Maui appears to be the most progressive county in Hawaii and in the nation in terms of promoting fair taxation of timeshares.  On Maui, timeshares form a separate real property tax rate category – with significantly higher tax rates than for other real property categories.  Here is a January 22, 2010 article in the Pacific Business News, “Maui timeshare taxes surge.” 

Since we are on this subject, here is some information on this from my post from 5-9-09       Re the incredibly preferential treatment the timeshare industry enjoys when it comes to paying taxes

Sally Kwak, Ph.D. and James Mak, Ph.D., Professors of Economics at the University of Hawaii, have researched thoroughly the subject of Taxing Timeshare Occupancy in Hawaii.  Here is what they found.  Apparently, when it comes to taxes, timeshare is in a class of its own and is taxed very differently – and highly favorably – compared to hotels and other transient accommodations.

The American Resort Development Association (ARDA) is the main entity to represent the timeshare industry and lobby for their interests. Much of the information about the timeshare occupancy taxation comes from the ARDA and their reports boasting successes of the ARDA’s lobbing efforts. Check out their website www.arda.org, incl. their reports “Legislative Advocacy On Behalf Of Timeshare Owners: What Has ARDA-ROC Done For You Lately?” By the ARDA’s own information, in 2005, rental of U.S. timeshare units generated only $80 million in state and local occupancy taxes. Compare this to the more than $88 million over the two-year budget term that the state of Hawaii hopes to generate as a result of the recently passed highly controversial increase in the transient accommodations tax!

In 1986, the state of Hawaii started to levy a statewide Transient Accommodation Tax (TAT) on the occupancy of transient accommodation units, incl. hotels, in addition to the general excise tax. Even though timeshares had been operating in Hawaii since 1968, the TAT did not apply in any way to timeshare occupancy till 1998. In 1998, the state of Hawaii began to apply TAT to timeshares by enacting Act 156, with HRS 237D detailing the specifics. While the HRS 237D language is relatively simple, experts point out that the administration of the tax is actually complex and hard to fully enforce.

Specifically, the timeshare occupancy taxes are based on an estimated “fair market rental value” (FMRV), which the HRS 237D defines as one-half of the gross daily maintenance fees. Experts claim that the current FMRV definition, as in the HRS 237D, used to tax timeshares grossly understates the actual fair market rental value. “ARDA Hawaii Chapter’s 2008 study of the state’s timeshare industry estimates that in 2007 the average daily rate for a rental timeshare unit was $218 (Hospitality Advisors LLC, 2008). The average daily maintenance fee was $143.71 (=$1,006 per week divided by 7 days); one-half of that amount is $71.85. Thus, in 2007, the statutory average daily timeshare tax base amounted to a mere one-third of the unit’s fair market rental value” (Kwak and Mak 2008).

Why did the 1998 Hawaii Legislature decide to tax timeshares this way? The PMCI Hawaii, the local lobby retained by the Hawaii chapter of the ARDA, gives the answer: “Beginning in 1992, measures began being introduced to impose the State hotel room tax on timeshare properties. … PMCI was able to defer enactment of the tax for six years. Because of the leadership change in 1998, there was a virtual certainty that a bill imposing a hotel room tax on timeshare properties would finally pass. The focus of PMCI’s engagement was then shifted to minimize the impact of the tax…. PMCI was able to negotiate an acceptable protocol for application of the tax based on a percentage of maintenance fees.” The ARDA (2005) claims that this political victory in Hawaii “limited the amount when actually enacted from about $24 per day to about $6 per day.” I.e., by the timeshare industry’s own acknowledgment, the Hawaii timeshare occupancy is taxed at 25 percent of the fair market rental value.

Back to the Ilikai: As a reminder, the Ilikai governing documents delineate permitted uses of units. Specifically, both the Ilikai Declaration and By-Laws state, “The owner of each apartment within the building shall use such apartment only as living accommodations for hotel or apartment purposes” (emphasis added).  Anyone claiming that timeshare and hotel uses can be equated should be asked, “If timeshare and hotel uses are same, then why are they taxed so differently under Hawaii law?”

There are so much misinformation and myths circulating around here.  Let me separate one such myth from reality.  There two main types of timeshare: deeded and not deeded.  Hawaii Revised Statutes HRS § 514E provides the Hawaii timeshare law and defines those, see the definitions below.  The timeshare by Shell Vacations Club (“Shell”) here at the Ilikai is not deeded.  That is, Shell owns their 123 units.  What they sell is points for the right to use.  Take a look at the definitions below.  Shell’s timeshare falls into the (2) category in the HRS § 514E-1 timeshare definitions. 

Please note that the fact that Shell’s timeshare is not deeded could be considered good news.  Why?  Because Shell holds the deed to those units.  This should make it easier for them to get out of here.  If it were deeded timeshare, it would be way more involved for them to cease their operations, because there would be circa 52 deeded timeshare owners per unit.  Just imagine that!

Speaking of which, as I reported earlier, an Ilikai affiliated entity is looking into setting up deeded timeshare here.  This is not a rumor, it is from a reliable external source, I have more detail.  With the current lawsuit against Shell, there is not much they can do.

I am writing this because I keep hearing from some owners this mythic claim that Shell’s timeshare is “points-based,” and thus, supposedly, it is not really timeshare but more like a hotel, and thus, Shell’s operations are legal.  Hello!  This is absurd logic.  What’s worse is that these owners allege that they hear this type of interpretation from certain Board Directors.

Almost all of timeshare is points-based these days.  Deeded or not deeded – almost all timeshare plans these days are points-based.  That’s the timeshare norm these days.  I encourage you folks to attend a timeshare presentation.  I have been to a few, it is very educational.

Back to the HRS § 514E-1 timeshare definitions: Pursuant to HRS § 514E-1,

“”Time share plan” means any plan or program in which the use, occupancy, or possession of one or more time share units circulates among various persons for less than a sixty day period in any year, for any occupant.  The term time share plan shall include both time share ownership plans and time share use plans, as follows:

(1) “Time share ownership plan” means any arrangement whether by tenancy in common, sale, deed or by other means, whereby the purchaser receives an ownership interest and the right to use the property for a specific or discernible period by temporal division.

(2) “Time share use plan” means any arrangement, excluding normal hotel operations, whether by membership agreement, lease, rental agreement, license, use agreement, security or other means, whereby the purchaser receives a right to use accommodations or facilities, or both, in a time share unit for a specific or discernible period by temporal division, but does not receive an ownership interest.

“Time share unit” means the actual and promised accommodations, and related facilities, which are the subject of a time share plan” (emphasis added).

Note that HRS § 514E-1 clearly states, “excluding normal hotel operations.”  I.e., the Hawaii timeshare law itself clearly differentiates between “normal hotel operations” and “timeshare.”  Timeshare is also taxed very differently than hotels, among other differences.

As a reminder, here is what the Ilikai covenants (Declaration and Bylaws) say about permitted uses of Ilikai apartments:

1. Pursuant to Section 7(a) of the Ilikai Declaration, “[t]he owner of each apartment within the building shall use such apartment only as living accommodations for hotel or apartment purposes” (emphasis added).
2. Pursuant to Article VI Section 1(a) of the Ilikai By-Laws, “[t]he owner of each apartment within the building shall use such apartment only as living accommodations for hotel or apartment purposes” (emphasis added).

Now compare that with the timeshare definitions in HRS § 514E-1.  HRS § 514E-1 clearly states, “excluding normal hotel operations.”  The Hawaii timeshare law, HRS § 514E, itself clearly differentiates between “normal hotel operations” and “timeshare.”  How can anyone argue that Shell’s timeshare operations are same as hotel and thus should be allowed here?!  Why is our Board of Directors refusing to cite and fine Shell for violations for using their units for timeshare purposes even though the Ilikai Declaration and By-Laws only permit hotel and apartment uses?

Here is a Wall Street Journal article of July 8, 2009, “Hotels Sound the Alarm on Time Share.”   Take a moment to read the article and please note what it says there about a timeshare company, Consolidated Resorts, Inc.  I have more about that company – a sad story of a condominium project conversion into timeshare by Consolidated and what happened to that project.  Let’s hope the Ilikai does not follow that path.

Here are some quotes from the article (emphasis added): “The hotel industry has been reeling for the past year amid a steep decline in business and leisure travel. Now it is moving away from one of its former profit centers: time shares.  Major time-share developers, led by Wyndham Worldwide Inc., Marriott International Inc., Starwood Hotels & Resorts Inc. and others, are scaling back their time-share business as investors in time-share loans demand higher interest rates, buyers become more scarce and resales of time shares put downward pressure on prices and demand for new units. …

The pullback will reshape some large time-share players. Wyndham, which owns 150 resorts globally and counts 830,000 time-share owners, intends to whittle its time-share business by 40% this year to an annual sales rate of $1.2 billion. That is a big reduction for Wyndham as a whole; its time-share division provided 53% of Wyndham’s revenue last year and 42% of earnings before interest, taxes, depreciation and amortization.  …

The cutbacks made by Wyndham and others are aimed at remaking their time-share divisions into “a much smaller business” …

The problems came to a head late last month for a Las Vegas time-share developer when the company, Consolidated Resorts Inc., said it would file for bankruptcy protection. …

Analysts say the giant hotel companies aren’t in danger, but the decline in the time-share business will be a drag on profits for years. …”

Anyway, take a moment to read the whole article and note Consolidated Resorts, Inc., I have more about them – that should ring the alarm for us at the Ilikai.

Why is our Board of Directors still refusing to cite Shell for running their timeshare operations at the Ilikai, even though the Ilikai Declaration and Bylaws only permit hotel and apartment use?  Why are they allowing Shell to run their timeshare sales here?

Here is a Florida example of a condominium association dealing with timeshare.  Ocean Walk Resort in Daytona Beach is a mixed-use project consisting of regular condominiums and timeshare units owned and managed by Wyndham:  ”Civil Action Filed against Wyndham”, “Timeshare, condo group square off in court,” Take a look also at this blog-style posting with more information on the situation and interesting comments from readers, “Having a combo of timeshare and condo-hotel is the problem.  Not the legal system, not the law.”

As a reminder, here is what the Ilikai covenants (Declaration and Bylaws) say about permitted uses of Ilikai apartments:

1. Pursuant to Section 7(a) of the Ilikai Declaration, “[t]he owner of each apartment within the building shall use such apartment only as living accommodations for hotel or apartment purposes” (emphasis added).
2. Pursuant to Article VI Section 1(a) of the Ilikai By-Laws, “[t]he owner of each apartment within the building shall use such apartment only as living accommodations for hotel or apartment purposes” (emphasis added).

Here is a case with relevance to the Ilikai lawsuit against Shell Vacations Club (“Shell”) to cease timeshare operations at the Ilikai: O’Connor v. Resort Custom Builders.

In  this case, some individuals (“appellees”) owned a home in a subdivision located in a resort area.  These appellees sought to sell interval ownership interests, or timeshare, for that home.  However, the subdivision had a restrictive covenant stating that the homes were to be occupied for residence purposes only.  Appellants sued to prevent appellees from selling interval ownership interests, i.e., timeshare, in their home.  Appellees in turn claimed that other communities in the area permitted timeshare, and that they should be allowed to do the same.  They also pointed that the subdivision covenant did not explicitly prohibit timeshare. They also claimed timeshare was similar to rental of property, and that they should be allowed to proceed with timeshare because it was similar to rentals.  The lawsuit outcome was this: The court ruled that appellants had a right to restrict the use of the land in accordance with the restrictions delineated in the subdivision covenant, – i.e., not allowing timeshare.  The court also ruled that it was immaterial that other entities in the same community had permitted timeshare.  The court also ruled that rental of property was not equivalent of timesharing.

The arguments by the individuals attempting to sell timeshare in the above case show similarities to the arguments by Shell and some brainwashed-by-Shell individuals, incl. some brainwashed-by-Shell Ilikai owners.  Brainwashed-by-Shell individuals claim that timeshare is permitted in other properties in Waikiki, that the Ilikai covenants (Declaration and Bylaws) do not explicitly prohit timeshare, and also claim that timeshare is supposedly no different than rentals – that’s the common arguments by the brainwashed-by-Shell individuals.  (P.S.: I do fully recognize the importance of Hawaii specific statutes and cases.)

As you may or may not know, but an Ilikai neighbor, Discovery Bay, had their own share of trouble with timeshare.  (Discovery Bay is a 42-story twin tower condominium complex across the street from the Ilikai.)  Back in the 1980s, Paradise Palms Vacation Club acquired eight units at Discovery Bay and started points-based timeshare operations.  Discovery Bay pursued a lawsuit to prevent the use of units for timeshare purposes and succeeded removing timeshare operations from the premises.  Good for them!

There was also a related lawsuit: Federal Trade Commission (F.T.C.) v. Paradise Palms Vacation Club, 1986 U.S. Dist. LEXIS 19109 (W.D. Wash. 1986 ) (click on the link to view) alleging developer’s misrepresentations about location, availability and exchange privileges of Hawaii timeshare units. 

Discovery Bay

In F.T.C. v. Paradise Palms Vacation Club, it was alleged that timeshare developers sold some 3,000 timeshares at $6,000 a share by using promotional material depicting Discovery Bay, luxurious Hawaii condominiums near or on the beach at Waikiki.  However, the defendants were unable to deliver the advertised Hawaii timeshares to more than 20% of the timeshare owners.  The remainder were offered “comparable” units in Lake Tahoe and Ocean Shores, Washington.

Several years later, the Paradise Palms case was resolved by the entry of judgments against the timeshare developers one of which described the following misrepresentations:

“(A) That each (timeshare owner) would be able to vacation in a luxurious condominium unit in Hawaii every year for decades to come.  In fact, the Club’s luxury units would accommodate no more than 20% of its members.  The large majority of (the) vacation units were not in Hawaii at all, but rather in an apartment building in Lake Tahoe, Nevada, and a motel in Ocean Shores, Washington.

(B) That (defendant) owned the entire 42-story, twin tower Discovery Bay condominium complex in Waikiki. In fact, the Club owned only eight Discovery Bay units, all of which were the subject of litigation seeking to prevent their use for timesharing purposes.”

Note that the lawsuit was separate from the other lawsuit that succeeded to cease timeshare operations at Discovery Bay.