Why is Buying Real Estate in Hawaii so Different?

by on April 7, 2012Jason Van Steenwyk

hawaii real estateThe real estate game in Hawaii is unlike anything elsewhere in the United States. The reason: Hawaii is only 236 years removed from a stone-age civilization – and only 120 years removed from a monarchy.

The legacy of the Hawaiian monarchy still exists today. The last of the Hawaiian monarchs, Queen Lili’uokalani, was forced from her throne by a detachment of Marines from the U.S.S. Boston, acting in concert with a group of American and European businessmen, on January 17, 1893.

Faced with overwhelming military force at her seat of power, Iolani Palace in Honolulu, Queen Lili’uokalani stepped down in lieu of fighting, confident that an appeal to the United States Government would restore her to the throne. That intervention never came. But much of the land formerly owned by the Hawaiian royal family is still held in a few different trusts. It is rarely sold outright, in “fee-simple” transactions. Instead, “leasehold” land and the various trust interests overseeing it are a fact of life in Hawaii real estate and politics.

The largest landowner in Hawaii today, by far, is the Kamehameha Schools system, which currently owns over 365,000 acres of land. The Schools are the beneficiary of a trust set up by a member of the Hawaiian royal family, Princess Bernice Pauahi Bishop, who granted the land with directions to trustees to use the land to support the welfare of the Hawaiian people – including the operation of two schools, to educate children of Hawaiian ancestry. The Kamehameha Schools are still in operation today – and the Bishop estate, together with Liliuokalani’s trust and a few other large holders still hold much of the usable land in the state.

The Evolution of Landownership in Hawaii

The result was the creation of a two-tiered landownership system in Hawaii. Those looking to buy real estate in Hawaii must choose between leasehold property – that is, ownership of a home built on land that is actually leased – and which will eventually return to the control of the estates – and land that is owned free and clear, under a “fee-simple” title.

Land in Hawaii is scarce and notoriously expensive. Many buyers are initially attracted to leasehold properties because they can typically be had for a lower cost than fee-simple properties. However, the looming expiration of these long-term leases creates a significant downside to owning leasehold property: Leasehold land cannot be passed down to future generations, nor can it be easily developed, because as the expiration of the lease approaches, it becomes more and more difficult to obtain financing for projects on leased land.

“With leasehold land, you only own the box above ground” explains David Nash, a real estate agent who specializes in the Island of Oahu. “At some point – after five years, 20 years, 50 years, you’re going to have to give that property back.”

Buying “fee-simple” real estate in Hawaii is just like buying real estate elsewhere in the country. You get permanent title to the land, as long as you pay your mortgage and tax obligations and zoning laws, subject only to the right of the government to condemn under eminent domain.

But when you buy leasehold land in Hawaii, you must take into account a number of complicating factors:

  • How long is left on the lease? If your lease gives you the right to enjoy the property for 30 or 50 years or more, you might not have a problem. Though your heirs may have some complications to deal with after you’re gone.
  • How much is the monthly lease payment? Can it go up?
  • Will the lessor sell the fee-simple title to you? At what price?
  • When is your lease up for renegotiation? Most long-term lease agreements have built-in mechanisms for renegotiating lease rates based on market rates.
  • What will happen at the end of the lease term? Will you or your heirs be able to extend? On what terms? Will you be able to buy out the lease and become the fee simple owner?

Thus far, lease expirations have not been accompanied by draconian measures. “It’s only happened a couple of times, in Hawaii, where families get booted out of their homes. Normally, they do get an opportunity to renegotiate their fee for another 30 years or 50 years.” Nevertheless, Nash warns, it could happen at some point in the future – the leaseholder could take back the whole property, including the structures on it.

“If you’re young, and you want to stay in a home for 40 or 50 years, but there’s only 20 years left on the lease, you might want to keep looking for something that’s fee simple,” counsels Nash.

Screening Hawaii Real Estate

So, when researching real estate for sale in Hawaii, how can you tell which listings are fee-simple and which are leasehold properties? Mike Bates, another veteran Oahu real estate agent, advises you to check the listing: Leasehold properties will have a special designation on the upper right hand corner of the customer short page in the MLS, next to the asking price: “LH – Leasehold.” If you see “LH – Leasehold / FA,” it means the leaseholder is willing to sell a fee-simple title to the property. And properties being sold fee simple are designated with “FS,” says Bates.

{ 19 comments… read them below or add one }

Miss Informed August 24, 2014 at 11:59 am

I heard somewhere that you have to be native to the islands to purchase land on Hawai’i. Is that true? If so, what exactly does that mean? You have to be born there, or have Polynesian blood in your family?

Please excuse my ignorance.
Thank you,
Miss Informed.

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Leslie Diane Pool June 7, 2014 at 1:53 pm

The Kingdom still exists even though in 1893 the Monarchy was overthrown and Hawaii is currently illegally occupied. Here are some helpful websites to get your facts straight. Please know that the Royal patents, national patents and deeds on the land, water and air are still firmly in place and can never be abolished changed or revised… Not ever.You cannot annex and separate and sovereign nation by joint resolution…. it does not work that way…. AND, btw, there is NO statute on fraud! Do your homework…… ignorance if the law is not an excuse…

http://hawaiifakestate.com/Hawaii_-_The_Fake_State.html
http://www.hawaii-nation.org/publawall.html
http://www.atooination.com
http://hawaiiankingdom.org

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Jason Van Steenwyk June 9, 2014 at 7:27 pm

Well, you feel free to go right on thinking that. ;-)

The rest of us will deal in reality.

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Chriatopher July 24, 2014 at 10:33 pm

That would mean Barack Obama is not President of the United States because Hawaii is a foreign country, by your way of thinking.

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T. Phillips February 28, 2014 at 4:49 pm

Good article — I have a couple of other questions that I’m hoping someone can answer as it pertains to Leasehold properties:

1. How do you know when the lease expires? Is that info in the MLS listing?

2. Are banks loaning for LH properties or are these mostly going to cash buyers? We have a property in Las Vegas and many lenders won’t touch condos or hotel/condos so curious if the same in Hawaii.

3. Where can one find a guide outlining typical monthly costs for LH properties? For example, I assume there are HOA or maintenance fees plus the costs of letting for short periods, etc. Is there an online resource someone could point me to?

4. Lastly, can anyone recommend a good unbiased site examining the Hawaii real estate market. Google brings up lots of agents – which is helpful – but would be better to have information from sources that don’t have commercial interests.

Thanks in advance to anyone who can assist.

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Mark Guagliardo May 16, 2014 at 1:52 pm

Good questions..

1. Lease Expiration is listed on the MLS, however it is a good practice to have your Realtor verify.

2. Banks do loan on Leasehold property, however they tend to deduct 5 years from the lease as loan length, i.e. if the Lease expires in 27 years, the max they will give for loan length is a 22 year loan

3. “Typical” is not a word I would use, each property is unique, be it a Condo or 40 acre Macadamia Farm, again it is a good practice to have your Realtor verify.

4. Hard to recommend a single site, since there are so many factors and data sources, Market Sales, Schools, Crime Statistics, etc.. that is why we work hard to provide these in one spot on our website at http://www.kwhawaii.com/mimarket/zip/96815

Yes, we are professional Realtors and our livelyhood is based on assisting buyers and sellers, our Realtors will never try to sell you a home, we provide you with the information you need to make the best decision for you and your family.

Mark Guagliardo
Hawaii@KW.com
http://kwHawaii.com

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J FEARN February 3, 2014 at 12:39 pm

I have been reading various articles about the new laws for renting in Hawaii with the new law indicating all rentals must be done through a management company, the value proposition of a rental property in Hawaii is gone. If you want to use the property yourself for a month or so and rent out 60% of the time ( which I hear is a good rental stream) there is no way you can break even if you finance a property. ( after all you want to finance it since it is a write off) Have you heard about this new law.

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Kristian Nielsen February 13, 2014 at 10:41 pm

J Fearn,
I run a real estate business in Hawaii and can share this with you: Hawaii law has always required a local contact for out out-of-State investor owners renting out their property.mThis local contact does not have to be a licensed person if he only manages properties for one owner.

However, there is a new law that now requires that this local contact registers if he handles transient rentals (less than 180 days per tenant). It is a way for the State to get their hands on the 7.25% TAT (transient accomodation tax) due on all rental income shorter than 180 day tenants. This new registration requirement is very new and controversial in its application, and could possibly be modified during the current legislative sessions.

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Terri Shnuitzer January 6, 2014 at 12:30 am

Thank you for the great information. I was in the lending business and had only ran into this situation while selling condos for UCLA on property donated to the school. I have a timeshare in Maui with Diamond resorts. I never asked that question however we love it so much there my significant other have discussed about selling the time share and retiring over there and this article brought up so good information . T & S Leonard

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miles petty June 22, 2013 at 11:08 pm

Thanks for the info, good , clear and precise info that is easy to understand and makes decisions easier in relation to purchasing property.

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Julie Z May 9, 2013 at 12:01 am

We are considering buying some leasehold land right now. Thanks for the info, but a little more info on what is allowed and not allowed on the land would be helpful, but over all, thanks for the advice and info. We were wondering why all the homes on leasehold land were coffee shacks, yurts and other structures that looked like they were semi-permanent! Thinking of doing some container homes!

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Yvonne Jaramillo Ahearn, Esq. March 2, 2013 at 2:16 pm

Thank you for the history lesson, but this article makes it sound like buying real estate in Hawaii is very different than buying on the mainland. It is not. It is only different when you are buying leasehold property and it is not clear from this article that the VAST MAJORITY of RESIDENTIAL property in Hawaii is NOT LEASEHOLD. There are some leasehold condo buildings remaining, many with the “fee available” and there are even fewer single family leasehold properties. Consumers should be very careful buying leasehold properties but there are MANY, MANY to choose from that are not leasehold. Also, Hawaii is not a third world country. We are part of the US, and as a realtor in 2 US states and attorney in 3, and someone who owns property both here, on the mainland and in a foreign country, I can tell you that buying here is very similar to buying on the mainland. You just need to carefully to read the lease agreements and understand what you are getting into (and risking) when you purchase leasehold property.

Mahalo,
Yvonne Jaramillo Ahearn
Principal Broker/Owner
Home Shoppe Hawaii

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Terri Shnuitzer January 6, 2014 at 12:39 am

This article was not written for the attorneys and realtors that no the rules it’s for the new buyer or even a 25 year lender as I am that May not know all the answers . You kinda have the new attitude ” JUST SIGN IT” and you can read it later. We have all been to DUMB to trust that kind of Lingo anymore and are finding out the Consequence when it’s TOO LATE

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Scott Innes January 27, 2013 at 10:35 am

Thank you Jason. This is a great history of real estate in Hawaii and the differences that make it so unique.

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Michael Borger August 19, 2012 at 6:49 am

Aloha and thank you for helping educate people about the Hawaiian history and how it applies to the local real estate scene. We most definitely operate in a unique market here in the Hawaiian Islands. As an investor here who buys and sells homes, I have to take into account all the extra intricacies, such as leaseholds and land rights in additional to our unique coastal regulations. But at the end of the day, it’s still very rewarding.

Thanks again for the post, or as we say here, MAHALO.
Michael Borger, Big Rock Investments

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Nate June 19, 2012 at 4:03 pm

An email share widget is a button that people can use to email, or “share,” the article with other people by emailing it to them. On large commercial sites, it will usually show up in a small row with Facebook and Twitter share icons as well.

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Lisa April 12, 2012 at 4:34 pm

Great history! I’ve never heard it explained so clearly. No email share widget??

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The Realestate.com Team April 12, 2012 at 11:20 pm

Lisa – Can you explain what you are looking for when you say “email share widget”? Thanks!

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Mallorca Finca Mietung April 7, 2012 at 7:56 pm

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