The Lease-to-Fee Division of Savio Realty Ltd. has assisted lessors and lessees with the sale and purchase of fee interests since 1985. The Lease-to-Fee Division was the real estate representative for the Kamehameha Schools/Bishop Estate for the sale of its fee interest. In addition, we were also appointed sales agents for numerous organizations and individuals, including the following, to assist them with their lease-to-fee conversions.
- Catholic Church of Hawaii
- First Hawaiian Trust
- Kurisu & Fergus
- Saint Francis Foundation
- Teruya Brothers
- The Gentry Company
- MacNaughton and Gushman
- Kamehameha Investment Corporation
- American Savings Bank
- Harold Kometani
To date, we have converted over 26,000 units from leasehold to fee simple ownership in more than 230 buildings. The Savio Group is the largest active lease-to-fee converter in the State of Hawaii. Call 808.955.6672.
A lease-to-fee conversion is when a leasehold condominium owner (lessee) purchases the land (leased fee) in the project to convert to fee simple ownership. Fee simple ownership grants absolute title to land, which one can sell or pass to another by will or inheritance.
A leased fee is the interest that is owned by a lessor (the owner of the land that has been leased to a developer, etc.). The lessee owns an interest in the development; for example, the lessee might own a leasehold condominium on the land and the right to use the land for a set number of years, as well as a proportionate share of the common interests such as the pool, recreational facilities, lobby, and anything else that is shared by the owners of the units in any project. The lessee pays lease rent to the owner of the land - this rent is generally fixed for 25-30 years, and then a new lease rent can be negotiated. The new leases are generally fixed for a ten year period, and then the process is repeated and the lease rent is renegotiated again. There are usually three periods of lease rent renegotiations, and then the lease ends and the condominium usually reverts or is returned to the lessor.
The terms for renegotiating the lease are usually spelled out in the individual leases. Most often, they allow for the lessor and the lessee to mutually agree on a new lease rent or they can have the new lease rent arbitrated. If they decide to have it arbitrated, the lessor and lessee each hire an appraiser. The two appraisers hire a third appraiser. All three appraisers individually determine the new lease rent by establishing the value of the land, and then together they determine the new lease rent that the lessee will pay. Generally, the cost of an appraisal is from $8,000 to $12,000 each, but it will vary depending on the complexity of the project and assignment. The decision of the arbitrators is final and binding on the lessor and the lessee.
The new lease rent is generally determined by the value of the land under the current zoning, multiplied by a prevailing rate of return or the rate of return specified in the lease. The value of the land itself is dependent on a number of factors - primarily the location, the size, and the zoning of the property. The prevailing rate of return refers to the rate of return that other investors or lessors are receiving for comparable property. Alternatively, some leases may indicate the rate of return as a set percent, some are tied to the prime rate plus a premium, and others are tied to price indices. It has been ruled unconstitutional to cap or limit the amount that the lease rent could be increased during renegotiations.
After the final lease rent renegotiation period is over and the condo is returned to the lessor, the lessees must leave the condominium and arrange other housing alternatives for themselves. The lessor would then own the land and buildings in fee simple and would be able to do as he or she chooses with the property. However, if the lessor is willing to sell the leased fee, the lessees would be able to purchase the land and become fee simple owners. The lessor may also agree to extend the lease. In most cases, if the land is not offered to the lessees, the lessor would probably take the property back at the end of the lease.
If the lessees are able to purchase the leased fee, they would own both the leasehold condominium and the leased fee; in effect, they would then own a fee simple condominium unit. There would be no lease rent to pay and no surrender at the end of the lease. Buying the leased fee cancels the lease. Any lessees who do not purchase the leased fee would remain leaseholders and subject to the terms of the lease. The lessor would only renegotiate the lease rent with the lessees who have not purchased the leased fee. When the final lease period ends, the lessor would only receive the leasehold condominiums from the lessees who have not purchased the leased fee. The lessor would then own those condominiums in fee simple.
When leasehold units are surrendered at the end of the lease, the lessor is treated the same way all the other fee simple condominium owners are treated. The lessor would have to follow all the house rules and by-laws of the condominium.
The price to purchase the leased fee is determined by appraisal. Generally, Hawaii’s lessors have based the price of the leased fee on an MAI appraisal. MAI appraisals are among the most sought after appraisals in the commercial real estate world, and they generally value the leased fee in a number of different ways:
- Based on other leased fee sales
- Based on the proportionate size of comparable land
- Based on the proportionate size of comparable condominium units
- Based on the present value of its income stream
- Based on the relationship of similar fee simple and leasehold properties
If lessor is unwilling to sell the leased fee, there are legal actions which can be taken against them. On Oahu, the City Council passed a law which can force a lessor to sell the leased fee. However, only financially-qualified lessees who are owner occupants and own no other fee simple property on Oahu can qualify. The price is determined in a court of law by a jury of peers. The lessor and the lessee each present their case and value as determined by appraisal. The jury would then award an amount for the sale of the leased fee. In addition to the cost of the leased fee, the lessee must also pay for their own legal fees, appraisal fees, court and administrative costs, the City’s cost, and Blight of Summons.
A Blight of Summons is similar to interest; it is the return due to the lessor for the opportunity cost lost from the time the filing started to the time that the lessees have to pay for the leased fee (generally two to four years). It's calculated as a percentage of the value of the leased fee - historically, it has been eight percent (8%) of the leased fee. Although the Blight of Summons is similar to interest, the IRS has indicated that that this amount can NOT be written off for tax purposes, but must be added to the tax basis of the property. Generally, only when the property is sold will the lessee be able to realize benefits from the expense.
For lessees who do not qualify for the legal proceedings to force the sale of the lease fee, they will not be able to purchase the leased fee unless the lessor decides to offer it voluntarily. Also, any lessees who do not live on Oahu can not participate in the forced sale because there are currently no statewide laws nor any laws on any of the neighbor islands that could force a lessor to sell. Lessees who live on the neighbor islands would not be able to purchase the leased fee unless the lessor decides to offer it voluntarily.
As of September 1999, there were been no lessees who have purchased the leased fee under the new law. There are currently a number of condominium projects who are going through the process, but none have been completed. Over the past 15 years, approximately 40,000 to 50,000 lessees have been able to purchase the leased fee voluntarily and convert their condominium units from leasehold to fee simple.
The best way to purchase the leased fee is to work closely and fairly with your lessor. Hire a good appraiser and a good Realtor who has experience in lease-to-fee conversions. Over the past 14 years, Savio Realty Ltd. has converted over 200 condominium projects from leasehold to fee simple, involving over 24,000 units. Savio Realty Ltd. has represented both lessors and lessees, and has represented more lessees and homeowner associations in successful lease-to-fee conversions than any other active leased-fee converter in the state.
We are a full-service real estate firm specializing in a number of niche markets, including lease-to-fee conversions. We charge a sales commission on leased-fee sales, similar to other real estate sales. The sales commission is charged only when the leased fee is sold and closed. We are paid only if we are successful in assisting the lessee and lessor in the purchase and sale of the leased fee. If no one purchases, we do not charge a sales commission.
If you have other questions on lease-to-fee conversions, please contact us by email () or phone (808-955-6672), or write to us at:
Attn: Derrick Fujisaki
Savio Realty Ltd.
931 University Avenue Suite 105
Honolulu, HI 96826