Fee Conversion

Since 1993, MPI has been representing condo and co-op projects in fee conversion; negotiating for and purchasing their leased-fee interest (includes resale to apartment owners). Typically, we are hired as the association’s agent (representative) to handle all aspects of the project’s fee conversion effort from start to finish, very much the hub of the effort and transaction. This includes communication and coordination with the board, apartment owners, fee owner and other professionals, start to finish.

MPI does the work and provides all necessary information, and the association’s board is left with primarily decision-making and oversight functions. We refer or recommend, and coordinate, all other professionals that may be needed (attorney, appraiser, lender, escrow/title, etc.).

MPI produces and sends periodic reports to all association members (educational, informative and instructive) and collects a reasonable up-front cost contribution from the association to cover the cost of production and mailing the reports and other various costs of representing the association and its members. Our basic fee or commission is usually a percentage of the purchase price paid at closing, only if there is a closing. No closing, no fee.

We are happy to meet with association boards to address their situation, make preliminary assessments and answer questions. There is no charge for this. Thereafter, the board can make more-informed decisions about how to proceed. If asked, MPI would then make a proposal to represent the association.

MPI enjoys a reputation for competent, reliable and ethical representation.  We typically work on about 40 fee conversion cases at any one time (some proceed faster than others), more cases than anyone else, and professionals call on us for fee conversion and lease rent renegotiation information and opinion (attorneys, appraisers, association managers, Realtors, etc.).  All our leased-fee work has been referred to us from these types of professionals or lessees themselves.

Click here for a list of MPI’s recent bulk-sale transaction closings.  We estimate that this represents about 85% of the bulk fee sales statewide over the past few years.

The key law pertaining to condominium and co-op fee conversion is Chapter 514C, Hawaii Revised Statutes. 514C has three essential elements:
A condominium association’s right of first refusal to purchase the leased-fee interest ahead of anyone, including third-party investors and its own members.

Authority for fee owners to sell the leased-fee interest direct to apartment lessees, circumventing the condominium owner’s association.

Authority for condominium associations to purchase the entire leased-fee interest from fee owners in bulk purchase transactions, including if the project is partially converted (some fee simple and some leasehold apartments).

Click here for complete HRS Chapter 514C statute [L 1988, c 298, pt of §1].

One of the most controversial issues in fee conversion is price and how a leased-fee interest is valued.

The universal appraisal method used by commercial MAI appraisers is an income approach, also called discounted cash flow (“DCF”). Essentially, a leased-fee interest has two benefits or values to the fee owner income (lease rent payments) and reversion (land back at the end of the lease). A DCF analysis basically calculates the present value of these two future benefits using the lease’s terms and assumptions of discount rates, appreciation rates and unencumbered land value.

Historically, a DCF analysis attempted to value a lessor’s equivalent reinvestment potential, but the closed market nature and proliferation of leased-fee sales in Hawaii over the past 15 years has resulted in appraisers now valuing what lessees might pay for leased-fee interest as opposed to what its worth. As such, appraisers now sometimes blend multiple methods with their discounted cash flow analysis (including sales comparison and others).

In the end, sellers in a closed market context can ask for whatever price they want, regardless of valuation methodology. As such, it can be a complicated task to analyze and negotiate reasonable leased-fee prices with fee owners.

MPI has developed the expertise to produce broker’s price opinions (“BPOs”) for its clients that can be used for decision making. There is no charge for MPI’s BPOs.

The following is a sampling of news articles that include comments from Michael Pang of MPI.

Click here for news articles.