HB1829 HD2.DOC

SECTION 1. The legislature finds that ownership of commercial and industrial land in Hawaii is concentrated in the hands of a few landowners under the same oligopoly identified in earlier legislative actions and court review. This condition, a vestige from the historic days of the monarchy, has been previously addressed by the legislature in order to correct deficiencies in the residential leasehold market through the Hawaii Land Reform Act of 1967. At the county level, the city and county of Honolulu enacted section 91-95, Revised Ordinances of Honolulu, to correct similar inequities in the residential condominium market. These laws were deemed constitutional by the United States Supreme Court in Hawaii Housing Authority v. Midkiff when challenged by landowners.

According to the legislative reference bureau's Report No. 5, 2003, since a majority of urban industrial properties in this State are in leasehold tenancy, the market valuations of these properties have been affected by the speculative and investment markets. The legislature finds landowners of commercial and industrial ground leases have raised rents on the basis of these artificial market values. Therefore, when drafting lease contracts, landowners have included terms that allow them to impose a rent rate, described as a market rate, that bears no real relation with the risks attached to the investment. As a result, ground rents of leasehold properties have increased far beyond the inflation rate over the last thirty years. The legislature further finds that as a result, leasehold tenancy has created disincentives for lessees to maintain, repair, renovate, or replace the improvements they have built on their ground leases such that the economy of Hawaii has been, and continues to be, harmed.

The legislature finds that Hawaii has an exceptionally high rate of leasehold ownership, with approximately sixty per cent of commercial and industrial land under leasehold as of 2003. In the very near future, hundreds of commercial and industrial leases will expire. This could potentially lead to hundreds of businesses looking for suitable properties to which they can relocate. The legislature further finds that the continuing system of leasehold ownership frustrates necessary and rational economic development in Hawaii because the leasehold system defies the national trend in industrial and commercial real estate, adversely affects amortization of loans, and deprives ordinary citizens of the privilege of building equity and bequeathing wealth to subsequent generations.

The legislature further finds that action taken to support economic development is within its proper legislative powers and is an obligation to the public that it must meet. Therefore, the legislature seeks to establish an equitable means for both parties entering into a long-term ground lease to realize a

sustainable and fair economic return on their respective investments. The legislature further finds that so long as there is a significant number of leasehold tenants of ground leases in the industrial and commercial market that it is important to the economy of the State that there be a reasonable relationship between how rent is established for land subject to a ground lease and the income-earning capacity of that land, as improved. This principle is best effected through the use of residual techniques in valuing land while there is a disproportionate amount of land in leasehold estate.

The purpose of this Act is to require certain lessors of new ground leases for commercial and industrial property to provide existing lessees the opportunity to enter into new leases on terms that are fair and reasonable to both parties.

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

REAL PROPERTY COMMERCIAL AND INDUSTRIAL LEASES

§ -1 Definitions. As used in this chapter, unless the context clearly requires otherwise:

"Excess rent" means the amount by which a contract rent exceeds the market value for rent at the time of the appraisal, created by a lease favorable to the landlord, lessor, or sub-lessor, which may include unusual management; a lease execution in an earlier, stronger rental market; or an agreement of the parties. Due to the higher risk inherent in the receipt of excess rent, it may be calculated separately and capitalized at a higher rate in the income capitalization approach.

"Fee owner" means a person, corporation, firm, association, partnership, limited liability company, trust, or estate that owns the fee simple title to the real property leased under a property development, and the person's or entity's heirs, successors, legal representatives, and assigns; provided that if more than one person or entity is the fee owner, the term "fee owner" shall apply to each of them, jointly and severally. "Fee owner" shall not include the State, any county, or any other political subdivision of the State.

"Fee simple" or "fee simple interest" means the absolute ownership of real property unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

"Lease" means the conveyance of land or an interest in land larger than fifty thousand square feet by a fee owner or other lessor to a lessee who owns the project situated on the land for an original or extended lease term of five years or more in exchange for payment of rent or other compensation; provided that one hundred per cent of the land and any appurtenant buildings are located on commercial, business, manufacturing, mercantile, industrial, or other nonresidential property.

"Leased fee" means a freehold interest where the possessory interest has been granted to another party by the creation of a contractual landlord-tenant relationship, including a lease.

"Leasehold" or "leasehold interest" means the possessory interest created by a lease.

"Lessee" means any person, corporation, firm, association, partnership, limited liability company, trust, or estate that owns a project and to whom land upon which the project is situated is leased, including the person's or entity's heirs, successors, legal representatives, and assigns; provided that if more than one person or entity is a lessee, the term "lessee" applies to each of them, jointly and severally.

"Lessor" means any person who leases land to another, and the person's heirs, successors, legal representatives, and assigns, but excludes the State and any county or other political subdivision of the State.

"Market rent" or "fair market rent" is the most probable rent that a property would bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements.

"Master lease" means the dominant lease in a project 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" 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 Agreement for the lease of private lands; lease renegotiations; calculation of rent. After July 1, 2012, whenever any agreement for the lease of private lands provides for the renegotiation of the rental amount or other compensation during the term of the lease, the amount of rental or other compensation, shall be calculated based on the use to which the land is restricted by the lease agreement; provided that:

(1) Fair market rent, or market rent per square foot, shall be determined in conformance with the uniform standards;

(2) Any disputes over value shall be settled by an alternative dispute resolution procedure mutually agreed to by the lessor and the lessee and not by arbitration under chapter 658A; and

(3) Any other provision or remedy afforded to any class of lessee under this chapter or in any other law 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 under this chapter or in any other law or rule shall be denied to any other class, lessee, or tenant.

§ -3 Rules. The department of business, economic development, and tourism shall adopt rules pursuant to chapter 91 as may be necessary to implement the purposes of this chapter.

§ -4 Applicability. This chapter applies to all projects over fifty thousand square feet that are occupied by lessees pursuant to master leases whether executed before or after the effective date of this chapter.

§ -5 Priority. If this chapter conflicts with another state law, this chapter shall prevail."

SECTION 3. Chapter 519, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§519- Commercial and industrial leases. (a) All new ground leases of commercial, business, manufacturing, mercantile, industrial, or other nonresidential property, excluding property owned by the State and any county or other political subdivision of the State entered into after July 1, 2012, that have a term of five years or more, including extensions, renewals, or any other period accumulating to any particular lease or tenant, the lessor shall afford the lessee the option to renew the lease according to terms that are fair and reasonable to both the lessor and lessee.

(b) For leases renewed under this section involving a fee simple interest whose legal or equitable owner possesses an interest in greater than fifty thousand square feet of land in the State:

(1) The market rent or fair market rent shall be established by an appraiser licensed or certified under chapter 466K;

(2) The renewal period shall not be less than thirty-five years, with a rent that is fixed for the initial fifteen years and renegotiated every ten years thereafter;

(3) When provided for in the lease agreement between the lessor and lessee, during or after the fortieth year of any ground lease between a lessor and a lessee, if the lessor intends to acquire the leasehold interest and improvements from the lessee, the lessor may do so for a value to be determined by appraisal by an appraiser licensed or certified under chapter 466K; provided that the lessor notifies the lessee of such intent at least five years prior to the end of any fixed rent term; and

(4) Any increased value of the leasehold interest based on excess rent shall be shared equitably between lessor and lessee, with no less than five per cent and no more than fifty per cent to be the lessor's share, as determined by appraisal.

(c) This section shall apply to leases under which one hundred per cent of the leased property is located on commercial, business, manufacturing, mercantile, industrial, or other nonresidential property over fifty thousand square feet.

(d) This section shall apply to a sublease as if it were a lease, to a sublessee as if the sublessee were a lessee, and to a sublessor as if the sublessor were a lessor.

(e) This section shall only apply to ground leases that are in compliance with all other terms and conditions of the lease agreement at the time of the rent reset period.

(f) The provisions of this section shall be part of and incorporated into any lease subject to this section."

SECTION 4. New statutory material is underscored.

SECTION 5. This Act shall take effect on July 1, 2112.

HOUSE OF REPRESENTATIVES	H.B. NO.	1829
TWENTY-SIXTH LEGISLATURE, 2012		H.D. 2
STATE OF HAWAII