Real Property Leases; Condemnation
Gives certain lessees and sublessees the option of extending the remainder of their lease to full term, or acquiring the leased fee interest in the property from the lessor for fair market value in accordance with the uniform standards of professional appraisal practice, either by agreement or through condemnation.
TWENTY-FIRST LEGISLATURE, 2002
STATE OF HAWAII
A BILL FOR AN ACT
relating to real property leases.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that 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.
The legislature further finds that 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, increased costs, and a malfunctioning real estate market that has helped to create undesirable socio-economic impacts throughout the State, but especially in the city and county of Honolulu.
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 1980’s 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. Those individuals who were personally responsible for their lease and mortgage obligations 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, the legislature finds that there is a close relationship between the monetary values accorded land on Oahu and the stability and strength of Oahu’s economy as a whole. Land values, which are artificially inflated by concentrated or single ownership, market conditions, and other factors, skew Oahu’s cost of doing business toward unnecessarily high levels. Leasehold property in Honolulu is very difficult to sell because purchasers are concerned about the inflated values, and financial institutions will not lend on purchases of leasehold property or refinance the property. This pervasive and substantial contribution made to inflation by such high values for property actually gives rise to deflationary conditions, which creates a potential for economic instability and disruption on Oahu. Socio-economic conditions on Oahu 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, in turn, are forced to pass on their increased costs to tenants and consumers. Honolulu 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 on Oahu, 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 state residents, and particularly to members of Oahu’s community, residents, businesses, and consumers alike.
Practices and policies that result in the use of falsely inflated land values have serious economic consequences such 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:
(1) Refinance because lenders will not make loans on these properties;
(2) Sell because the buyer cannot borrow to purchase them;
(3) Lease the improvements because the tenants do not know what their total costs will be, since 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.
To accomplish the public purpose of using and managing property wisely in the community interest requires changing the present practices involved in leasing of such property. The acquisition by lessees of the fee simple land on which their developments are situated, or leasing at fair and reasonable prices, will alleviate the negative conditions discussed in this section and will promote the economy of the State and the public interest, welfare, and security. Changing the practices of leasing and land ownership throughout the State, and particularly on Oahu, by allowing property lessees to purchase, in fee simple, the land on which their developments are situated through public policy or the exercise of the power of eminent domain will help to satisfy the pressing public necessity for a secure, strong, and stable state economy.
The power of the State to use eminent domain to effectuate the purposes of this Act is provided pursuant to chapter 101, Hawaii Revised Statutes. The legislature finds and declares that the use of the State’s power of eminent domain to condemn, if necessary, the leased fee interest to property and the payment of just compensation therefor for the purpose of making the 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 the negative economic conditions set forth in this section by providing for the right of any lessee under a long-term master lease of property situated on any county in the State, to lease at fair market value or acquire the fee simple title to the land on which their development is sited. This will be accomplished by providing for the condemnation, if necessary, of the fee simple title to the land by the State through the use of its eminent domain power.
Because of the conditions described in this section, it is found necessary and in the public interest consistent with the United States and Hawaii Constitutions, and based upon the police powers necessary to protect the public, that private contracts must be abridged for lessees and lessors to be equally protected by laws affecting leasehold land and in all transactions pertaining thereto.
It is the intent of this Act, within the meaning of section 1033 or 1231 of the Internal Revenue Code, applicable provisions of chapter 235, Hawaii Revised Statutes, and all other laws relating to taxation, that any conveyance of title to property by a fee owner to the State, or a county under this Act, shall constitute a compulsory or involuntary conversion, as a result of the exercise of the power of condemnation or the threat of imminence thereof, and that the fee owner shall not, by reason of this Act or by reason of the execution by the fee owner of leases to the property and other properties subsequent to the effective date of this Act, be deemed to hold the property primarily for sale to customers in the ordinary course of trade or business.
SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:
REAL PROPERTY LEASES
§ -1 Definitions. As used in this chapter, unless the context clearly requires otherwise:
"Fee owner" means the person who owns the fee simple title to the land leased under a property development and the person’s heirs, successors, legal representatives, and assigns.
"Lease" means the conveyance of land or an interest in land by a fee simple owner, or other lessor, to a lessee who owns the project situated on the land for an original, or extended lease term of thirty years or more in consideration of payment of rent or other recompense.
"Leased fee" and "leased fee interest" means reversionary interests of the fee owner, lessor, and all legal and equitable owners of land which is leased, other than the lessee’s or a sublessee’s interest.
"Legal and equitable owners" means the fee simple owners and all persons having legal or equitable ownership interests in the leased fee or in the lessor’s leasehold estate, including mortgages, developers, lienors, and sublessors, and their respective heirs, successors, legal representatives, and assigns.
"Lessee" means any person who owns a project and to whom land upon which the project is located is leased, including the person’s heirs, successors, legal representatives, and assigns.
"Lessor" means any person who leases or subleases land to another, and the person’s heirs, successors, legal representatives, and assigns.
"Lessors", "lessees", "fee owners", and "legal and equitable owners" includes individuals, both masculine and feminine; corporations, firms, associations, partnerships, limited liability companies, trusts, and estates; and the State of Hawaii and any county or other political subdivision of the State. When more persons than one are the lessors, lessees, fee owners, or legal and equitable owners of a lot, the terms apply to each of them, jointly and severally.
"Master lease" means the dominant lease in a property development issued or assigned by the fee owner, or the lessor, to the owner of a project, all or portions of which may be subleased to occupants.
"Uniform standards of professional appraisal practice" means the current uniform standards of professional appraisal practice approved by the director of commerce and consumer affairs pursuant to section 466K-4(a).
§ -2 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 the 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 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:
(1) Fair market value per square foot shall be determined in conformance with the uniform standards of professional appraisal practice;
(2) Any disputes over value shall be settled by the procedure selected by the lessee and not by arbitration under chapter 658;
(3) Any lease renegotiations concluded within ten years prior to the effective date of this chapter may be reopened for reconsideration under the procedures set forth in this chapter, within two years of the effective date of this chapter at the initiation of either party; and
(4) Any other provision or remedy afforded any class of lessee in this chapter or in any other law or ordinance relating to the lease of real property shall be equally available to all lessees; and no provision, right, benefit, or remedy afforded to any class of lessee or tenant by this chapter or in any other law, ordinance, or rule shall be denied to any other class, lessee, or tenant.
(b) All lease contracts are hereby amended to conform with the uniform standards of professional appraisal practice for all property valuations; and, in addition to the foregoing, any lessee or sublessee who in fact pays or has been responsible for paying the land rent and real property taxes shall have, at one time only, each of the following options:
(1) To extend the remainder of the lease to its full term, upon written notice to the lessor;
(2) To acquire the leased fee interest in the property from the lessor for fair market value, as determined in accordance with the uniform standards of professional appraisal practice, either by the lessor's agreement to sell at such price, or, failing agreement, then through condemnation. If the lessor agrees to sell at such price, then the lessor shall have a right of first refusal to buy the land and improvements from the lessee at fair market value determined in accordance with the uniform standards of professional appraisal practice. If the lessor does not accept such price then the lessor shall bear the costs of condemnation and in such case the lessor shall not have a right of first refusal; or
(3) To offset against payments of lease rent, or acquisition costs those overpayments made during the current renegotiated rental period as determined by a uniform standards of professional appraisal practice-based revaluation of value.
§ -3 Rules. The housing and community development corporation of Hawaii shall adopt rules pursuant to chapter 91 as may be necessary to implement this chapter.
§ -4 Applicability. This chapter applies to all property developments which are occupied by lessees pursuant to master leases executed either before or after the effective date of this chapter.
§ -5 Priority. If this chapter conflicts with another state statute, this chapter shall prevail."
SECTION 3. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act, which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.
SECTION 4. This Act shall take effect upon its approval.