Ka Wai Ola - Office of Hawaiian Affairs, Volume 1, Number 5, 1 June 1984 — LeaseRent Control: Opportunity or Threat? [ARTICLE]

LeaseRent Control: Opportunity or Threat?

B_v Paul Cathcart Special Projects Coordinator Bishop Estate Land Division

The threat to the future existence of the Kamehameha Schools/B. P. Bishop Estate (KS/BE) grows eaeh year as special interest groups across the State seek to separate Trust assets from its beneficiaries. Their means to this objective is as eommon and legal as our society's right to free speech. We're talking, of course, about the legislative process whieh leads to the enactment of new State laws. The 1984 State Legislative session was certainly no different than sessions of recent years as the number of bills whieh would lower values of residential lease-

holds continue to be introduced. This year, the most serious proposal affecting the KS/BE involved several bills that intended to amend the existing lease rent control law by limiting even further what a residential lessor may charge for lease rent at the time of renegotiation. Passed in 1975, Chapter 519 of the Hawaii Revised Statutes mandates that a residential lessor may set a new rent after

the expiration of the first fixed rent period at no more than four percent of land value. Basically, if land valueis high, the rent will be high and that is exactly what has happened to many residential lessees facing the fixing of new rents for the remainder of the lease term. Lessees have accused lessors of "ex-

tortion" in the setting of new renegotiated rents while overlooking the fact that restrictive land use policies of County and State governments are the main reason for land values being so high, and eonsequently, high lease rents. Undaunted by this fact, lessees lobbied heavily for the introduction of several bills that would set the new renegotiated rent by escalating the old rent at an

annual rate compounded ior the period the old rent was in effect. One bill proposed a 5.5 percent annual rate since this presumably represents a fair return due to its use as the passbook savings interest rate (incidentally, this rate will no longer be used after 1986 because of deregulation).

It's no wonder the lessees have thrown their full support behind this measure. lf this formula were applied to a KS/BE lease in Kailua with an old rent of $ 1 80 a year, the new rent would be increased to only $690 a year instead of the $4,200 a year whieh the current law allows. This reduction in rent could be devastating to some lessors. lf this bill had passed, the Hawaiian beneficiaries of the KS/BE would have lost approximately $25 million between 1984 and the year 2000, assuming 6,500 residential leases renegotiated under this formula. The pros and cons of this complex issue ean go back and forth. The lessees

See Lease Rent, Pg. 2

maintain that new renegotiated rents must be "affordable and predictable". They have testified that an increase in rent from $400 a year to S4,000 a year is unjustified and renders their residential leasehold unmarketable at sales time. On the other hand, lessors point out that lessees have enjoyed the same low rents for three or four decades and now the lease contract calls for the setting of new rents based on current land value.

• Lease Rent, from Pg. 1

Even more significant is the measure's effect on the sale pnee of the land. That is, say the land is condemned under the Hawaii Land Reform Act. A jury would determine that the landowner's interest in the residential leasehold should be sold at a value reflected by the "ineome stream" method.

This approach basically examines the entire ineome stream (lease rent) during the lease term and computes the stream as if it were all received in today's dollars. lf the ineome stream is depressed by a harsh rent control law as was proposed this session, the fee sales price will be set unfairly low. Looking at all 3,400 KS/BE residential lots involved incondemnation suits, it is estimated that the Trust beneficiaries could have lost approximately $200 million if this bill was signed into law and used during the condemnation trials. Fortunately for the beneficiaries, all lease rent control bills that were introduced this session were killed. However, lessees vow to return in 1985 and pursue this issue even further. As Hawaiians, we must insist to our lawmakers that any effort to change the existing lease rent control law must recognize the landowner's right to a fair and reasonable return. Any other way would be unfair and detrimental to charitable institutions such as the Kamehameha Schools, Queen Liliuokalani Trust, Queen Emma Foundation and the King Lunalilo Trust, who rely on universally accepted investment practices to prudently manage their land-based assets.