Lease-to-fee Conversion

#198 in the Moʻolelo series

Although it is not as enthralling a topic as, say, royal scandals, the leasehold situation, and the real estate system in Hawaiʻi more generally, is a topic that affects the livelihood of many local people. Leaseholds are a form of real estate holding, a fixed rent for a fixed period, typically 20 or 30 years for residential and often 55 years for commercial properties, particularly for Bishop Estate/Kamehameha Schools, a major employer of leaseholds. When “mainland” or foreign buyers come to Hawaiʻi, sometimes they are surprised that prices arenʻt higher, only to find that the properties are leasehold. a frequent response is “What’s leasehold?” This form of land tenure exists, but isn’t common for residential properties outside Hawaiʻi. This stems from Hawaiʻi unique land history.

Kamehameha Schools Bishop Estate has extensive land holdings in West Hawaiʻi, including the summit of Hualalai above Kailua, Kona.

When I explain leaseholds to my students, I try to hammer home the point by telling them that at the end of the lease, you might have to give it back! (This is if the lesee is not able to renegotiate the lease at an acceptable price). All this begs the question: why does anyone buy leasehold? Sumner LaCroix explains, though not so succinctly: “… borrowing-constrained households may prefer to buy leasehold property.” In other words: it’s cheaper! (But you don’t own the land, you only control it for the period of the lease).

The prevalence of leaseholds in Hawaiʻi goes back to the presence of large landowners from the late Kingdom period. By 1960, 79 owners owned 96% of all the land in Hawaiʻi (Cooper and Daws, 1985)! No wonder people bought leaseholds! There was virtually no land available on the market. According to LaCroix, Mak and Rose (1995), there were 22,000 leaseholds in Honolulu in the mid-1960s.

In 1967, a law was passed that attempted to constrain this situation. By 1991, only 5000 leases remained. The authors conclude that while:

ideological forces initiated the land reform in 1967 … rent-seeking forces captured the process in the mid-1970s. It is therefore concluded that Hawaiʻi’s experiment with leasehold was a failure due to the difficulties associated with specifying and enforcing long-term contracts in residential land.

LaCroix, Mak and Rose, “The Political Economy of Urban Land Reform in Hawaiʻi” Urban Studies, vol. 32, No. 6, 1995.

When I first began teaching at Kamehameha in 2002, the school appeared to support Mufi Hanneman for mayor over Duke Bainum, mainly because Hanneman was opposed to lease-to-fee conversion. The estate had been forced to sell lands in 1986 (and perhaps previously as well) leading to its holdings being reduced from about 450,000 acres to 365,000.