A bold idea this year to address Hawaii’s chronically short supply of affordable housing by developing and selling leasehold condominiums on state land is still in play at the Legislature.
Two bills that would permit such projects could be sent to Gov. David Ige if House and Senate leaders resolve differences over the measures.
Recently, however, University of Hawaii economists questioned whether one bill’s goal of having the state develop and sell leasehold condos for $300,000 is achievable.
The economists also suggest that leasehold condos might not sell well and could lead to evictions or the sale of state land at the end of proposed 99-year leases.
Economists Sumner La Croix and James Mak made their assessment in a March 31 University of Hawaii Economic Research Organization report.
The leasehold condo proposal addressed in the UHERO report began as Senate Bill 1 and is the more ambitious of the two bills.
SB 1 proposed having a state agency that helps developers finance affordable housing act as a developer contracting to build high- density leasehold condos on state land within a half-mile of planned city rail stations.
These condos initially would cost no more than $300,000 to build, and the state would sell them at cost to recoup all expenses.
Condos developed under SB 1 also would restrict resales with provisions to either buy back units from owners or collect 75% of any profit in a sale to a private buyer.
SB 1, which was introduced by Sen. Stanley Chang, received overwhelmingly positive testimony. Yet the bill stalled in the House. Chang, as chairman of the Senate Committee on Housing, revived his proposal by gutting a House bill related to the state budget and inserting the contents of SB 1 as an amendment passed by Chang’s committee.
This “gut and replace” bill, House Bill 820, was passed Friday by the Senate Ways and Means Committee. House negotiators would have to agree to the drastic change for the bill to be considered by the full House and Senate, which makes the bill’s chances of becoming law more questionable.
UHERO’s report also expressed doubt as to whether condos can be built for $300,000. The report cited a 2016 Strategic Economics study for the city that pegged development costs, excluding the expense for land and including some reduced or waived government fees, at $409,452 for low-rise housing in Kapolei, $471,603 for midrise housing in Kapalama and $462,414 to $474,446 for high-rise housing in Ala Moana.
Prices for leasehold condos are crucial, UHERO’s report said, because buyers will prefer existing fee-simple condos without resale and profit-sharing restrictions if the fee-simple homes don’t cost significantly more. The median price of existing condos on Oahu so far this year is $411,250. That means half sold for a lower price and half for a higher price.
The UH economists even said renting might be preferable to buying a leasehold condo depending on the comparable monthly cost and other factors. They also noted that Chang’s proposal doesn’t specify how much, if anything, the state would charge in lease rent.
One failed example of leasehold condo development cited in the report was a 30-unit UH project developed in late 1994 for faculty. By mid-1996, amid a housing market slump, only eight of the three-bedroom townhomes in Manoa had been sold for $335,000 to $360,000 under 55-year leases with
$1 annual lease rent. The university ended up converting the project, called Kau‘iokahaloa Iki, to rentals.
Another issue noted in the UHERO report is that condo owners are likely to oppose lease termination at the end of the term.
“Residential leasehold tenure has endgame problems,” the report said. “As lessees face the prospect of higher renegotiated leases or giving up their housing assets at the end of the lease, they organize to try to get leases changed via the political process.”
The second pending leasehold condo bill, Senate Bill 1190, generally would allow private developers to work with a state agency that helps finance affordable housing to build leasehold condos on state land leased for 99 years.
Under SB 1190 the Hawaii Housing Finance and Development Corp. could issue requests for proposals to develop such condos.
SB 1190 was introduced at the governor’s request. Because of amendments made in House committees, House and Senate negotiators would have to settle differences for the bill to be considered by the full Legislature.
