Report Title:

Leasehold Property, Rent Renegotiations

 

Description:

Requires, in a leasehold rent renegotiation, that a rent based on fair market value shall apply even if the value is lower than the existing rent and the contract bars the lowering of rent upon renegotiation.

 

THE SENATE

S.B. NO.

688

TWENTY-FIRST LEGISLATURE, 2001

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO REAL PROPERTY APPRAISALS.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. Leasehold ownership in Hawaii is, has been, and will be for the foreseeable future a common form of ownership of land.

Historically, the land ownership system in Hawaii has been characterized by the concentration of the fee title to lands in the hands of a few estates, trusts, and other private landowners. The historical pattern of land ownership on Oahu has led to the practice of landowners leasing rather than selling their land, and the ownership of land beneath developments is consistent with this pattern of land ownership. Owners of property have refused to sell the fee-simple title to lessees and instead have leased the land to lessees under long-term leases. These master leases have terms and conditions heavily weighted in favor of the lessors or fee owners against the lessee developers. The pervasiveness of this practice has resulted in a serious shortage of fee-simple property, has increased costs, and has resulted in a malfunctioning real estate market that has helped to create undesirable socioeconomic impacts in Hawaii.

In recent years, there has been a significant appreciation in the apparent and artificial value of real estate on Oahu. Land prices were driven up in the 1980s by wealthy international buyers who subsequently were forced to sell their properties. Nevertheless, the artificially high property values have been used by lessors as a basis on which to calculate master lease ground rents. Those with long-term commitments have had to pay the higher ground rents and suffer reduced or even negative cash flows. Others, who have not been able to pay the increased ground rents or pass them on to sublessees, have had to move out. Some have had to simply walk away from their properties, forfeiting the valuable improvements to the landowners, and those individuals who were personally responsible for their lease or mortgage obligations, or both, have been faced with mortgage foreclosures and bankruptcy.

In addition, the artificially high property values have also made leasehold property on Oahu very difficult to sell. Potential purchasers fear future escalation of lease prices, and, for the same reason, financial institutions are reluctant to approve financing for purchases of leasehold property.

Further, there is a close relationship between the monetary values accorded land in Hawaii and the stability and strength of its economy as a whole. Land values that are artificially inflated by concentrated or single ownership, market conditions, and other factors skew cost toward unnecessarily high levels. Leasehold property is very difficult to sell because purchasers are concerned about the inflated values and the financial institutions will not lend on purchases of leasehold property or refinance the property. The pervasive and substantial contribution made to inflation by these high values for property actually gives rise to deflationary conditions which creates a potential for economic instability and disruption. Socioeconomic conditions are deteriorating due in large part to a malfunctioning real estate market.

When ground lease rents are too high, master lessees are forced to pass their increased costs on to their sub-lessees who are, in turn, forced to pass on their increased costs to tenants and consumers. Hawaii residents and businesses, particularly small businesses, are suffering.

For businesses, jobs are being lost daily due to failures and cost-cutting measures such as downsizing and part-timing caused by unrealistically high rental rates levied upon businesses by landowners. Thus, inflation, instability, and economic disruptions due to excessive ground lease rents have real and potentially damaging consequences for all members of the community. Stabilizing land values will improve the stability of the economy and prevent economic disruptions to the general benefit of all members of the community, residents, businesses, and consumers alike.

To accomplish the public purpose of using the managing property wisely in the community interest requires changing the present practices involved in leasing property. The leasing of property at fair and reasonable prices will alleviate the negative conditions discussed above and will promote the economy of Oahu and the public interest, welfare, and security. Changing the practice will help to satisfy the pressing public necessity for a secure strong and stable economy in Hawaii. Therefore, making the leasing of property viable for the lessees is for a public purpose.

It is therefore declared to be necessary and it is the purpose of this Act to alleviate these negative economic conditions by providing for the right of lessees under a long-term master lease of property to lease at fair market value the land on which their developments are sited.

Practices and policies that result in the use of falsely inflated land values have serious economic consequences, as is now the plight of commercial and condominium lessees in Hawaii who face tremendous increases in renegotiated lease rents, based upon greatly exaggerated land valuations.

The resulting uncertainty has a paralyzing effect on transactions regarding these properties. The lessee cannot refinance because lenders will not make loans on the property; the lessee cannot sell because the buyer cannot borrow to purchase the property; and the lessee cannot lease the improvements because the tenants do not know what their total costs will be, because the lessee does not know the lessee's rental costs. Essentially, the lessees must either default on the higher rents and thereby abandon their properties, or pay the rents but default on their loans because they cannot afford both -- or go bankrupt.

Lease agreements generally contain a lease rent renegotiation provision that utilizes real property appraisals to determine a critical component in the renegotiation process -- the fair market value of the land. Residential and commercial leases are commonly structured whereby the fee simple owner leases the land to the lessee, who as a sublessor then subleases the land or a portion of the land to a sublessee.

The legislature finds that it is in the public interest that lease rent and sublease rent be based on the fair market value of the land.

Leases commonly prohibit a reduction in rent at renegotiation even though a resale property appraisal determines that lease rent based on the land’s fair market value is less than the current lease rent.

The purpose of this Act is to provide:

(1) That lease rent amounts that are:

(A) Based on fair market value as determined by a real property appraisal; and

(B) Less than the rental amount being paid at the time of renegotiation;

shall prevail over amounts specified in an existing lease contract provision that bars the lowering of lease rents upon renegotiations; and

(2) That differences over appraised value per square foot be resolved by an appraisal process selected by the lessee which is in conformance with the current Uniform Standards of Professional Appraisal Practice and not by arbitration, which is much more costly and has been used to evade the Uniform Standards of Professional Appraisal Practice.

SECTION 2. Section 519-1, Hawaii Revised Statutes, is amended to read as follows:

"[[]§519-1[]] Lease renegotiations; calculation of rent; definition. (a) Whenever any agreement or document for the lease of private lands provides for the renegotiation of the rental amount or other recompense during the term of the lease and [such] that renegotiated rental amount or other recompense is based, according to the terms of the lease, in whole or in part upon the fair market value of the land, or the value of the land as determined by its highest and best use, or words of similar import, [such] the value, for the purposes of determining the amount of rental or other recompense, shall be calculated upon the use to which the land is restricted by the lease document[.]; provided that a lease rent:

(1) Based on fair market value as determined by a real property appraisal; and

(2) That is less than the rental amount currently being paid,

shall prevail over any existing contract provision that bars the lowering of the lease rent upon renegotiation.

(b) At the option of either party, any disagreement over fair market value per square foot that cannot be resolved by negotiation may be settled by an appraisal process selected by the lessee that is in conformance with the Uniform Standards of Professional Appraisal Practice, and shall not be subject to arbitration under chapter 656.

[(b)] (c) The term "lease", "lease agreement", or "document" as used in this section, means a conveyance leasing privately-owned land by a fee simple owner as lessor, or by a lessee as sublessor, to any person, for a term exceeding five years, in consideration of a return of rent or other recompense."

SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall take effect upon its approval.

INTRODUCED BY:

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