The 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.