Report Title:

Real Estate Appraisals; Lease Rent Renegotiation

Description:

Establishes an advisory task force to review methods of arriving at equitable lease rents on rent renegotiations for commercial and industrial properties.

THE SENATE

S.B. NO.

2642

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO LEASES.

 

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

SECTION 1. The legislature finds that many commercial and industrial businesses operate on leased property. Generally, these long term leases provide for an initial fixed rent period followed by a number of periods where the lease rent is renegotiated for each new period. In most cases, the renegotiated lease rent is based upon an agreed fixed percentage return to the fee owner of the then fair market value of the land unencumbered by improvements. Again, in most cases, the fair market value is arrived at based upon the recent sales of comparable properties within the area of the leased property.

Over the years, real property values in the State have been subject to economic factors and geopolitical events occurring outside of the State which all have an effect on our local economy. The most extreme example of external factors affecting our local economy was the intense Japanese investment in Hawaii real estate during the period covering 1985 to 1990, causing a spike of artificially high land values. The land values were then used as comparables in rent renegotiations for commercial and industrial leasehold properties, resulting in highly inflated long-term ground lease rents.

Another concern of lessees with the prevalent method of renegotiating lease rents is that due to the concentration of commercial and industrial leasehold lands in the hands of a few large landowners, there are not sufficient sales of fee simple commercial and industrial properties to provide true comparable values upon which lease rents may be based.

The purpose of this Act is to establish an advisory task force to review methods of arriving at renegotiated lease rents for commercial and industrial properties which may result in more fair and equitable lease rents.

SECTION 2. (a) There is established an advisory lease rent task force within the department of commerce and consumer affairs for administrative purposes.

(b) The task force shall consist of nine members as follows:

(1) The director of commerce and consumer affairs or the director's designated representative;

(2) Two real estate appraisers, licensed pursuant to chapter 466K, and two persons representing financial institutions that finance leasehold commercial and industrial properties, appointed by the governor;

(3) Two persons appointed by the president of the senate, one representing fee owners and one representing lessees of commercial and industrial properties; and

(4) Two persons appointed by the speaker of the house of representatives, one representing fee owners and one representing lessees of commercial and industrial properties.

(c) The task force shall convene as early as practicable. The director of commerce and consumer affairs or the director's designated representative shall chair the task force. The department of commerce and consumer affairs and the department of the attorney general shall provide the necessary staff and logistical support required by the task force to carry out its duties. The task force shall meet at the call of the chairperson.

(d) The duties of the task force are as follows:

(1) Review the prevalent method of establishing lease rents for commercial and industrial properties upon rent renegotiations, based upon a fixed return on the then fair market value of the land unencumbered, which fair market value is usually based upon the sale prices of comparable properties;

(2) Consider the use of other indices, other than the fair market value of the property based on comparable sale prices, including:

(A) The consumer price index;

(B) Recently renegotiated comparable lease rents;

(C) A review based upon the comparable values of the underlying fee simple property and the value of the improvements made by the lessee; and

(D) The value of the property using the income method of appraisal of the property based upon the actual use of the property by the lessee;

(3) Meet with representatives of landowners and lessees of leased commercial and industrial properties, representatives of financial institutions that finance commercial and industrial leasehold properties, and any other stakeholders or persons concerned with the issues of commercial and industrial lease rents.

(e) The members of the task force shall serve without compensation but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties.

SECTION 3. The task force shall submit a report, containing its findings and recommendations, including proposed legislation, to the legislature twenty days before the convening of the regular session of 2005.

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

INTRODUCED BY:

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