RELATING TO HOUSING.

SB3312

THE SENATE

S.B. NO.

3312

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to housing
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

PART I

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SECTION
1.
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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.
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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.

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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.

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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.
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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.

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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.
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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.

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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.
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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.

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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

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

"
Part
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.
�

qualified conversion projects

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

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

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(1)
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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

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(2)
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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.

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

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

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

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(2)
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H
ave 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

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

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"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.

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"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:

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(1)
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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;

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

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(A)
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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

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

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(3)
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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

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

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"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.

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

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

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

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(A)
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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

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(B)
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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;

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

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(3)
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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.
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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-
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;

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

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(5)
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Sh
all 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.

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

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(c)
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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.

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

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(1)
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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

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

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(b)
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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.

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

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201-E
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Tax incentive program.
�
(a)
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There
shall be established a tax incentive program for certified qualified conversion
projects.
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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-
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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.

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

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

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(2)
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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

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

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

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�201-F
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Annual report.
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(a)
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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.

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(b)
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The report shall include:

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

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(2)
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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

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(3)
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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.

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

PART III

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

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"
�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.

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(b)
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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
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of chapter 201
.

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(c)
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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.
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The
costs upon which the tax credit is computed shall be determined at the entity
level.
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Distribution and share of credit
shall be determined by rule.

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(d)
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The director of taxation:

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

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

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

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(e)
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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.
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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.
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Failure to comply with the
foregoing provision shall constitute a waiver of the right to claim the credit.

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(f)
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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
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of
chapter 201, the credit claimed under this section shall be recaptured.
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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.

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(g)
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For the purposes of this
section:

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

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

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

PART IV

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SECTION
4.
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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.

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

PART V

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SECTION
5.
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New statutory material is
underscored.

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SECTION
6.
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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:

_____________________________

Report Title:

DBEDT;
DOTAX; Qualified Conversion Projects; Program; Income Tax Credit; Appropriation

Description:

Establishes
a program and income tax credit to incentivize the conversion of commercial
properties into residential properties.
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Appropriates moneys.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.