Jun 20, 2010

Illegal Dwelling Units - a MILLION Dollar loss

In Honolulu, illegal units mean unregulated construction and occupancy that although serves the immediate needs of the community, removes a significant portion of revenue (taxes and utility metering fees) that could be used by local gov't to manage and improve existing utility infrastructure, not to mention sharing the cost burden amongst more taxpayer shoulders.

This article discusses the # of illegal units on Oahu and the $$ amount of revenue lost when a community turns to illegal units to fill its housing shortage.

Are there really that many illegal units? The precise # of illegal rental units in Honolulu is difficult to quantify, so let's look at studies from another municipality.

San Francisco is similar to Honolulu in terms of above average real estate prices and declining supply of buildable land. According to a report by the San Francisco Planning & Urban Research Assoc (see pg 4), a 1996 survey conducted by the SF Planning Dept, examined the external appearance of homes (ie. comparing address numbering to # of permitted units, counting # of mailboxes on site, etc) and concluded that approx 8% all housing units were illegal. The report states:
"This [8%] figure is probably low because many unauthorized units cannot be detected from the street and would not have been recorded in an exterior survey. In the mid-1980s, a survey of the sale records of single family dwellings indicated that approximately 10 to 15% of the dwellings had an illegal secondary unit. Given the current housing shortage and high rents, it is quite likely that the creation of new unauthorized units is continuing, but at what rate is unknown."
Applying a conservative 8% guesstimate to Honolulu and data on the # of households from a 2008 US Census Bureau survey, (including only 1-unit attached/detached and 2-unit dwellings; NOT included: multifamily or hi-rises) reveals:
190,512  Residential Households in Honolulu
x 8%       Conservative Guesstimate of Illegal Dwellings on Oahu
15,241 estimated illegal units on Oahu
Every 2 months, the Board of water Supply sends a water bill that includes a Sewer Base Charge and a Sewer Usage Charge. (Sample BWS bill) In 2010, the City expects to collect approx $23 Million per month and is the primary source of revenue for the Wastewater system. Dwelling units built illegally without a permit do not contribute to this revenue stream and increase the burden for legal dwelling units, since there are fewer customers to shoulder the cost burden.

Based on figures from a 2009 Wastewater Bond Prospectus, the City Wastewater Branch has by its own count:
 136,019  Living Units (Prospectus--table 14)
x $68.39  Monthly Sewer Base Charge (Eff. FY2010 rate increases to $68.39 per dwelling unit per month.)
$9,302,339 Monthly Sewer Charge collected every month (not including $2.88/1,000 gal Usage fee)

Theoretically, if every estimated illegal unit were instantly converted into a legal unit with a landlord that paid the required sewer fee per dwelling unit, the City Wastewater Branch monthly revenues would increase by:

   15,241  Estimated Illegal Dwelling Units on Oahu
x $68.39  Monthly Sewer Base Charge
$1,042,329 Additional Monthly Sewer Base Charge collected - if all illegal units were legal and paid their share of the sewer fee. 

That's an 11% increase in fees for the Wastewater Branch. 
That's a total of $1 Million in revenue that can fund sewer maintenance and expansion that will create new sewer capacity that has prevented so many other housing projects from getting off the ground!

To reduce the number of New illegal units, the City could to take steps to amend the Zoning Code to allow secondary units. The current Zoning Code encourages the creation and perpetuation of illegal units that rely on public infrastructure and taxpayer dollars but do not contribute to fees and taxes (note: Illegal rentals are also not likely to pay the 4% GE tax or properly assessed their share of property taxes) and raise the cost of living for those units that were legally established and therefore diminish the capacity of City officials and local developers to create new housing units.

I'm not advocating a citywide manhunt for illegal rental units. From a public policy standpoint, it is more difficult and costly to evict a person from their home and remove a source of income that the landlord had come to rely upon. Instead, as a community, we would have more to gain by reducing the barriers to creating new housing in Honolulu by simplifying the permit process and legalizing the already widespread practice of adding a secondary unit to a home, or Accessory Dwelling Units (ADU's)

If the Wastewater Branch is not able to collect sufficient funds from the existing supply of legal residential units, they will increase the monthly Sewer Base Charge and Usage Fees to compensate. Increasing the number of customers will help reduce the individual financial burden on each customer.

Monies collected for the Sewer Fund, remain in the Sewer Fund and cannot be transferred (verify), which is esp important when City offices are being furloughed and gov't budgets squeezed.
"As part of the commitment to ensure the financial strength of the Wastewater System, they City Council adopted Ordinance No 05-006 on March 31, 2005, pledging not to transfer Sewer Fund monies to the City & County's General Fund." 2009 Wastewater Bond prospectus, pg 25.

UPDATE: 7/5/10:
Bond Prospectus (2009 senior and junior series):