WASHINGTON, D.C. — (RealEstateRama) — The U.S. Department of the Interior is giving until Monday, August 29, 2016, to provide input regarding Act 173, a state law proposing to amend the Hawaiian Homes Commission Act of 1920 (HHCA) by permitting the Department of Hawaiian Home Lands (DHHL) to lease by direct negotiation and at fair market rents, and for a term not to exceed five years, any improvements on Hawaiian home lands, or portions thereof, that are owned or controlled by the DHHL.
What is Act 173 and how will it impact beneficiaries? The answer to these and other questions can be found below under our Frequently Asked Questions section. We also uploaded background material to provide context in the Background Documents section below.
Please email your manaʻo on Act 173 to Kaʻiʻini Kimo Kaloi, Director of the DOI’s Office of Hawaiian Relations at kaiini_kaloi (at) ios.doi (dot) gov and include in the subject line “Opinion on Act 173.”
FREQUENTLY ASKED QUESTIONS – ACT 173, SHORT TERM SPACE LEASING
- Why do we need Act 173? What’s the story behind “space leasing”?
In the 1980s, the DHHL received certain industrial/commercial lands with warehouses or similar structures from the DLNR. The warehouses were already under General Leases from DLNR. As part of the deal, the DHHL accepted the lands, structures, and existing General Leases. These warehouses typically have several bays. Also at the time of deal, many of those bays were subleased; the DHHL agreed to honor those subleases.
Fast-forward to today: many of those subleases are expiring, and the Master Leases/General Leases will begin to expire in 2022. As the lease terms come up, the tenants essentially have to decide whether they want to leave or to re-up. If they want to stay the only disposition readily available to them is a month to month Right of Entry while the process outlined by HRS ch. 171 is conducted. If they choose to leave, the DHHL must go thru the process outlined in HRS ch. 171 without a tenant; the space sits vacant.
- What’s the problem with the space leasing situation?
The problem has two parts. The first part is that with a month to month disposition, no tenant will pay a premium for the space nor will any tenant invest in maintaining or upgrading the space. The second part is if the tenant leaves, it can be several years before the process required by HRS ch. 171 is completed, and the space is occupied and rental income is generated, again. Remember that while the space sits vacant, the DHHL is paying to repair, maintain, and secure the premises. This means that the DHHL and beneficiaries lose big or lose bigger. Here’s why:
Lose Big—if there is a month to month tenant paying less than premium rent and not investing in the space because there is no guarantee that the tenant will be allowed to stay for more than a month, the DHHL and beneficiaries don’t see the full income potential from the property. In addition, the DHHL is paying for repair and maintenance of the building/space. This means that we are “in the red” for repair and maintenance costs and we are losing a portion of the rental value.
Lose Bigger—if there is no tenant, we see zero rental income and pay for repair and maintenance. This means we are deep “in the red” on both rental value and repair and maintenance costs.
The extra scoop of mac salad in this is that on O‘ahu, these properties are located in the planned Rapid Transit Corridor. This means the value of these properties will likely increase and/or their use may be changed in the next five years.
Act 173 fixes the entire situation!
- What does Act 173 say? How does it fix the space lease problem?
Act 173 amends section 204(2) of the HHCA by adding language that would permit the DHHL to lease by direct negotiation and at fair market rent any department-owned or department-controlled improvements, or space within an improvement, on Hawaiian home lands for a term not to exceed 5 years.
Here’s how Act 173 works to fix the space lease problems:
“Gap-filler”— Act 173 allows the DHHL to enter into short term leases in order to fill the “gap period.” The HRS ch. 171 process often creates a several year gap period between the ending of one lease and the taking effect of a new lease. During this gap period the DHHL and beneficiaries are either losing big or losing bigger (see above for an explanation why). The leases under Act 173 cannot exceed 5 years! With Act 173, the DHHL can be “in the black” for the gap period.
Short term occupancy at fair market rent—Act 173 guarantees a short term lease, which means a tenant can do the math necessary to know how to maintain or improve the property without losing money. Act 173 also guarantees the DHHL and beneficiaries that rent will be at market value. Without any guarantee of occupancy from one month to the next, a tenant won’t pay market rent nor will they invest in improving or maintaining the property because they are at constant risk of being kicked out. With Act 173, the DHHL can be in the black for rental income and repair and maintenance of these spaces.
Direct negotiation—Act 173 allows the DHHL to negotiate directly with the prospective tenant and fill the space quickly. Direct negotiation maximizes income in the short term for the gap period between long term tenants. The HRS ch. 171 contemplates long term General Leases and it takes time to complete the process. It is not meant for the short term. With Act 173, the DHHL can move quickly from red to black during the General Lease gap period.
- Does Act 173 change any obligation to native Hawaiian beneficiaries?
Act 173 doesn’t change any obligation under the HHCA to native Hawaiian beneficiaries. The existing requirements under the HHCA remain in place and Act 173 merely addresses the space leasing situation as detailed above.