A mainland client told me recently that she understood that you could only buy the houses in Hawaii, not the land underneath them. I explained that she was talking about leasehold property. The majority of residential leasehold has been converted to fee simple years ago. So what is leasehold or holding title to a leasehold property mean? You can get the legal description form the legal beagles, but here’s what it means as far as buying (or selling) real estate in Hawai‘i.
Way back after World War II, there was an influx of new residents wanting to live in Hawai‘i. At the time there were still only a few major landowners in the Islands and not many homes available. The landowners wanted to develop their holdings and build homes for those returning to make Hawai‘i the destination and strategic key to the Pacific that it is today. (I can tell you a funny about one landowner. All his relatives were lawyers and business owners downtown, and thought he was nuts to take his ranch land and put it into developments, as “there’s no future in real estate development”…well, look whose family is worth millions upon millions today!! You gotta know your market!)
So they developed the properties, built houses on the land, sold the houses and leased the land under the houses for a monthly rent for periods of up to fifty years or so. Time passed and many of these landowners became paper rich and cash poor as the value of their lands soared with the development of the modern Islands, and the corresponding increase in value of every square inch of land (for you Econ 101 students, land in Hawai‘i equals finite supply)
Time passed and some of the leases were coming to an end. There is a renegotiation period before the end of the lease to set terms and conditions of the new lease. In some cases, the landowner did not wish to continue leasing the land as redevelopment would be more profitable, or the new lease amount and terms were not to the lessees’ liking. Either way, if the lease is terminated, the land and “all improvements thereon” revert to the landowner. “All improvements thereon” means your house and or condominium building, pools, special trees – anything put on or in that land.
Well people were losing their homes. Our society still has roots in the plantation system, so our lawmakers are prone to step in when the workers need protection. So various processes occurred and a new law was passed allowing condemnation of single family leasehold land and forcing the landowners to sell the land in fee simple (you own the land). Some landowners fought the conversion and some started offering the fee under their terms rather than being forced to do so by the courts. Some lessees could not afford the price but most over the next few years did purchase their fee. There are some leasehold single family properties in the islands but they are now the exception and not the rule as it was back in the 60s and 70s.
Now, what wasn’t included was condominium leaseholds. As the value (and corresponding prices) of single family homes increased, more and more bought smaller condominiums, waited their three to five years and sold them to move up to the next property. Problem is, now many of those condominiums are like single family homes were thirty years ago. The leases are held by large (ok, sometimes small or individual) landowner trusts who either need to renegotiate the leases to current (very much higher) values or the property location is such that redevelopment is going to bring much more to the bottom line. Needless to say, this issue is in the legislature’s hands and a condo condemnation package almost passed in 2008. It will pass in some form sometime, but who knows when given all the pressing infrastructure issues facing Hawaii..
Not only are the leases beginning to expire or reach their renegotiation dates, but the buildings are older also and have needed upgrades and other issues which translates into a need for higher fees to cover upcoming maintenance and repairs (that’s a whole other article about the laws to protect you from inadequate reserves). The actual cost of purchasing a leasehold condominium can be more than if you purchased a like unit in fee, as you are receiving diminishing equity as the lease moves towards expiration. More to come….
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Katherine Kate Braden R (B) Principal Broker Realtor ePRO ABR SFR AHWD
Oahu Real Estate Online, LLC
Honolulu Board of Realtors
Windward Regional Vice Chair
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