Fall 1991 Home   Newsletters

Fall 1991

Spring 1992

President's Message - Don't Let it Happen Here (Evelyn Bender)
Board Highlights
Members Appreciated
Leasehold in Hawaii
Update on Educational Revitalization (Libby Oshiyama & Marion Saunders)
Time for Action - League Supports Gejdenson Proposal
State Council
Health Care Consensus
National Convention
Urgent: Leasehold Conversion and Lease rent cap Legislation Needed (Richard Port)
Mandatory Conversion Laws Covering Leasehold Projects (Bruce C. Dinman)
Small Landowners' Perspective on Leasehold (James K. Mee)
Legislature and the Elusive Leasehold Issue - 1991 (Virginia Isbell)
Talk to LWVHI on Nov. 5, 1991 by Oswald Stender (Irene Coogan)
Mandatory Conversion Could Benefit Lessors (Joan Hayes)

Mandatory Conversion Could Benefit Lessors

Landowners consistently oppose mandatory conversion of leasehold condominium property. Yet mandatory conversion of leasehold land to fee simple can be the best thing that ever happened to them.

For smaller landowners, their land is their primary asset and they are fighting to keep it, expecting to pass it on to their children. Inheritance taxes, as they'll learn when they consult a tax expert, are levied on the land at current value. Inheritance taxes must be paid within nine months of death. Inheritance tax rates escalate very rapidly. When the land reaches $3 million in value, the tax rate is 55%. Every $1 in added value adds 55 cents to the ,government's share and 45 cents to the testator's share.

A recent article on "Mistakes in Estate Planning," noted that unless you leave a lot of liquid assets, your heirs could be forced to sell quickly "at fire-sale prices" to pay estate taxes on time.

Tax attorney Peggy King points out that it makes "more sense for landowners to convert while they have a say on the choice of reinvestment," making certain that at least part of it is readily convertible to cash, than to leave their heirs facing a "forced sale" to provide IRS tax payments. Transferring title to include offspring, in whatever shares might be indicated will do the heirs no good at all when it comes to inheritance tax payments. Unless those new title owners can prove they contributed appropriate sums of money for their share of the land, the IRS will levy the tax as if it there had been no transfer of title.

Voluntary conversion allows a landowner six tax-free months to switch from one real estate investment to another under Section 1031 of the IRS tax code. Landowners can delay final closing until they have found a satisfactory substitute real estate investment - two years in a recent conversion. In one instance, a condo board owned mainland property all of two hours before swapping it for the fee under the condo buildings.

However, whenever a tax bill is considered, Congress gets busy closing "loopholes" - like Section 1031.

Mandatory conversion from leasehold to fee simple land, proposed in Honolulu Councilman John Henry Felix's Bill 156, provides two tax-free years for a landowner to reinvest.

Voluntary conversion process now range from the 40-45% of 1991 tax assessment, which is asked for conversion of properties in the Waipuna, developed by Magoon Estate, to double the 1991 tax assessed value, now being asked by Bishop Estate. Leasehold property is now virtually unsaleable. Lessees, confronted with a continuation of that status versus paying what many of them say is an exorbitant price, feel that gaining peace of mind is worth the "extoration."

Bishop is relying on appraisals done by Peter Savio, who does not follow the usual methods of land appraisal. In fact, he is unwilling to reveal the method he uses. He does appear to ignore the fact that real estate values can go down as well as up or that foreign buyers can vanish from the pool of potential Hawaii purchasers.

If Felix's bill were to pass quickly, landowners will find that they may still be able to enjoy the value enhancement generated by the flood of Japanese investments which peaked here in 1988.

Prices are dropping, Mike Sklarz, director of research at Locations, Inc., says it will be three to five years before prices here start recovering.

Dawning buyer awareness that leasehold land has disadvantages is causing an additional skid in prices of those units. A year or two from now tax assessments on both land and building will head down. Can conversion prices be immune?

The year of 1991 may be the highest price period for landowners in this decade. In April 1990, 399 leasehold properties sold versus 256 fee-simple units. Just three months later, at the end of July 1990, the full disclosure law went into effect. This insures that leasehold purchasers are fully informed as to the length of the lease, the renegotiation dates, and what the surrender clause really means.

The law gives leasehold purchasers 10 days to declare "buyer's remorse" and get a refund of their offering payment. By January 1991, lease sales had plummeted to 90 units versus 93 fee-simple sales. Leaseholds had gone from an excess of 143 over fee-simple to three less.

Joan Hayes
Former Chair, House of Representatives Committee on Housing

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