Hawaii’s illegal vacation rentals create financing problems

Today we closed a sale at the Makaha Beach Cabanas and this time getting financing was more difficult than expected. Sure, we’ve all heard banks are adding more requirements to get loans today. The problem we ran into with this Cabanas purchase was different.

The buyer was well qualified with a large down payment. The problem came when the underwriter did some searching on the internet. You see, residential condos are generally not legal for short term rentals, defined as less than 30 days. Check Google and other search engines for the Makaha Beach Cabanas and the results will bring up many sites advertising the condo as a vacation rental.

Here are some sites advertising the Makaha Beach Cabanas as such:

Our financing problem occurred when the underwriter poked around on the internet and decided the Makaha Beach Cabanas are a condotel. And banks are not offering financing for condotels these days.

A condotel is a hotel that has been sold off to individuals, while still operating as a hotel. Some of Oahu’s condotels are: Ala Moana Hotel Condo; Aloha Surf Hotel; The ?I?l?i?k?a?i?????????, ??T?h?e? ??P?a?l?m?s? ?a?t? ??W?a?i?k?i?k?i?, Turtle Bay Ocean Villas?? ?a?n?d the Beach Villas at Ko Olina.

??the ?Ko Olina ?Beach Villas?.?

The Makaha Beach Cabanas and other condos in Makaha ARE NOT condotels. There are a handful of these units which have sh

The Makaha Beach Cabanas and other condos in Makaha ARE NOT condotels. A handful of owners have certificates allowing them to legally rent their units for short terms (defined as less than 30 days at a time).

We pulled up the property tax records for the Makaha Beach Cabanas, which indicate that it’s apartment zoned. We also pulled the Ala Moana Hotel’s property tax records, showing its mixed use zoning.

Another of the underwriter’s questions was whether there was a front desk for visitors to check in. There is no front “check in” desk. We provided the name and contact number of the building’s resident manager so that the underwriter could call him directly (and I was told she did call him).

The underwriter was satisfied with the additional information changed her position, approving our buyer’s financing.

Does this look like a hotel to you?

cabanas_front_640

To recap, residential properties are not zoned for vacation rentals. Owners and operators who conduct vacation rentals, in most cases are breaking the law. An exception is when an owner has a Nonconforming Use Certificate (NUC). These certificates are “grandfathered” from about 20 years ago when the City and County of Honolulu started clamping down on illegal rentals. Owners with NUC’s can legally conduct short term rentals with their condos and they must abide by certain rules, otherwise the NUC’s can be taken away and it will not be possible for the owner to get a new certificate.

Many renters are unaware that short term rentals maybe illegal. The risk of “getting caught” is primarily on the owners. When the State of Hawaii does take action against owners, it can be severe. I have heard of some owners simply giving up their condos to the State because they did not want to pay back taxes, fines and penalties.

I also read about an incident where a realtor managed an illegal vacation rental. When she was caught, she not only paid a fine but her real estate license was revoked.

Renters – my guess is the risk would be that an owner gets caught, has his vacation rental shut down and then the renter finds out he can’t stay in a room that he had reserved.

Property Taxes

Besides zoning issues, short term rentals have significantly higher property tax rates. Short term rentals are “hotel” zoned and charged $12.40 per $1,000 of assessed value. Properties such as the Makaha Beach Cabanas are residentially zoned and charged $3.42 per $1,000 of assessed value. (Both rates are applicable for the City and County of Honolulu’s fiscal year ending 6/30/11).

Operators of illegal vacation rentals are taking advantage by using the residential property tax rates when the property tax rate for that type of use should be almost four times higher.

If you’re planning to buy a condo on Oahu and use it for short term rentals, buy a property where such use is permitted. Operating an illegal vacation rental is not only… illegal, it is also creating problems for prospective owner occupants and investors who want to get mortgage financing and intend to use their condos for legal purposes.

For visitors who love Hawaii’s beaches, we understand your wanting to find a bargain rate room. Please just be aware that the short term rental maybe illegal if it’s not in a condotel or a condo with a nonconforming use certificate.

Michael Bates (RA)

iProperties Hawaii

(808) 548-1220

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June 22, 2011 • Tags: Financing, Financing Problems • Posted in: Financial News

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