The Hawaii Legislature last week passed a bill that creates new requirements for real estate investment trusts to do business in the state, but most of the contents of House Bill 286 are redundant for hotel REITS, according to the top tax official for the owner of the state’s largest resort.
HB286, which was sent to Gov. David Ige on Friday, requires a REIT to notify the state Department of Taxation of its operations in the state no later than 15 days after starting business here, designate on its tax return that it is a REIT, and submit its federal tax return along with the state tax return or face a penalty of $50 per day.
The reporting requirement is likely moot for any REIT already operating in the state.
Hotel REITs already submit their federal returns along with their state returns, said Scott Winer, senior vice president, tax, of Park Hotels & Resorts Inc., which owns 60 Hilton-branded hotels and resorts in the United States, including the Hilton Hawaiian Village Waikiki Beach Resort and the Hilton Waikoloa Beach Resort on Hawaii Island.
Under the unique structure of a hotel REIT — the REIT owns the real estate, but a taxable REIT subsidiary runs the hotel business on the property — the hotel ends up paying real property tax and general excise tax as well as corporate income tax, Winer said. Under federal rules created in 1960, a REIT must pay out 90% of its profits to shareholders in the form of dividends, which it can then deduct from its federal and state taxes.
But the shutdown to tourism caused by the Covid-19 pandemic directly impacted REITs’ bottom lines. Winer noted that Park reported losing $1.44 billion in 2020 because of the Covid-19 pandemic shutdowns and did not pay dividends in 2020 and likely will not again in 2021, Winer said.
“You can look at the forecast for the industry recovering and nobody's expecting pre-Covid levels for years, 2024 maybe 2025,” he said. “The dividends itself are driven off of the tax requirements and what the street requires you to pay and right now with hotels not operating at the level they should because of the pandemic, nobody's expecting the cash dividend.”
Winer noted that Hilton Hawaiian Village, which was closed for most of 2020, still paid $22 million in real property tax to the City and County of Honolulu and paid another $4 million in G.E.T. on the rent the taxable REIT subsidiary pays to Park.
“If you look at 2019 for instance, the number was like $9.5 million in G.E.T. that Park paid to the state of Hawaii for the rent it received from its subsidiary,” he said. “So that G.E.T. is incurred solely because of the structure that's required under the federal rules.
Meanwhile, House Bill 283, the Legislature’s eighth consecutive attempt to disallow the corporate income tax deduction of dividends paid to shareholders by REITs, failed to gain traction. New Hampshire is the only state that doesn’t allow a dividends-paid deduction.