Hawaii does not have a law requiring the lessor to sell to the lessee the leased fee
interest under a condominium, cooperative or PUD leasehold project. Still, some lessors
decide voluntarily to offer for sale the leased fee interest to apartment owners (referred
to as a fee conversion).
How is the offering price determined?
The price at which the fee may be offered is not subject to any legal restrictions.
This price may be determined by mutual agreement between the parties or set by an
impartial panel of one or more appraisers. In some cases, the lessor may want a certain
price, leaving little room for negotiation.
Appraisers typically use the income approach to value the leased fee interest in the
land under a leased apartment unit. In addition to lease rent payable over the period of
the lease, the owner also will receive the return of the land at the end of the lease
(reversion).
The appraiser calculates the amount of lease rent due over the fixed period of the
lease and estimates the projected rent over the renegotiated lease period. This amount is
then reduced (discounted) using present value tables. This reflects the fact that lease
rent dollars received in the future are worth less than dollars received today. In
essence, the appraiser asks how much would a person need to invest today (as in an
immunity) to receive a stream of income equal to the amount of rent projected for the
entire lease term.
Next, the appraiser evaluate the worth of the revision of the land, by calculating the
projected value of the land at the end of the lease but then discounting that amount to
present value. An example follows:
Determining the value of leased fee
Projected ground rent over remaining lease term (discounted to present worth):
Present value of fixed rent $600,000
Present value of renegotiated rent $900,000
Plus
Present value of reversionary interest in land (market value of raw land discounted to
present worth): $500,000
Equals
$2, 000,000
Times
Lessee's percentage of common interest X 1%
Value of leased fee interest $20,000
As you can see, it is not easy to determine what price you may have to pay for the
leased fee interest, assuming the lessor is willing to sell, and you are willing to buy.
If the lessor does offer to sell the leased fee interest, you may want to consult an
expert to advice you about the pros and cons of the offer. If the lessor has not committed
to sell the leased fee interest, you should carefully consider the possible impact of this
on present and futures value.
Sometimes preliminary negotiations for the voluntary sale of the leased fee are
underway when the sellers list their apartment unit for sale. One of the questions you as
a buyer want to ask your seller is whether their is an ongoing or planned leased/fee
conversion. If so, the sales contract (DROA) should address such issues as seller
cooperation and transfer of any deposit money.
What is the right of first refusal for condominium associations and cooperative
corporations?
In 1988, the Hawaii State Legislature enacted a law to give condominium owners
associations a right of first refusal to buy the leased fee interest if the lessor decides
to sell to anyone other than the existing individual apartment owners. At least 75% of the
unit lessees must approve of the purchase, or the lessor can complete his sale of the fee
to another party. The intent of this law is to encourage negotiation for a leased fee sale
between lessors and condominium or cooperative owners or their associations or
corporations.
