Fall 1991 Home   Newsletters

Fall 1991

Spring 1992

President's Message - Don't Let it Happen Here (Evelyn Bender)
Board Highlights
Members Appreciated
Leasehold in Hawaii
Update on Educational Revitalization (Libby Oshiyama & Marion Saunders)
Time for Action - League Supports Gejdenson Proposal
Appreciation
State Council
Health Care Consensus
National Convention
Urgent: Leasehold Conversion and Lease rent cap Legislation Needed (Richard Port)
Mandatory Conversion Laws Covering Leasehold Projects (Bruce C. Dinman)
Small Landowners' Perspective on Leasehold (James K. Mee)
Legislature and the Elusive Leasehold Issue - 1991 (Virginia Isbell)
Talk to LWVHI on Nov. 5, 1991 by Oswald Stender (Irene Coogan)
Mandatory Conversion Could Benefit Lessors (Joan Hayes)

Mandatory Conversion Laws Covering Leasehold Condominium and CO-OP Projects

Our law firm's involvement with lease rent renegotiation and the conversion of leasehold condominium and co-op projects from lease to fee has led us to conclude that leasehold residential properties are untenable in Hawaii, and that laws must be passed to enable the lessees of condominium and co-op units to convert their projects from lease to fee. Our experience has also led us to conclude that laws should be passed which prohibit the creation of new leasehold residential condominium and co-op projects.

It is not believed that lessors had ill-intentions when leasehold residential co-op and condominium projects were first created. Rather, it is believed that no one suspected at that time that land values would skyrocket in Hawaii to the point that lessees would be unable to afford to pay a rent which would provide lessors with a fair return upon their investment. However, the advent of the jet age created a global demand for Hawaii real estate, and the law of supply and demand ensured that the value of a relatively scarce commodity (i.e., Hawaii land) skyrocketed. There does not appear to be any reason to believe that the law of supply and demand will not continue to cause Hawaii real estate to appreciate over the long run, with the result that lease rents for residential property will continue to increase significantly upon each lease rent renegotiations.

A substantial number of Hawaii residents live in condominium and co-op units, and it is anticipated that this trend will continue in the future, due to the fact that multi-family housing is more affordable than single family homes. Thus, condominium and co-op units are an important form of housing for many Hawaii residents. To enable people to continue to reside in Hawaii following retirement, it is important that they be able to pay off the mortgages on their residences during their working careers allowing them to secure for themselves a place to live during their retirement years. However, if a retiree pays off the mortgage on his or her leasehold residence but is then faced with skyrocketing lease rents, that person's life savings may be depleted and he or she will ultimately lose that home at the end of the lease term.

It is typically the case that the income of a retired person remains at a relatively fixed level for the rest of that person's life. This being the case, it is foreseeable that most retired persons will not be able to pay steadily increasing lease rents as the value of the land under their co-op or condominium units continues to appreciate and the lease rent renegotiates based upon those increasing values. This problem affects not only lessees, but their heirs as well.

As indicated above, the specter of skyrocketing lease rent and the need to vacate leasehold co-op and condominium apartments at the end of the lease term is an extremely serious problem for retirees. A second aspect of this problem is its effect upon the children and other heirs of the lessees of such property. Since the price of homes is quite high in Hawaii, one of the main ways that young people are able to continue to live in Hawaii is to be given or inherit apartments from their parents or other relatives. However, the skyrocketing of lease rents and the expiration of lease terms will deprive many young people in Hawaii. from being able to be given or inherit leasehold condominium or co-op apartment owned by their parents and relatives. This will deprive many young people in Hawaii from being able to be given or inherit leasehold condominium or co-op apartments owned by their parents and relatives.

This will foreseeably exacerbate the already critical housing situation in future years,' and increase the migration of young people from Hawaii to other parts of the country in which housing is more affordable As such it is believed that the continued existence of leasehold condominium and co-op apartments will work to the detriment of retirees and members of the next generation, and will be detrimental to Hawaii as a whole, to the extent that it results in or contributes to the departure of a significant number of members of the younger generation from Hawaii.

For the above reasons, it is believed that the leasehold system of ownership simply will not work in Hawaii Proponents of that system argue that the existence of leasehold property makes housing more affordable and that leasehold projects would therefore continue to be built. In reality, each new leasehold unit may save the initial purchaser a bit of money in the short run, but will rum into a serious problem in the long run. Therefore, it is strongly believed that Hawaii will be best served if the future creation of leasehold residential co-op and condominium projects is prohibited.

Many Hawaii legislators are reluctant to vote in favor of mandatory conversion and/or lease rent ceiling laws applicable to co-op and condominium projects, on the ground that it is unfair to force lessors to sell their interests in leasehold co-op and condominium properties to lessees. It is doubtless the case that there is an element of unfairness in so doing. However, not passing such laws will force thousands of lessees to face skyrocketing lease rents and will then force them out of their homes and onto the streets, even if they are somehow able to pay those lease rents for the entire duration of the lease term.

As such, there is in reality no fair solution, and the legislature is in essence faced with a choice of evils. On the one hand, the Legislature can pass laws which force lessors to sell their investment property at a fair price, giving them the ability to reinvest the sales proceeds in other investment property. The other alternative is to force lessees to be faced with skyrocketing lease rents and then to leave them homeless. Of these two choices, the former is clearly the lesser of two evils. As such, it is not believed that there is any choice but to proceed with the enactment of such laws. Further, while the Honolulu City Council is to be applauded for taking the initiative to seriously pursue the enactment of such laws on a county level, it is ultimately the responsibility of the Hawaii Legislature to pass such laws on a statewide level_ Otherwise, it may only be Oahu lessees who have such protection, while identically situated lessees on the outer island may well be left with no such protection.

There has been a fair amount of discussion about the possibility of abolishing surrender clauses in condominium and co-op leases. Such clauses provide that co-op and condominium apartments must be transferred back to lessors at the end of the lease term. In actual fact, abolishing surrender clauses will not likely solve the problem, since it is unlikely that many lessees would be able to pay steadily increasing lease rents, even if their leases did not end. For example, assuming an annual real property appreciation factor of 10% a, newly retired, 60 year old apartment lessee, if paying a lease rent of $300.00 per month until he is 70 years old, can expect to pay a lease rent of $778.16 per month for the 10 year period leading up to his 80th birthday. That same person could then expect to pay a lease rent of $2,018.40 per month for the 10 year period leading up to his 90th birthday. Even if the surrender clause of his lease was abolished, it is likely that his resources would be sapped by such lease rents, and that he could not afford to pay even higher lease rent amounts after that time.

For the above reasons, it is concluded that mandatory conversion laws and lease rent ceiling laws applicable to leasehold residential co-op and condominium units must be enacted,' and that a housing crisis of unheard of proportions will face a significant number of Hawaii residents, both young and old, unless this occurs.

Bruce C. Dinman, Esq.
Dinman, Nakamura, Elisha & Nakatani

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