REPORT TITLE:
Condominium; Leasehold


DESCRIPTION:
Establishes a fair market value standard (FMVS) for appraising
the leased fee interest of condo and co-op housing corp. for
leases that do not specify an appraisal standard and for leases
on or after effective date of this Act; allows FMVS if lessor and
lessee agree for leases prior to date of this Act.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        876
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO RESIDENTIAL LEASE-TO-FEE CONVERSION.



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

 1      SECTION 1.  The legislature finds that a standard is needed
 
 2 to clarify the conditions in which a fee simple owner offers a
 
 3 leased fee interest in condominiums and cooperative housing
 
 4 corporations to be purchased by a lessee.  The appraisal of these
 
 5 properties should be based on its fair market value to ensure
 
 6 equity and fairness in the process.
 
 7      According to John W. Reilly in his book The Language of Real
 
 8 Estate in Hawaii, "The valuation of a lessor's interest is a
 
 9 complex procedure involving capitalization rates and present
 
10 value tables to ascertain the present value of the landlord's
 
11 reversion interest and the present value of the rented income."
 
12      One method to accomplish this purpose would be to first
 
13 calculate the fair market value of the real property.  After
 
14 determining the total interest of the fee owner, this percentage
 
15 of the property would be assigned to determine proportionate
 
16 percentages of ownership between the fee owner and the lessee.
 
17      The purpose of this Act is to establish a fair market value
 
18 standard for determining the value of the leased fee interest to
 
19 be purchased by a lessee.
 

 
Page 2                                                     876
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      SECTION 2.  Chapter 519, Hawaii Revised Statutes is amended
 
 2 by adding a new section to be appropriately designated and to
 
 3 read as follows:
 
 4      "§519-     Appraisal method for cooperative housing
 
 5 corporation lease-to-fee conversion.  (a)  All leases, including
 
 6 subleases executed by a cooperative housing corporation as
 
 7 lessee, and all leases, including subleases acquired by a
 
 8 cooperative housing corporation by assignment, executed prior to
 
 9 the effective date of this Act, that establish within the lease
 
10 or sublease an appraisal method for determining the value of the
 
11 lease-to-fee conversion, may use the following fair market value
 
12 conversion appraisal method to compute the value of a lease-to-
 
13 fee conversion:
 
14      (1)  A qualified real estate appraiser must complete a
 
15           leased fee analysis of the property to determine the
 
16           fair market value of the property;
 
17      (2)  The fee owner's total interest in the property is
 
18           calculated;
 
19      (3)  After determining the total interest of the fee owner,
 
20           this percentage of the property would be assigned to
 
21           determine proportionate percentages of ownership
 
22           between the fee owner and the lessee; and
 
23      (4)  The amount for the lease-to-fee conversion would then
 

 
Page 3                                                     876
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           be calculated based on the percentages set forth in
 
 2           paragraph (3);
 
 3 so long as all parties to the lease agree to the use of this
 
 4 method.
 
 5      (b)  All leases, including subleases executed by a
 
 6 cooperative housing corporation as lessee, and all leases,
 
 7 including subleases acquired by a cooperative housing corporation
 
 8 by assignment executed: 
 
 9      (1)  On or subsequent to this Act; or 
 
10      (2)  Prior to this Act that do not specify an appraisal
 
11           method in the lease;
 
12 shall use the fair market value conversion appraisal method set
 
13 forth in subsection (a) to compute the value of a lease-to-fee
 
14 conversion.
 
15      (c)  For purposes of this section:
 
16      "Cooperative housing corporation" has the meaning set forth
 
17 in section 519-3(d).
 
18      "Fair market value" means that amount of money that a
 
19 purchaser willing, but not obliged, to buy an interest in land
 
20 would pay an owner willing, but not obliged, to sell it, taking
 
21 into consideration all uses to which the land is adapted or might
 
22 in reason be applied.
 
23      "Lease" or "sublease" means a conveyance of land or an
 

 
Page 4                                                     876
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 interest in land, by a fee simple owner as lessor, or by a lessee
 
 2 or sublessee as sublessor, to any person, in consideration of a
 
 3 return of rent or other recompense, for a term, measured from the
 
 4 initial date of the lease or sublease, of twenty years or more,
 
 5 including any periods for which the lease may be extended or
 
 6 renewed at the option of the lessee.
 
 7      "Lessee" means any person to whom land is leased or
 
 8 subleased, and the lessee's heirs, successors, legal
 
 9 representatives, and assigns.
 
10      (d)  This section shall not apply to lease-to-fee conversion
 
11 through condemnation."
 
12      SECTION 3.  Chapter 514A, Hawaii Revised Statutes is amended
 
13 by adding a new section to be appropriately designated and to
 
14 read as follows:
 
15      "§514A-     Appraisal method for condominium lease-to-fee
 
16 conversion.  (a)  All condominium leases, including subleases
 
17 executed prior to the effective date of this Act, that establish
 
18 within the lease or sublease an appraisal method for determining
 
19 the value of the lease-to-fee conversion, may use the following
 
20 fair market value conversion appraisal method to compute the
 
21 value of a lease-to-fee conversion:
 
22      (1)  A qualified real estate appraiser must complete a
 
23           leased fee analysis of the property to determine the
 

 
Page 5                                                     876
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           fair market value of the property;
 
 2      (2)  The fee owner's total interest in the property is
 
 3           calculated;
 
 4      (3)  After determining the total interest of the fee owner,
 
 5           this percentage of the property would be assigned to
 
 6           determine proportionate percentages of ownership
 
 7           between the fee owner and the lessee; and
 
 8      (4)  The amount for the lease-to-fee conversion would then
 
 9           be calculated based on the percentages set forth in
 
10           paragraph (3);
 
11 so long as all parties to the lease agree to the use of this
 
12 method.
 
13      (b)  All condominium leases, including subleases executed: 
 
14      (1)  On or subsequent to this Act; or 
 
15      (2)  Prior to this Act that do not specify an appraisal
 
16           method in the lease;
 
17 shall use the fair market value conversion appraisal method set
 
18 forth in subsection (a) to compute the value of a lease-to-fee
 
19 conversion.
 
20      (c)  For purposes of this section:
 
21      "Fair market value" means that amount of money that a
 
22 purchaser willing, but not obliged, to buy an interest in land
 
23 would pay an owner willing, but not obliged, to sell it, taking
 

 
Page 6                                                     876
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 into consideration all uses to which the land is adapted or might
 
 2 in reason be applied.
 
 3      "Lease" or "sublease" means a conveyance of land or an
 
 4 interest in land, by a fee simple owner as lessor, or by a lessee
 
 5 or sublessee as sublessor, to any person, in consideration of a
 
 6 return of rent or other recompense, for a term, measured from the
 
 7 initial date of the lease or sublease, of twenty years or more,
 
 8 including any periods for which the lease may be extended or
 
 9 renewed at the option of the lessee.
 
10      "Lessee" or "sublease" means any person to whom land is
 
11 leased or subleased, and the lessee's heirs, successors, legal
 
12 representatives, and assigns.
 
13      (d)  This section shall not apply to lease-to-fee conversion
 
14 through condemnation."
 
15      SECTION 4.  New statutory material is underscored.
 
16      SECTION 5.  This Act shall take effect upon its approval.