The city is offering a 50 percent discount on property taxes — but only for some landowners and businesses in Kakaako.

The move is intended to help preserve and promote industrial business uses in an area that has become the center of high-rise condominium development on Oahu.

A main premise of the tax break, which was granted by the City Council over opposition from Mayor Kirk Caldwell’s administration, is that high-rise developments and other more valuable property uses in Kakaako, especially around planned rail stations, are driving up property taxes for owners of industrial properties and businesses.

Some businesses in Kakaako have been hit with double-digit percent increases in their property taxes in recent years.

“This will provide support for those industrial and service companies that do not want to be forced out for higher density uses of their land, i.e. high-rises and condos,” said Steve Scott, a principal of slipper manufacturer Scott Hawaii on Hopaka Street, in written testimony on the tax discount plan.

Scott’s property tax bill this year rose 16 percent to $30,000 from about $26,000 because of a higher assessed value, according to property records.

“It is important for these businesses in Kakaako to continue and provide the mixed use that it is currently zoned for,” Scott said.

The tax discount measure was introduced by Councilwoman Carol Fukunaga, who represents the Kakaako area.

Initially, Fukunaga’s bill gave a tax break to industrial businesses near all 20 of the planned rail stations in the area. That bill drew objections from a city budget executive who estimated that the measure, Bill 61 (2015), would cost $27 million in the first year and clash with a main goal of transit-oriented development: to promote higher and better new property uses, such as residential and retail establishments that increase populations near rail stations and boost the city’s property tax revenue.

After seven public hearings the measure was scaled back to cover only part of Kakaako. Council members voted 8-1 last month to pass the bill, and it became an ordinance without Caldwell’s signature on July 21. Councilman Brandon Elefante was the lone no vote.

Ordinance 16-21 offers a 50 percent property tax break to landowners or lessees within Central Kakaako if inadequate infrastructure serving their property prohibits significantly denser development. The bill is considered a “demonstration,” which could be expanded to other parts of Oahu.

Question of fairness

To obtain the tax break, qualified landowners or their tenants must be using their property for an industrial purpose specifically named in the bill. Those include “personal services establishments,” repair shops, warehouses, manufacturing, film or sound studios, printing, publishing, building material sales, aluminum can collection, automobile service stations, car washes, laundries, food preparation, catering and more.

The tax break can be claimed for 10 years — from July 1, 2017, through June 30, 2027.

Nelson Koyanagi Jr., director of the city Department of Budget and Fiscal Services, which oversees real property taxes, estimated the exemption could reduce property tax collections by about $1 million in the first year.

He questioned the need for the ordinance and called the tax break unfair.

“There is an equity issue within Kakaako and to the other 3,900+! island wide industrial classified parcels that would not benefit from this bill,” he said in written testimony.

Koyanagi also noted that part of Central Kakaako doesn’t even permit high-rise development.

“This bill seeks to grant parcels with lower height limitations a 50 percent discount which we believe to be unnecessary,” he said in his written testimony.

Part of Central Kakaako has a 65-foot height limit under regular and transit-oriented development rules set by the Hawaii Community Development Authority, a state agency created in 1976 to encourage redevelopment in Kakaako.

Unique condition

Much of the area also prohibits considerably denser development until substandard infrastructure, including roads, are improved.

Caldwell said in a message to the Council that he supports the intent to preserve small industrial businesses in Kakaako but is troubled by features in the bill — chiefly its circumvention of uniform property tax assessments.

“If this were not a demonstration project, I would be vetoing the bill,” Caldwell said in the message.

Fukunaga defended the bill.

Small businesses in Central Kakaako suffer from the unique condition of having mixed-use zoning that attracts development of new towers nearby, which in turn drives up property taxes even though high-rise development isn’t possible in much of Central Kakaako because infrastructure hasn’t been improved, she said in an email.

Several business and landowners in Central Kakaako who can benefit from the new ordinance encouraged the Council to pass the bill, saying they face rising property taxes, construction impacts and displacement.

Van Takemoto, president of Island Fender on Ilaniwai Street, said his company has been in business at its location since 1937, and he wants to continue to fix cars in town.

“The high property tax in Kakaako makes continuing doing business here very difficult if not impossible,” he said in written testimony.

Takemoto’s property tax bill this year rose 20 percent to $29,000 from about $24,000 because of a higher assessed value.

Not for all

Frank Young, owner of K&Y Auto Service on Kawaiahao Street, said he applied for the tax break Tuesday and has walked through his neighborhood to spread the word about it.

“You’re talking about $16,000 a year,” he said, referring to how much a 50 percent savings means to him as a tenant who pays the property taxes on two properties he leases. “Kind of big.”

Yet other business owners who could be equally affected by rail and transit-oriented development aren’t getting the same break. Lex Brodie’s Tire, Break and Service Co., located just beyond the Central Kakaako border between Cooke and Coral streets, had a 19 percent property tax increase this year but isn’t eligible for the discount.

Some observers question the connection between the planned rail line and rising property taxes, noting that other incentives for high-rise development in Kakaako that have been in play for decades have been putting pressure on smaller landowners.

In Kapalama about one block from a planned rail station, property taxes and assessed value for land under Hawaii Spring Supply’s business on Puuhale Road rose 7 percent this year. And near a planned Lagoon Drive rail station near Honolulu Airport, a property that includes Tile Warehouse had a 4 percent increase in assessed value and taxes this year.

Zoning blind spots

The city has developed transit-oriented zoning plans around each planned rail station. The zones are designed to encourage redevelopment in some areas and preserve existing uses in others. These TOD zones have unique borders that aren’t neat circles and typically range from a quarter-mile to half-mile, but not close to 1 mile, from the station.

John Whalen, HCDA’s chairman and a former director of what is now the city Department of Planning and Permitting, told the City Council in written testimony last year that the initial version of the bill was a more viable way to retain industrial service businesses in TOD districts than zoning policies.

“TOD zoning policies tend to increase property tax assessed valuation by promoting higher value mixed-use development at higher densities, making it difficult for established industrial service businesses to remain in the area,” Whalen wrote. “Typically, industrial service businesses in urban Honolulu are located on small lots, so their development potential is limited, but property tax assessment methods do not necessarily take this inherent limitation into account.”

Whalen said this is already happening in Central Kakaako, and businesses in the area see property taxes increase at about 20 percent a year as a result of zoning-tax decisions that favor higher densities.

In further testimony after the bill’s focus was narrowed to Central Kakaako, Whalen noted that HCDA zoning regulations restrict allowable density in this area until infrastructure is improved to sustain denser use. But he also said property tax officials don’t necessarily take this into account when valuing real estate for tax purposes.

“While this regulation helps to reduce development pressure in Central Kakaako itself, it does not insulate these small industrial properties from the dramatic increases in property tax assessed valuation brought about by the higher density mixed-use development in the surrounding areas of Kakaako, as well as Ala Moana and Downtown,” he wrote.

As of last week HCDA had received about 40 requests from business owners or landowners in Central Kakaako seeking certifications that their property lacks sufficient infrastructure for dense development.

The deadline to submit tax-break applications to the city to qualify for next year’s tax bill is Sept. 30. To maintain the discount, business owners and landowners must resubmit the HCDA certification every two years.