ARTICLES

Mayor Mufi Hannemann, the Honolulu Committee on Aging and the Elderly Affairs Division recently honored Monarch Properties Inc. with the Lei Hulu Award for its voluntary contribution to the welfare of seniors.

Nominated by Hawaii Meals on Wheels, Monarch Properties provides financial support each year and has employees that deliver meals each week to Hawaii Meals on Wheels’ homebound clients in the neighborhood surrounding their business. Everett Kaneshige, COO and founder of Monarch Properties’ meal delivery program felt businesses should not only monetarily contribute to charities but also give back to the community on a personal level. This model gives opportunities to employees who want to give back to the community but never had the time to fit it in their schedules.

The 2008 Hawaii Legislature has adopted a resolution asking  the Auditor to examine the fact that over the next thirty years, about half of Hawaii’s remaining 18,700 long-term leasehold condominium units are set to revert to their fee owner, which will potentially leave thousands of Hawaii residents in need of alternative housing and that this displacement of hundreds of lessees each year could dramatically impact the already existing affordable housing crisis in Hawaii.  The Auditor is requested to provide recommendations on potential mitigation of the reduction in affordable housing stock due to lease expirations, including the recommendation of any potential legislation in a report to be submitted to the Legislature including findings and recommendations no later than twenty days prior to the convening of the 2009 legislative session.

HCR 125 HD1 – REQUESTING THE AUDITOR TO EXAMINE UPCOMING CONDOMINIUM LEASEHOLD EXPIRATIONS AND THEIR IMPACT ON THE AVAILABILITY OF REPLACEMENT AND AFFORDABLE HOUSING FOR HAWAII RESIDENTS.

Senate Bill 3196 ensures that an association of apartment owners or cooperative housing corporation has a right of first refusal to purchase the leased fee interest in land under the condominium or cooperative project if the owner of the fee interest intends to sell it.  This would be accomplished  by granting the association of apartment owners or the cooperative housing corporation the right of first refusal when a lessor has displayed an objective intent to sell, or has accepted a written offer to purchase prior to or within two years after the termination of the lease.

SB3196 – A BILL FOR AN ACT RELATING TO LEASE TO FEE CONVERSION

A recent decision by a federal appeals court may require the City to complete fee conversion for lessees who had pending contracts under the City’s previous mandatory conversion law.

Discovery Bay Condo Fee Suit to be Re-tried

The 18-unit Kailuan is the first multi-family project (co-op) to have its lease expire (12/31/07) with the residents still occupying the property. The residents attempted to purchase the leased fee prior to expiration but were turned down by the landowner, Kaneohe Ranch. Ultimately both sides ended up in court with the landowner seeking to evict the residents and residents saying that they were not given the opportunity to purchase the leased fee as required by law. The court ruled in favor of landowner and lessees are losing their homes.

The following is a series of articles from the Honolulu Star Bulletin describing the sequence of events and Michael Pang’s commentary on why legislative action may be the only hope for lessees facing similar circumstances in the future.

• Leasehold Owners Face Tough Decisions
• Hawaii Residents Face Leasehold Shakeup
• Leasehold Owners Face Eviction
• Kailuan Residents on Borrowed Time
• Kailuan was never intended to be affordable housing
• Kailuan Eviction Hearing Slated for Tomorrow
• Kailuan Case to be Decided Tomorrow
• Judge Lets Ranch Oust Leaseholders
• Leasehold Reversion: The Kailuan & A Looming Social Issue By Michael E. Pang (R)

The first multi-family (condo, co-op, PUD) lease expiration (surrender of the property back to the fee owner) in Hawaii was scheduled to occur on July 31, 2007 for Kahala Garden Apartments, Inc., a 16 unit co-op; Kamehameha Schools its fee owner.

In 2004, Kahala Garden Apartments hired Monarch Properties to help it seek relief from the surrender. Possible concepts were: lease extension, fee purchase or surrender and rent back. The co-op preferred fee purchase, but KS was not willing to sell at that time.

Ultimately, KS agreed to sell and the fee purchase closed escrow on July 31, 2007, the lease expiration date. Both sides were happy with the result; the shareholders own a fee simple property and have housing-certainty in their lives, while KS can reinvest the proceeds of sale in other potentially more-lucrative investments.

There were a number of fairly unique obstacles and issues to resolve that could be present in other situations where a co-op has a short lease term remaining: valuation (negotiating the price), affordability (some shareholders with limited affordability), qualifying for financing (significantly higher loan payments compared with the lease rent payments), and legal and tax issues about continuing the co-op past the original lease expiration date. All issues were resolved, some of them with innovative solutions.
All in all, this was a very challenging assignment for MPI, but a truly satisfying one to have accomplished.

Act 166 (formerly Senate Bill 600 H.D.2 C.D.1) was signed into law by the Governor on June 8, 2007. It provides a capital gains tax exclusion to leased-fee owners who sell their interest to the Association of Apartment Owners. This creates a win-win situation for everyone since lessees would get fee simple home ownership, fee owners can profit in reinvestment and the state can free up millions of dollars to be put into the economy, hopefully generating use tax dollars that would not be generated otherwise.

H.R. 2613 was recently introduced by Representatives Abercrombie and Hirono to provide a similar capital gains tax exclusion from federal income taxes. Given that this bill represents and affects a very minor issue from a national perspective and is unique to Hawaii, there is no guarantee that Congress will consider it this year let alone take action on it. We will provide you with any updates as we become aware of them.

• Act 166 (2007) – State Tax Exemption for Bulk Leased Fee Sales
• H.R. 2613 (2007) – Federal Tax Exemption for Bulk Leased Fee Sales