hotel room inventory dropped by ~50% and the Aqua-Aston Waikiki Sunset hotel room inventory dropped by ~30%.

Reportedly, Aqua-Aston and a few other property management companies within the Waikiki Banyan are renegotiating their commercial rent with the AOAO because of decreased revenue and profitability. It is expected that the loss in revenue to the AOAO will translate into a future increase in maintenance fees. 

Recently before the law took effect, a typical Waikiki Banyan unit with a partial ocean view sold around $600K, regardless if the unit had a NUC or not. The perceived value spread between NUC units vs. non-NUC units had been negligible. But Waikiki Banyan units are mostly bought by investors and are often valued based on their income potential. We have seen Waikiki Banyan income statements with short-term rental income between $4,000 and $4,700/mo vs. long-term rental income between $2,000 and $2,300/mo.

With the imminent enforcement, non-NUC units could drop in value from $600K to the lower mid $400K range, comparable with other Waikiki 1-bedroom units with partial ocean view where short-term renting is not allowed, e.g. Four Paddle, Villa On Eaton Square, Chateau Waikiki, etc.

Waikiki Banyan inventory for sale has quadrupled since the law took effect. It might take six months for people to realize their unit is not worth the ~$600K they thought it was.

However, there are a couple of reasons why this price adjustment might take longer or why it might only partially unfold.

  1. Loss aversion. The human brain is far more averse to losing versus winning. You get more displeasure from losing $100K then pleasure from gaining $100K. Some owners will rather take a chance and wait. They will hold on until prices recover to break even instead of selling at a loss.
  2. Hysteresis. The value adjustment lags behind the changes that cause it. We have seen this gradual price adjustment with Trump Tower condos that had been notoriously cash-flow negative year over year. A typical city view Trump studio dropped in value from the $700K range to eventually bottoming around $350K. But it took many years to get to those levels. Sellers dropped their unit price only marginally below the most recent low sale to spark buyer interest and eventually become the next lower sale.
  3. Emotional purchase. Some buyers might not care about the actual cash flow differential and just like the Waikiki Banyan for its layout, location, amenities, and views. For an emotional buyer, there are plenty Waikiki Banyan bargain priced units currently available to choose from.
  4. Optimistic probability bias. The AOAO filed a lawsuit with high hopes for a windfall ruling as early as the upcoming November court date. Stay tuned.

Waikiki Banyan Lawsuit

— See important update 10.22.2019 at the top of the page. — The Waikiki Banyan AOAO filed a lawsuit on August 6.2019 against the acting director of the DPP. A court date is expected in November 2019. The attorney Chris Porter makes three basic arguments in seeking the Waikiki Banyan to be exempt from CO 19-18 (Bill 89): 

  1. Economic hardship.
  2. Lack of past enforcement by the DPP.
  3. The Waikiki Banyan is within 3,500 ft proximity of the ‘Resort Mixed Use’ district. This is a reference to CO 19-18 (Bill 89), Sec 21-5 (a).

We are not attorneys. We are expert realtors committed to excellence in assisting buyers and sellers with their real estate needs. We agree with Chris Porter’s team and the AOAO that both the Waikiki Banyan and Waikiki Sunset are different and do deserve special consideration. But the arguments in the complaint seem weak and could have been made by half a dozen other Waikiki buildings as well.

Chris Porter’s team has a monetary incentive to pursue this. Their is still time to refine their arguments before the November court date. Instead, Kathy Sokugawa as the DPP’s acting director has no financial incentive. She will defend the existing laws she didn’t create but has been tasked to enforce.

Filing a complaint against the acting director that is enforcing the law because of ‘economic hardship’ and ‘lack of past enforcement’ is comparable to suing a traffic cop that is issuing you a speeding ticket. “I have been speeding for years without ever receiving a ticket. Operating within the speed limit will now cost me productive time and economic hardship.”

The 3rd argument, ‘within 3,500 ft proximity of the Resort Mixed Use district’ simply does not apply to Waikiki. There is no A-1 and A-2 district in Waikiki.

We are in full agreement that the economic impact at the Waikiki Banyan and the Waikiki Sunset are substantial. But are the three arguments presented in the complaint the right approach to convince a judge to grant an exemption status? Expecting this to get resolved at the November court date appears to be wishful thinking at best.

Here is a copy of the Waikiki Banyan complaint. What do you think?

The Path Forward
The Path Forward

The Path Forward

Times have changed during the last 30 years. Social and economic needs will continue to evolve. CO 19-18 (Bill 89) creates a new path effective October 2020, but only for new B&Bs. For now, that’s all there is and it’s the best that City Council came up with. But CO 19-18 needs to be reevaluated and possibly modified as future needs change.  

For immediate consideration we suggest the following:

The Waikiki Banyan and Waikiki Sunset are different and deserve special consideration. Both buildings have been matching precisely the current LUO’s hotel definition for decades.

No other buildings can make that claim, unless they are already exempt, period.

The Waikiki Banyan and Waikiki Sunset should both be granted ‘grandfathered hotel use status’ and exempt from the NUC requirement today.

There is a reason why the LUO’s hotel definition has been updated since 1989 eliminating the outdated 50% lodging unit requirement. The old definition became irrelevant. No longer should it be used today for a building to be exempt from the NUC requirement. It’s an oversight. That’s all.

The Waikiki Banyan and Waikiki Sunset deserve to join the ranks of other grandfathered non-conforming hotels, e.g. Aloha Surf, Hawaiian Monarch, Island Colony, Palms At Waikiki, Royal Garden At Waikiki, and the Ala Moana Hotel Condo.

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But wait. What about the tyranny of small decisions? A favorable ruling for the Waikiki Banyan and Waikiki Sunset could create two possible unintended consequences:

That’s why we suggest that the ‘grandfathered hotel use status’ and exemption from the NUC requirement should only be granted to buildings that have met the current LUO hotel definition prior to August 1st, 2019, the effective date of CO 19-18. This will eliminate perverse incentives and is consistent with the spirit of CO 19-18.

  • 2) The Free Rider Problem. – Owners of NUC units at the Waikiki Banyan and Waikiki Sunset have been faithfully renewing their NUCs at a cost of $400 every two years since 1989. From their viewpoint, it seems unfair that owners of non-NUC units have been ‘free riders’ and getting away with penalty-free short-term renting, plus they would now gain a free pass and the reward to become legal.

I regret, we don’t know if there is a perfect solution that is fair in every way. However, consider that all Waikiki Banyan and Waikiki Sunset owners will benefit, including the NUC unit owners. There won’t be a need for a $400 NUC renewal fee. It will restore lost hotel room inventory levels and reverse economic hardship.

We don’t pretend to know all the answers.  But the proposed represents a simple and most practical win-win solution.

Obviously, this won’t help North Shore homeowners or the owners at the Waikiki Lanais that allegedly hired an attorney for $40K to figure out why they have never met the LUOs hotel definition and how to change that.

The Waikiki Banyan and the Waikiki Sunset should correctly be categorized as non-conforming hotels, because they simply are. Other condos like the Waikiki Lanais don’t appear close to making the cut. – But who are we to say? Tell us what you think!

We leave it up to the attorneys and the judge to figure it out. In the meantime, we are committed to excellence in assisting buyers and sellers. Let us know how we may assist you best. We are here to help. ~ Mahalo & Aloha

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The information is deemed reliable, but not guaranteed, and should not be relied on in deciding to purchase or sell. Always verify any and all information before making a decision to purchase or sell. Rules, regulations, tax rates, tax laws, zoning laws, condo governing documents, etc. are subject to change.

Let us know what we might have missed. We are grateful and will humbly update. With your kind consideration, the information will remain current and help others too! We are here to help. ~ Mahalo for your input and comments.

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12 thoughts on “Honolulu’s CO 19-18 (Bill 89) – Economic Impact And The Path Forward – North Shore, Waikiki Banyan & Waikiki Sunset

  1. Excellent article! When journalism no longer has its pride…”does not have a time to read”… at least she contacted the right person! Thank you for sharing your great insight of human behavior and bias – I totally agree and find them in myself!

    1. Aloha Misa Kataoka!
      Thanks for checking in and your kind words. Let us know if there is anything we can do for you.
      ~Mahalo & Aloha

  2. Hi, I found a vacation home that would rent to me for a week in May in Laie. How do I verify that this is a licensed listing? I would hate for a last minute cancellation to occur, like some of the posters from your original Bill 89 post. Thanks for any insight.

    1. Aloha Keiko Pogany!
      Thank you for checking in and commenting.
      All legal short-term rental properties outside of the resort zone must have a ‘NUC.’ Only four properties with a NUC are located in Laie.
      Here is the complete list of properties that have a NUC:
      https://www.hawaiiliving.com/assets/editor/nucreport_dec_8_2020.pdf
      Laie properties start with the Tax Map Key number “5-5” and are listed on page 13.
      No NUC = no legal short-term renting.
      Let us know if there is anything else we can do for you.
      We are here to help.
      ~Mahalo & Aloha

    2. George Krischke, Principal Broker, Hawaii Living LLC Thanks for the link! Also, if we find a property without a NUC that is willing to rent us on the short term, would that just be at our own risk? Can this property owner cancel our reservation without notice if they get “cold feet”?

    3. Aloha Keiko Pogany! I regret, we don’t vouch for what a property owner might do. We are expert realtors committed to providing the most exceptional service assisting buyers and sellers.
      Let us know if there is anything else we can do for you.
      ~ Mahalo & Aloha

  3. Waikiki Lanais bylaws have always stated that we could use our units up to hotel use. Your website, our lawyer, the board of directors and realtors alike all pointed to the bylaws saying when we made our investment that we would be safe because of it. Allowing us to buy our property at inflated prices. Then everything changed last year with the crusade to put us out of business. I don’t appreciate the callout like we are just money grubbers. We tried to make sure our investment was sound and now through all the mess we are just trying to protect the investments of many people. Our building has operated short term rentals for decades too, (admittedly not as many as banyan and sunset) and i find the requirement to be zoned hotel-resort just to do so ridiculous. It’s not a hotel or a resort. We don’t have gift shops, restaurants, complimentary breakfast or any of that. And no one really wants it to feel like one. Is it so hard to classify this new wave of transient vacation rentals without having to drive all the pioneers out of the business first?

    1. Aloha Christopher Marshall Reed!
      I’m very sorry that you relied on sketchy advice. We share your frustration. There has been much confusion abound.
      – That’s exactly why we put this site together, to help buyers and sellers make better decisions. To be clear, we don’t take sides. We don’t vouch for the government or any attorney. We have a curious mind and a deep desire to learn and help.
      We have never recommended Waikiki Lanais for short-term renting. We discussed the WL bylaws’ controversy here: https://www.hawaiiliving.com/blog/risks-of-short-term-vacation-renting/
      If there is anything we missed, let us know and we will humbly update our site. It’ll help other buyers and sellers avoid the pitfalls.
      We are committed to providing the most exceptional service available.
      Perhaps one day we can assist you too.
      We greatly appreciate your comment.
      We are here to help.
      ~ Mahalo & Aloha

    2. Aloha, George Krischke, Principal Broker, Hawaii Living LLC your site is excellent and I have used it for a long time. I was referring to when I bought my property 5 years ago. Since then the site has been updated to clear any confusion. Thank you for being on top of it.

    3. Aloha Christopher Marshall Reed!
      Let us know if there is anything else we can do for you or how we might improve quality and clarity. We are here to help and grateful for your comments and feedback. ~ Mahalo & Aloha

    1. Aloha Preston Sims!
      Mahalo for your kind words. Let us know if there is anything else we can do for you. We are here to help. ~ Mahalo & Aloha