Real Property Appraisals

Provides that: (1) fair market value that is determined to be
less than current lease rent amount prevails over contract
provision barring reduction of lease rent.  Makes Act effective
January 1, 2050; (2) the sublease rents shall be accordingly
reduced; and (3) the fee simple owner shall have a tax credit
equal to the reduction in lease rent.  (SB873 HD1) 

THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                H.D. 1
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  Findings and purpose.  Leasehold ownership in
 2 Hawaii is, has been, and will be for the foreseeable future a
 3 common form of ownership of land.  Lease agreements generally
 4 contain a lease rent renegotiation provision that utilizes real
 5 property appraisals to determine a critical component in the
 6 renegotiation process, that is, the fair market value of the
 7 land.  Residential and commercial leases are commonly structured
 8 whereby the fee simple owner leases the land to the lessee, who
 9 as a sublessor then subleases the land or a portion of the land
10 to a sublessee.  
11      The legislature finds that it is in the public interest that
12 the lease rent and sublease rent should be based on the fair
13 market value of the land.
14      Leases commonly prohibit a reduction in rent at
15 renegotiation even though a resale property appraisal determines
16 that the lease rent based on the land's fair market value is less
17 than the current lease rent.  The purpose of this Act is to:  (1)
18      Provide that the lease rent that is based on fair market
19 value as determined by a real property appraisal and is less than
20 the rental amount currently being paid 

Page 2                                                     873
                                     S.B. NO.           S.D. 1
                                                        H.D. 1

 1           shall prevail over the existing lease contract
 2           provision which bars the lowering of lease rents upon
 3           renegotiations;
 4      (2)  Provide that any reduction in rent in the lease between
 5           the fee simple owner of the land and the sublessor,
 6           shall cause a corresponding reduction in the sublease
 7           between the sublessor and the sublessee; and
 8      (3)  Provide for a State income tax and general excise tax
 9           credit for the fee simple owner to the extent of the
10           reduction in the lease rent. 
11      SECTION 2.  Section 519-1, Hawaii Revised Statutes, is
12 amended to read as follows:
13      "[[]519-1[]]  Lease renegotiations; calculation of rent;
14 definition.  (a)  Whenever any agreement or document for the
15 lease of private lands provides for the renegotiation of the
16 rental amount or other recompense during the term of the lease
17 and such renegotiated rental amount or other recompense is based,
18 according to the terms of the lease, in whole or in part upon the
19 fair market value of the land, or the value of the land as
20 determined by its highest and best use, or words of similar
21 import, such value, for the purposes of determining the amount of
22 rental or other recompense, shall be calculated upon the use to
23 which the land is restricted by the lease document[.]; provided

Page 3                                                     873
                                     S.B. NO.           S.D. 1
                                                        H.D. 1

 1 that the lease rent, based on fair market value as determined by
 2 a real property appraisal, that is less than the rental amount
 3 currently being paid, shall prevail over any existing contract
 4 provision which bars the lowering of lease rent upon
 5 renegotiation.
 6      (b)  To the extent that the lease rent amount is reduced
 7 pursuant to subsection (a), the sublessor shall reduce by the
 8 same amount the lease rent under any sublease to a sublessee for
 9 the premises or portion thereof covered by the lease referred to
10 in subsection (a).
11      (c)  There shall be allowed to the fee simple owner subject
12 to the taxes imposed by chapters 235 and 237, a tax credit that
13 shall be deducted from the fee simple owner's net income tax and
14 general excise tax liability, if any, for the taxable year in
15 which the credit is properly claimed.  The tax credit shall be an
16 amount equal to the lease rent reduction in subsection (a).  If
17 the tax credit under this section exceeds the fee simple owner's
18 income tax and general excise tax liability, the excess of the
19 tax credit over liability may be used as a credit against the
20 taxpayer's tax liability in subsequent years until exhausted.
21 All claims, including any amended claims, for tax credits under
22 this section shall be filed on or before the end of the twelfth
23 month following the close of the taxable year for which the

Page 4                                                     873
                                     S.B. NO.           S.D. 1
                                                        H.D. 1

 1 credit may be claimed.  Failure to comply with the foregoing
 2 provision shall constitute a waiver of the right to claim the
 3 credit.
 4      [b] (d) The term "lease", "lease agreement", or "document"
 5 as used in this section, means a conveyance leasing privately-
 6 owned land by a fee simple owner as lessor, or by a lessee as
 7 sublessor, to any person, for a term exceeding five years, in
 8 consideration of a return of rent or other recompense."
 9      SECTION 2.  Statutory material to be repealed is bracketed.
10 New statutory material is underscored.
11      SECTION 3.  This Act, upon its approval, shall take effect
12 on January 1, 2050.