 Welcome to the Kondo Insider Show. I am your host, Cheryl Franklin, and today we're going to talk about the exciting subject of the new vacation rental law, which is very, there's a lot of buzz around that, especially why being a state of tourism, if you will. And with me today, my guest is Jane Sugimoro, my favorite guest, as a matter of fact. She's kind of an expert on everything. So I always enjoyed chatting with you, Jane. Welcome. It's nice to be here. Yeah. So let's just dive right in. Bill 89 is the new vacation rental law, and it basically stipulates that if you are renting out your unit for 30 days or less, you must obtain a city permit, and they're starting to enforce that. That's what the new law is about, right? Right. Well, I think they're only going to issues, 1,700 permits is what I heard. How much can you kind of share with us that you know how to do that? Well, my understanding, because I was at some of the preliminary hearings as city council on this bill, and it wouldn't apply if your association's governing documents have a provision in there that does not allow for short-term rentals. No. Most? A lot of condominiums do have that, and the way it reads is in that section about use in the either in the bylaws or in the declaration, it'll say that the units can be used only for residential purposes, which means that you cannot operate a business out of that unit and that any rentals less than 30 days or sometimes some provisions say 60 and 90 days. Oh, wow. 60 or 90 days are not permitted, and I know of one condominium that is right on the cusp of Waikiki, and they have a 60-day limitation, and a friend of mine used to be a board president of that condominium, and they used to have on-site security people, and you know, when you have on-site staff, they kind of know the residents, and if they saw somebody come in with a suitcase, they would politely go up to that person and ask them what unit they were staying at and how long they were staying, and if they said, oh, I'm only here for a weekend, and then they would, you know, turn it into the office and the office would check, and the owner would get a notice. What is this person doing here? We have this rule, and they were very strictly enforcing, and this was even before the years before this, and so, you know, it's always been an issue in buildings around Waikiki, because that's right in the tourist, you know, resort area, and let me tell you why some of those condominiums have that provisioned. Many, many, many years ago, when they introduced timeshare into the law in Hawaii, a lot of condominiums, especially in Waikiki, were very concerned about security. If you were an owner-occupant, you would not want your next-door neighbor to be changing every week. Right, right, right. You wouldn't know if they were supposed to be there or they're not supposed to be there, and so that's why a lot of condominiums had their bylaws changed or written so that you would not permit to prevent that, the short-term rentals, for security reasons only, and I know a lot of buildings in Waikiki, because they were older, had their bylaws amended to include that provision, and when they did adopt the timeshare law, they kind of limited to the resort area. In other words, you can't do timeshare in Hawaii, or Pearl City, you can only do it in a resort area, in certain neighborhoods. But I think fast-forward, what, 10 years, 20 years since that, or 15 years maybe, with the onset of VB, VR, BO, vacation rental by owner, many owners see it as a very lucrative way to supplement their income, and unfortunately, even though, like you stated a moment ago, it's written in their governing documents that they're not supposed to rent out their unit to short-term tenants, it's being done, and the associations have to deal with the issue of enforcement, and it's usually the owner-occupant or the long-term tenant who notices that the next-door neighbor changes every week, they're somebody different in the unit next door, and then they complain, either that or the guest, the transient guest needs a key, and all these units now have fobs, and so they go to the security guard for another fob, not knowing that those fobs are, because they allow people into the building and into the unit and sometimes control the elevators, they're not just issued just because you lost them, I mean, you have to go through a process, and so the question comes, well, are you a owner, and that's how the inquiry starts, and they'll say, oh no, I'm only here for like a week, and then that issue then has to go to the board if they have a restriction, a prohibition like that, and not only are there prohibitions in condo documents and kaka-ako, and over all those condominiums that are within the jurisdiction, I guess, of HCDA, they have rules that prohibit short-term rentals in that neighborhood. I know that, I live in that neighborhood, so that means if you live in kaka-ako, and you live in a building that has the, you know, the limitation, you can't do it in the building. Well that's good, that's good, well now the city's getting involved, and they're going to start enforcing, you know, enforcing bill 89, and it's my understanding that if you're going to rent out your unit and you're not in violation of your documents, and you have not filed for a permit, the city is even going so far as to monitor advertising sites, just to identify who the violators are, and I understand that maybe earlier in the month of July they sent out 5,000 potential notices, and since they started doing that, they noticed a decline of about 18 percent of advertising for vacation rentals that were possibly in violation of not having permits to do so. Right, and you know, the fact that, you know, you might own, you might be an investor owner, it doesn't mean you can't rent your unit, it just means you can't do it, you know, the weekend, or you know, one week. Right, you can go in and rent for six months, six months to a year. Yeah, yeah, yeah, so it's interesting, it's very interesting. And then, like you said earlier, about not being able to rent in or rent your unit out short term in areas like Hawaii Kai, that's where I understand Bill 85 came into play because residents or neighbors were complaining about the very thing that they don't want their neighbors to keep changing because you're renting out a unit, and it becomes very taxing on the community. Right, because you know, you know, not only is it a security risk, but you know, when you have transient, you know, renters, I mean, they're here on vacation. I mean, they don't live here, they don't work here, and they're here to relax and to party, and you know, so they don't really care if you, the next door neighbor, have to get up at six o'clock in the morning to go to work. Right, yeah. That's not their concern. And because a lot of these units are in Waikiki, and they figure, oh well, there's lots of hotels, lots of tourists, and this is not a concern, we can party however we want to. And I guess that is a concern that seems to be affecting a lot of the people who have to live in the buildings for these transient renters. Yeah, well it's my understanding also that the fines are going to be pretty steep. If you run out your unit and you don't have a permit, I understand they can be as high as $10,000 a day. Yes, and I think it's necessary to stop the illegal use. I mean, it doesn't prevent you as an investor owner to rent your unit, like I said, to somebody who's not a short-term renter. And so it doesn't prevent you from making, using your unit to earn money. You just can't do, you just can't violate the governing documents of the building, which apply to everybody in the building. And you have to comply with city and state and county ordinances. I mean, it's just that simple. I mean, and the state, I mean, the government can regulate these types of uses. And I think it's in response to maybe the public's concern, like when timeshare came up, it was very clear that they didn't want it to be, in other words, you couldn't do timeshare statewide. The public said, no, you have to restrict it. It was like not in my neighborhood. We don't want it. And so they restricted it only to resort areas where there are already tourists, staying in hotels and whatnot. And that, they felt was a reasonable accommodation for people who wanted to do timeshares, operate timeshares. And for the general public, because that way the general public would know that they wouldn't have timeshares in their building. Because that would affect, I think for a lot of the residential condominiums, that's going to affect the value of your building. If you had to sell, I mean, it's not very marketable if your residential condominium was a timeshare. If somebody had a family or maybe a couple just starting out, I doubt if they'd want to buy a unit in that building. As it stands right now, even just having renters in your building effects, it comes into play when you're trying to buy and sell the owner occupancy and things of that nature. So if you take it a step further and now it's operating as a timeshare or temporary housing or vacation rentals, that brings the value down even more. It becomes even more problematic. I understand there is an association that's not very happy about this bill. The Hawaii Vacation Rental Owners Association, they filed a lawsuit saying that this law violates certain constitutional clauses. And they were hoping that as they filed this lawsuit that it would put a temporary stay so that the city wouldn't enforce the law. But I understand the mayor said, we're going to enforce it. And I think the reason for that lawsuit, and I'm not really familiar with it, I think they're saying that one side of the street allows it and they're on the other side of the street, right? So because in Waikiki there is a resort, what they call a resort area, there are actually lines. Oh yeah. And so anybody on the Makai side, the ocean side, you know, can do them. And I think it's the Banyan. Yep, that's the one. They're on the other side of the street. Right. And so they're not in that resort, so-called resort area. And so they're being banned. And that's what they're saying. If the people across the street can do it, then why can't we? Right. And I'm not really sure about the issues, you know, in that, In the line? Yeah. Yeah, or how many? And you know, so I guess you know, the issue is going to be whether or not the government can draw that line. And say, okay, anybody on this side of the street can do it and people on this side of the street cannot. Yeah. But that's the issue in I think in that case. Yeah. Well in the interim, they're definitely going to start enforcements. I don't, I don't, I'm not sure if they have already. The mayor seemed to, what I've read in the newspaper and seen in his press releases, I mean, he seems pretty adamant that he is going to enforce it. I think mainly, and you know, I was at those hearings. I was at those hearings and the people, you know, and, and they were very long. And there's only there's certain areas of the island in Oahu that were, that seem to draw, you know, people and, and one of the areas was Waqiki, because right now it's, it's kind of iffy because some buildings can do it and some buildings cannot. Some buildings, you know, have the prohibition and their governing documents and some are in Kakaako. And so, you know, so, you know, so, so it's going to be a while before, you know, people, it settles in and, you know, people are going to feel comfortable with working with the law. Yeah. Well, I have a feeling it's, it's going to evolve, you know, as we move along and things come up and, you know, as with all laws, they progress as society changes. But this is a good time for a break. We're going to take a quick break and we'll be right back with more. Probial Oceanography Research and Education, Collateral Analytics, The Cook Foundation, Dwayne Kurisu, The Hawaii Community Foundation, The Hawaii Council of Associations of Abarbon Owners, Hawaii Energy, The Hawaii Energy Policy Forum, Hawaiian Electric Company, Integrated Security Technologies, Galen Ho of BAE Systems, Kamehameha Schools, MW Group, The Shidler Family Foundation, The Sydney Stern Memorial Trust, VOLO Foundation, Yuriko J. Sugimura. Thanks so much to you all. Back to the condo insider show. Right before the break, we've been discussing the new vacation rental law. But we want to segue that conversation into a very specific instance with an association called Waikiki Lanai. And they've done some very unique maneuvering, if you will, when it comes to the law and vacation rentals and things like that. And Jane, I'll let you kind of elaborate on this and I'm not sure where it will evolve from here. And Waikiki Lanai is a condominium. And we're all familiar with condominiums. And in this condominium, what you have is you have owner occupants who own the units and live in the units. And you have investor owners who rent their units out to long term renters. And you have investor owners who are currently doing short term rentals. And I'm not sure where they are, whether they're in that resort area so that they would be okay if they got a permit or, you know, but they may have to apply for a permit. But anyway, so you have three owners in a building with different interests, right? One is an owner occupant. The other one is an investor owner with long term renters. And the third group is investors who do short term rentals. Isn't that unusual? Not necessarily, because if you are an investor owner, you can choose to do long term rentals or short term rentals if the condominium is a documents allow. And in this case, I'm not sure if they are documents allow for it. Somebody told me that they have a 30-day prohibition. So if they have a 30-day prohibition, then the short term rentals are prohibited by the governing documents. But let's assume there's no prohibition, okay? So then it would mean that if they're in the resort area, they have to apply for a license under the new law. Otherwise, they would be prohibited from doing this, doing the rental. The issues, and the issue kind of centers on what is the common expense. And those of us who deal with condos, we don't want a common expenses. You live in a condominium. That means there are certain expenses that are common. That's why they're called common. Everybody in the building pays, like electricity, water and sewage, insurance for the building, staff, operational expenses to keep the security staff. All of this is paid for out of maintenance fees. And in this situation, and I'm hearing that the board, and you know, the board, the board is basically, I'm not sure if it's seven or nine members, but the statute, the condominium statute says that a board member has a fiduciary duty to the association. That means if you're a hundred unit building and you're a board member, you have a fiduciary to 100 people, 100 owners, right? That means that when you make a decision that you can't act in your own self-interest, you got to think of the group. Which is hard for some to do. Right. And some board members go in there, they got an agenda, and that's what they push. And what I'm hearing is that this board, for some reason, has approved something, and I'm told that there's a majority of this board are investors who want to do short-term rentals, or are doing short-term rentals. And so there was a motion, I think, to approve a front desk operation, which would only benefit short-term rentals. That means if you were an owner occupant, you would get zero benefit from a front desk operation. And if you were an investor owner who had a long-term tenant, you would also get zero benefit from a front desk operation. And so it's like, so how come our maintenance fees are being used to finance or pay for a front desk operation when we don't benefit? See, that's the issue. And if it is only benefiting a small portion, or less than 100% of the unit owners, it's not a common expense, and you can't use association money. And it doesn't matter. It goes on the board. It's real clear you can't use association money to pay for something that's not a common expense. Okay, so it doesn't matter the vote on the board. What matters is the stipulation towards common expense. And this is not unusual because places in, I think, Aston Hotel, who manages some condominiums in the resort areas, they set up a hotel pool. Okay, so let's say you have 100-unit condominium, and 50 units are owner-occupied, and 50 units are investor-owned, whether it's short-term or long-term. Okay, and so if you want to, and then, so the Aston will set up a pool, what they call a hotel pool, so if you're an investor owner who wants to do short-term rentals, then you would pay a premium, and you would pay that extra money to Aston to do the front desk, and the front desk would only take care- Now that seems fair. And you would also pay the maintenance fee to the association, just like everybody else in the building, to pay for the insurance, the upkeep, the grounds, whatever, okay, the water, sewage, electricity. So they're kind of showing you how it could be done. Right, and so with, and on the neighbor islands, Kihei, you have a lot of transient, you know, vacation rentals in Kihei, and over there, too, they set up a hotel pool, and you can, you can, you know, pay into it, but let's say you're an investor owner, and you rent out your unit, but maybe it's not short-term, maybe you do six-month leases, so you don't want, you know, you don't have a need for a front desk, you don't have a need for the cleaning services, because usually if you have a hotel pool, you have a staff who will go in and clean the unit after the guests leave, right, and so if you have a person who's in there for a long-term renter, maybe they're in there for six-month leases, you may not benefit from a front desk operation or from the cleaning, so you won't want to pay into the pool. Into the pool, yeah. But that's your choice. Right. But if you decide to pay into the pool, you get the front desk services and the cleaning services and security or whatever services the hotel pool offers, but you pay extra, so you're paying two fees. And so that's how it's typically done, you know, so it's not like, you know, you have to reinvent the system. There is a system already in place, but what is happening in Waikiki when I, if they are in fact using association funds to pay for that front desk, and they're doing this, they can be sued. They can be sued by the owners of, if you were an owner-occupant or an investor owner, you know, who has a long-term tenant who doesn't need those services, but their money is being used to pay for it. They can sue. They can sue. And those board members who voted for it, I mean, they might be personally liable. And you know, when people, when a board acts, right now the condominium law says, the minute shall reflect the eyes and the nays. So we know who voted yes and who voted no. Right. And so if there is a lawsuit, those people who voted to allow association funds to be used for non-common expenses, they could be held personally liable for that money. I'm surprised they don't know that. It's probably because there's something called the business judgment rule, and that is something that's also in the statute for boards of directors. And the business judgment rule is real simple. It says if you don't know, you need to ask and get an opinion. Right. Okay. It means that if it's a legal issue, you should have a legal opinion. Right. And it should not be from your, it can be from your association counsel. In fact, it should be from the association counsel saying that you can do this. Yeah. And, you know, one of the other things I heard about the Waikikila nays is that the current board voted to use association funds to challenge the city ordinance. Oh, it's worse. And the basis for the challenge would be that it affects property values of the condominium, except that if you were an owner-occupant, it doesn't benefit. That lawsuit does not benefit you at all. Right. And there are owner-occupants in that building. And so, you know, and if these investor owners, you know, who want to do short-term rentals, they want to file a lawsuit, they can get together and put some money together and file their own lawsuit. Yeah. There's nothing to prevent that. Right. And that would be very appropriate for them to do that. Yeah. Yeah. But you cannot use association funds because association funds benefit 100% Everybody. Right. And that's the test. You look at an expense to say, does that benefit everybody in the building? Right. And if it doesn't, then it's not a common expense. Right. And you need to be able to parcel it out. Yeah. That's all the more reason I believe that boards really need to take advantage of educational courses and seminars like with HCCA and things of that nature because quite often they get on the board and they believe they have voting power to do basically anything. Right. And unless, you know, they're educated and, you know. Every decision that a board member makes, they have to understand that they have a fiduciary duty. They're acting for everybody in the building. They can't, it's not like, oh, well, I don't like that. Right. So, I don't like that contractor. And so, you know, I'm going to not vote for him. Right. Right. Yeah. I mean, you're 100% right. But I think both of us working in this industry for a number of years, we've seen it. We've seen boards behave poorly and make decisions. And that's why, you know, Sue Savio, who represents Very fizzy. Yeah, who represents most of the, you know, she's the insurance person who represents most of the associations. She says, and she, you know, is not shy about it, but he has got the most claims of any state in the country. Yep. We're the smallest state, but we have the most and the largest D&O claims. D&O claims. And that's because you have boards acting badly. Yep. And it's not because they're doing it out of meanness, they're doing it because they don't know. Exactly. Exactly. They don't know any better. And what they don't understand is that ignorance is not going to be an excuse. If you get sued, if you get sued, it's not an excuse that you didn't know what the law says. Because the law is very plain. If they want to read it, it's in it, 514B, you know, 514B in the statute is very clear. Yeah. And they have to go to classes like for HCCA, CAI, and associate has classes, Board of Training, and Hawaiian, there's all these classes that they have to go to. Yeah, we could go on and I have a feeling we're going to continue this subject into the future because it's steadily evolving. I want to thank you for tuning in with us. Tune in again. We'll continue the conversation. Aloha. Thank you.