Lease to fee

Frequently Asked Questions

• What is a lease-to-fee conversion?
  
  A lease-to-fee conversion is when a leasehold condominium owner (lessee) purchases the land (leased fee) in the project to convert to fee simple ownership.

• What is a leased fee?
  
  A leased fee is the interest that is owned by a lessor. The lessor has leased his fee simple property to a lessees who built a condominium on the land.

• Who is the lessor?
  
  The lessor is the owner of the land that has been leased to lessees.

• What does the lessee own?
  
  The lessee owns a leasehold condominium and the right to use the land for a set number of years, as outlined in the apartment lease including a proportionate share of the common interests such as the pool, recreational facilities, lobby,and anything else that is shared by the owners of the units in any project.

• Does the lessee have to pay for the use of the land?
  
  The lessee pays lease rent to the lessor for the right to use the land. The lease rent is generally fixed for 25 to 30 years, after which time, a new lease rent is renegotiated between the lessee and the lessor.

• How is the lease rent renegotiated?
  
  The terms for renegotiating the lease are usually spelled out in the individual leases. Most often they allow for the lessor and the lessee to mutually agree on a new lease rent or they can have the new lease rent arbitrated.

• How is the new lease rent arbitrated?
  
  The lessor and lessee each hire an appraiser. The two appraisers hire a third appraiser. All three appraisers individually determine the new lease rent by establishing the value of the land, and they then together determine the new lease rent that the lessee will pay.

• How much does an appraisal cost?
  
  The cost of each appraisal is different and depends on the complexity of the project and assignment. Generally, the cost of an appraisal is from $8,000 to $12,000 each.

• How is the new lease rent determined?
  
  The new lease rent is determined by the method outlined in the apartment lease. It is generally the value of the land under the current zoning multiplied by a prevailing rate of return or the rate of return specified in the lease.

• What is the value of the land?
  
  The value of the land is dependent on a number of factors, primarily the location, the size, and the zoning of the property.

• What is the prevailing rate of return?
  
  It is the rate of return other investors or lessors are receiving for comparable property. In 1999, the prevailing rate of return is approximately 8%.

• Are other rates of returns used?
  
  Some leases indicate the rate of return as a set percent, some are tied to the prime rate plus a premium, others are tied to price indices.

• Is the decision of the arbitrators final?
  
  The decision of the arbitrators is final and binding on the lessor and the lessee.

• How long is the period of the renegotiated lease rents?
  
  The new lease rents are generally fixed for a ten year period.

• What happens after that ten year period?
  
  The process is repeated and the lease rent is renegotiated again.

• How many times does the lease renegotiate?
  
  The length of each renegotiations period and the number of renegotiations are contained in the apartment lease. There are usually three periods of lease rent renegotiations, each lasting ten years.

• What happens after the last renegotiations period ends?
  
  This marks the end of the lease. The apartment lease indicates what will happen at the end of the lease. Generally, the condominium reverts or is returned to the lessor (surrender).

• What happens to the lessees?
  
  The lessees would then leave the condominium and have to arrange other housing alternatives for themselves.

• What happens to the lessor?
  
  The lessor would then own the land and buildings in fee simple and would be able to do with the property as he chooses.

• Are there any alternatives to giving the condominium back to the lessor?
  
  If the lessor is willing to sell the leased fee, the lessees are able to purchase the land and become the fee simple owner. The lessor may agree to extend the lease. In most cases, if the land is not offered to the lessees, the lessor would probably take the property back at the end of the lease.

• What happens when the lessees purchase the leased fee?
  
  The lessees would then own both the leasehold condominium and the leased fee; in effect, they would then own a fee simple condominium unit. There would be no lease rent to pay and no surrender at the end of the lease. Buying the leased fee cancels the lease.

• What happens if not all the lessees purchase the leased fee?
  
  Those lessees who purchase the leased fee would then own fee simple condominiums. Those lessees who do not purchase the leased fee would remain leasehold and subject to the terms of the lease.

• What happens when the lease rent renegotiates?
  
  The lessor would only renegotiate the lease rent with the lessees who have not purchased the leased fee.

• What happens when the lease ends?
  
  The lessor would only receive the leasehold condominiums from the lessees who have not purchased the leased fee. The lessor would then own those condominiums in fee simple.

• How is the lessor’s treated when leasehold units are surrendered at the end of the lease?
  
  The lessor is treated the same way all the other fee simple condominium owners are treated. The lessor would have to follow all the house rules and by-laws of the condominium.

• What does it cost to purchase the leased fee?
  
  The price is determined by appraisal. Generally, Hawaii’s lessors have based the price of the leased fee on an MAI appraisal.
  
• What is an MAI appraisal?
  
  An MAI appraisal is one of the highest standing. The MAI appraisal generally values the leased fee in a number of different ways.

• What are the different ways a leased fee is valued?
  
  Some of the different ways a leased fee is valued are as follows:
  
  
  
  
  1. Based on other leased fee sales
     
     
  2. Based on the proportionate size of comparable land
     
     
  3. Based on the proportionate size of comparable condominium units
     
     
  4. Based on the present value of its income stream
     
     
  5. Based on the relationship of similar fee simple and leasehold properties
     
  
  
  
• What if a lessor is unwilling to sell the leased fee?
  
  On Oahu, the City Council passed a law which can force a lessor to sell the leased fee.

• Can anyone qualify under this law?
  
  Only financially qualified lessees who are owner occupants and own no other fee simple property on Oahu can qualify.

• How is the price determined?
  
  The price is determined in a court of law by a jury of peers. The lessor and the lessee each present their case and value as determined by appraisal. The jury would then award an amount for the sale of the leased fee.

• Is this the only cost to purchase the leased fee?
  
  In addition to the cost of the leased fee, the lessee must also pay for their own legal fees, appraisal fees, court and administrative costs, the City’s cost, and Blight of Summons.

• What is Blight of Summons?
  
  This is similar to interest. It is the return due to the lessor for the opportunity cost lost from the time the filing started to the time the lessees have to pay for the leased fee.

• How is Blight of Summons determined?
  
  It is a percentage of the value of the leased fee.

• What is the percentage?
  
  Historically, it has been eight percent (8%) of the leased fee.

• How long is the time period over which it is charged?
  
  This is determined by the length of time from the start of the filing to the time the lessees have to pay for the leased fee. It has generally been two to four years.

• If Blight of Summons is like interest, are lessees able to write this amount off for tax purposes?
  
  In earlier court cases, the Internal Revenue Service has indicated that this amount cannot be written off, but must be added to the tax basis of the property. Generally, only when the property is sold will the lessee be able to realize benefits from the expense.

• What about those lessees who do not qualify?
  
  They will not be able to purchase the leased fee unless the lessor decides to offer it voluntarily.

• What about lessees who do not live on Oahu?
  
  There are currently no State-wide laws nor any laws on any of the neighbor islands that could force a lessor to sell. Lessees who live on the neighbor islands would not be able to purchase the leased fee unless the lessor decides to offer it voluntarily.

• Have there been any other laws passed relating to the sale of the leased fee?
  
  The only other major law passed was one which would cap or limit the amount the lease rent could increase on renegotiations.

• What happened to this law?
  
  Although it was passed by the City and County of Honolulu, it was later ruled unconstitutional by a higher court.

• How many condominium lessees have been able to purchase their leased fee under the law passed by the City and County of Honolulu?
  
  As of September, 1999, there have been no lessees who have purchased the leased fee under the new law. There are currently a number of condominium projects who are going through the process, but none have been completed.

• How many condominium lessees have been able to purchase the leased fee voluntarily?
  
  Over the past 15 years, approximately 40,000 to 50,000 lessees have been able to purchase the leased fee voluntarily and convert their condominium units from leasehold to fee simple.

• What is the best way to purchase the leased fee?
  
  Work closely and fairly with your lessor. Hire a good appraiser and a good Realtor who has experience in lease-to-fee conversions.

• How many lease-to-fee conversions has Hawaiian Island Homes, Ltd. done?
  
  Over the past 14 years, Hawaiian Island Homes, Ltd. has converted over 200 condominium projects involving over 23,500 units from leasehold to fee simple.

• Who has Hawaiian Island Homes, Ltd. represented?
  
  Hawaiian Island Homes, Ltd. has represented both lessors and lessees. Hawaiian Island Homes, Ltd has represented more lessees and homeowner associations in successful lease-to-fee conversions than any other active leased-fee converter in the State.

• What does it cost for your services?
  
  We are a full service real estate firm, specializing in a number of niche markets, of which lease-to-fee conversions is one. We charge a sales commission on leased-fee sales, similar to other real estate sales.

• When is the sales commission charged?
  
  The sales commission is charged only when the leased fee is sold and closed. We are paid only if we are successful in assisting the lessee and lessor in the purchase and sale of the leased fee.

• What happens if no one purchases?
  
  If no one purchases, we do not charge a sales commission.

• What do we do if we have other questions on lease-to-fee conversions?
  
  Please contact our firm by telephone, by facsimile, or by letter as follows:
  

  Attn: Derrick Fujisaki
  Hawaiian Island Homes, Ltd.
  931 University Avenue Suite 105
  Honolulu, HI 96826
  
  Email: dfujisaki@hihltd.com
  
  Office: 808-955-6672
  
  Fax: 808-946-3225