Leasehold Conversion Controversies
Price of Paradise · Hawaii Public Radio · aired 1993-10-01
Guests: Neal Milner (Professor of Political Science, University of Hawaii); Clinton R. Ashford (attorney, Ashford & Wriston; longtime Bishop Estate counsel)
Duration: 0:28:00

[0:00:00] Randall Roth: As host of the Price of Paradise radio show. Today's topic is leasehold conversion. And with me to discuss it are Neil Milner and Clint Ashford. Neil is a professor in the political science department at UH, an expert on dispute resolution, and a condo owner who expects to find out within a day or two just how much the Bishop estate wants for the fee interest in his home. Clint is the Chief Justice of the Republic of the Marshall Islands, a founding partner in the law firm of Ashford and Riston, and someone who has represented the Bishop estate on many matters over many years. Clint, could you give us a little bit of history of the leasehold conversion issue?

[0:00:38] Clinton R. Ashford: Sure, Randy. Um, good morning. Um, I I think that while the the the current conversion of condominium and other multifamily units is quite different from the conversion that we went through for single family residential leaseholds that that a proper understanding of the of the problems currently facing the lessors and lessees really requires some understanding of that history. Briefly the high points were that all of this started nearly 30 years ago. At that time, the property concerned was all single-family residential leaseholds. Most condominiums had not at that time been built. And the majority of the single-family residential leasehold lots were owned by about two dozen landowners, including all of the major estates, Bishop, Campbell, Damon, Austin, and so forth.

[0:01:30] Clinton R. Ashford: The landowners were not interested in selling, primarily because of restrictions in their trust documents, severe adverse tax consequences and concerns about price and rate of return on investment. The lessees, on the other hand, were very anxious to buy so long as the prices were, quote, affordable, unquote. And they were concerned about probable large increases in ground rent at renegotiation time. Well, what happened was that the IRS refused to agree to tax code changes, which were justified, in my opinion, by Hawaii's unique situation, that would ease the tax impact on voluntary sales proceeds. So, the lessees, or rather the lessors, refused to sell and as a consequence, in 1967, the legislature passed the so-called Land Reform Act.

[0:02:21] Clinton R. Ashford: This Act ultimately authorized the transfer of title from lessors to lessees through condemnation proceedings by the Hawaii Housing Authority. The lessees were still concerned about price, however, and so nothing was done about condemnation for about 10 years and until after some modifications had been made to the statutory valuation formulas.

[0:02:41] Randall Roth: Clint, when you say lessees, you're talking about the homeowners. The people who live in the house who who want to buy that fee so that it'll be their home forever.

[0:02:49] Clinton R. Ashford: Correct. Um, now after the passage of this statute, and when the lessees through the HHA started to implement it, in 1979 and thereafter, Bishop estate, one of the major landowners, challenged both the valuation formulas and the use of condemnation on both federal and state constitutional grounds. The valuation challenges were successful, causing the statute to be again amended. But in 1984, 1985, the Supreme Courts of the US and Hawaii ruled that use of condemnation to force these conversions was indeed constitutional. Now, through the condemnation cases that followed thereafter, as well as many conversions by voluntary negotiation, I think that probably more than 90% of the single-family residential leaseholds have been sold, so that's really no longer an issue. The the path has been cleared and charted and it's easily walkable for those who remain as lessees of single-family.

[0:03:51] Clinton R. Ashford: Do you want me to talk about the current situation with regard to the court rulings and and the current ordinance on condo conversions?

[0:03:59] Randall Roth: Well, I I guess my question is, why do we have a problem with with condo owners when we don't have a problem anymore with single-family homeowners?

[0:04:08] Clinton R. Ashford: Well, the reason is the the Land Reform Act applied only to single-family residential leaseholds. It did not apply to multi-family, condo units, townhouses, planned unit developments, that kind of thing.

[0:04:20] Randall Roth: So when the Supreme Court of the United States and the Supreme Court of Hawaii said that the state can force landowners to sell the fee interest in land to the homeowners, the lessees, that was only for single-family homes.

[0:04:32] Clinton R. Ashford: Yes, but they set the precedent which has been followed by the federal court both by Judge Fong, a week or two a week or 10 days ago, and earlier by Judge Ezra, in ruling that the ordinance passed in 1991 by the city and county of Honolulu, authorizing mandatory conversion through condemnation of of condo units, that those are also constitutional. And those rulings were based primarily on the US Supreme Court case in the single-family residential situation.

[0:05:03] Randall Roth: Jeez, that makes it sound like the whole thing's pretty much been resolved and we just have a few details like figuring out the sales price. Neil, I know you wrote a chapter for the Price of Paradise volume two, which which just came out in the last few days, and in that chapter, you talk about a number of things having to do with leasehold conversion, especially as it relates to condominium ownership. Can you tell us just a little bit about that chapter?

[0:05:26] Neal Milner: Sure, Randy. Let me talk first of all about what I call unappreciated facts about it. Later on, maybe we can get into the implications. I think there are about five or six facts that it's important to understand about the present situation. Uh, the first one is that there is a vast difference between the small landowners and the Bishop estate. Um, the Bishop estate frequently has commercials that makes it sound as if they're very much like a group of six people who own some land in in somewhere that have one condominium on them.

[0:05:57] Randall Roth: Is is that the Hano Hano family?

[0:05:59] Neal Milner: Well, the Hano Hano, that's right. The Hano Hano family is the one but the, in fact, there's a big difference between the Hano Hano family and a lot of the other small landowners. The big difference though, between Bishop and most of the small landowners, is that Bishop definitely wants to sell its land and it wants to sell its land now, and that puts some enormous pressure on people.

[0:06:18] Randall Roth: Can I can I ask just briefly, Clint, do you generally agree with that statement that the Bishop estate wants to sell its land?

[0:06:24] Clinton R. Ashford: Oh, I don't think there's any question about it. They they've exhibited that by their actions. I should say that my firm has not been representing them in those sales, and I'm not here today as an advocate for Bishop estate, but merely as a information source.

[0:06:37] Randall Roth: Okay. So Neil, you're saying, generally speaking, the Bishop estate is different from the other landowners because it wants to sell and the others, generally speaking, don't want to sell.

[0:06:45] Neal Milner: Yes. Right. They don't want to sell because they really do see the land as a legacy, that that is the small landowners. The land is a legacy that they would like to keep in their family. There was a letter in the advertiser this morning that was a good example of that, uh, and if you look at the testimony uh of the small landowners, that's clearly the case. The Bishop estate wants to sell because it can clearly make a better return on its investment, um, in in other ways, in other investments, and that's been made about as public as it's likely to be. And Peter Savio talks in language very much like that when he makes his presentation.

[0:07:19] Randall Roth: And and they don't have tax problems anymore.

[0:07:21] Neal Milner: Not anymore as far as I understand, that tax problem seems to have been taken care of.

[0:07:25] Clinton R. Ashford: The the the the reason for that, if I can interrupt you gentlemen, is that all of this now is taken care of by on individual case-by-case basis. The owners are getting rulings, uh, which give them the required tax protection, so that they won't be classified as dealers and have these whopping income taxes.

[0:07:43] Randall Roth: Okay, Neil.

[0:07:44] Neal Milner: Uh, another point is that the there is here not just simply a legal and and economic issue, that this is a very strong moral component to this issue when it involves homeowning in America. Homeowning in America, the ownership of a single family home or something like a single-family home is about as strong a part of our culture as anything that I can think of. Uh, historically it goes back to Jefferson. And what happens in this kind of situation is that both the small landowner and the, um, condo owner start to feel themselves as being victims of a process, uh, being treated immorally. The Bishop estate is somewhat different here because it's an entity, it's not a group.

[0:08:25] Randall Roth: Neil, are are you suggesting then that if we were talking about commercial properties, somebody's rental unit that they owned it as an investment, that your approach to to this issue would be very different?

[0:08:36] Neal Milner: I think it might be. Later on we'll talk about the fact that there are a variety of approaches here, but I think the fact that we're talking about a person who has owned his or her home for a long period of time and had planned on continuing to own that home and had planned on saying that, I, as long as I do what I'm supposed to do, I pay my uh I pay my mortgage, I make improvements and in fact, maybe even purchase my fee if the price is fair, that life will work out for me okay. As long as that is the case, uh, these people feel all right. But right now there is clearly a sense of threat that this kind of moral dimension, this moral way, this proper way of living has, um, is being very much threatened.

[0:09:19] Randall Roth: So, so even if if they would would admit that from a legal standpoint, they merely lease the land, there's just that sense of right and wrong that by golly they've they've paid their dues they ought to own their own home. Well, that's right. And in fact, right now there's not even, I mean, the the argument is not the argument with uh Bishop at this particular moment is not really a legal argument about whether or not uh one can own the the lease uh the purchase the lease.

[0:09:46] Neal Milner: That's being offered. The problem is how much it's being offered for, and so it takes it a little bit outside of the of the legal dimension. Um, another point that I wanted to make an unappreciated fact is that there is a big difference um, here between the small landowners and uh the people who own condos on racial and ethnic grounds. That's not something we like to talk about in Hawaii, but I think it's a very important issue because it starts creating a sense of separation here, a sense that there are certain group of people and in this case, ironically enough, I think it's it's Haly's predominantly, feel that they're getting treated unfairly and I want to say something later on about that.

[0:10:26] Randall Roth: Okay, now, when you say that the Halis, are they the the condo owners? They're the condo owners predominantly, disproportionately so. Any any sense at all for the percentage of condo owners that would be Caucasian?

[0:10:37] Neal Milner: Well, it's really hard to estimate. The best thing the the the I can my attending of meetings of condo owners and my working some of these meetings for uh the neighborhood Justice Center and so on, uh, I would judge by those who come to the meetings. Now, that's not quite the same. It may overestimate the Holly's. Uh, my estimate is that you're talking about a sizable majority, maybe 60, 75%, um, would be owned by by uh by Hollys. But it also is in certain neighborhoods. Um, in Hawaii Kai, uh, for example, it's the case. Now, as I say, this takes on an important issue when you start thinking about the effect of this kind of uh racial or ethnic tension in regard to larger issues like Hawaiian sovereignty. And I would prefer to get back to that later on, but I want to make some other points.

[0:11:30] Neal Milner: Another thing that happens here though is that the the small landowners as well as Bishop tend to label condo owners as outsiders, as outsiders, as people in effect not of the aina. And that language is in fact used in the testimony.

[0:12:03] Clinton R. Ashford: Uh, I disagree to some extent with you Neil. Um, I think there probably is an ethnicity, uh issue here, but it seems to me that the issues are more economic. And when you talk about outsiders, I think the feeling there is because with the, um, with the leasehold condominiums, about two-thirds of the unit owners are investors, not uh not owner occupants. They are investors and they are the people who who bought here, uh, bought the long-term leases, and they turn around in turn and lease them on a short-term or month-to-month or something to to other uh occupants. And it seems to me that the, uh, the locals who own the land and nearly 90%, I think, of these multifamily uh project are the the landowners own one only project, uh, fewer than it's only a few like Bishop state, estate, Campbell estate, all of whom are getting out of this business that own multiple projects.

[0:13:06] Clinton R. Ashford: And they're the locals who own the the land under the project look upon the investors who probably are uh how lease, mainland, how lease and so forth, as being outsiders.

[0:13:06] Randall Roth: And in fact, maybe instead of calling them homeowners, they'd call them not just investors but speculators. Is it possible that that's part of it? No, I think Well, I think that's right. The the the issue though is that you may be right statistically, but the distinction is not made as far as I can see when the issue is talked about publicly. That's that's my concern.

[0:13:25] Neal Milner: Um, and I just want to say one more thing. Uh, it's now at a stage where the Bishop Estate is just about the only big player in it. Almost everybody else is is pretty much out of it.

[0:13:41] Randall Roth: You're listening to the Price of Paradise Radio Show. I'm Randy Roth and my guests are UH professor of Political Science Neil Milner, and Bishop Estate attorney Clint Ashford. Neil, you're telling us about some of these tension points.

[0:13:53] Clinton R. Ashford: Right, the other tension point I wanted to raise, the final one is that this really should be seen as part of the bigger housing crisis in Hawaii. People are in this position because housing is not affordable. And the lack of affordable housing here hurts both the small landowner and it hurts people like myself, the condo owner. And what this issue is doing is creating another tension point for what is probably the most serious, and I think the most unjust problem in living in Hawaii, and that is uh adequate shelter for adequate price.

[0:14:25] Randall Roth: Now Neil, I know that that in addition to being a an expert on dispute resolution and a press professor at UH, you are a condo owner and you're expecting to find out very very soon what the Bishop Estate wants for your fee. Um, does it just come down now to money? If another if if they said, Neil, we'll give it to you for $500, I assume you'd be very happy. If they want all the money in the world, then you're not going to be happy. Are we just talking about the size of of that purchase price at this point?

[0:14:52] Neal Milner: Well, if you if uh, let's, I'll personally, if they say $500, I'll write the check tomorrow. Um, I think that there is another issue involved and that is process. Um, if if prices were low enough, people wouldn't be so concerned about process. But I think what concerns people who are getting their offer is the process by which this offer is being made and is being as I call it, non-negotiated. And so there was a great deal of resentment in the sort of take it or leave it offer in a kind of impersonal relationship between the buyer and and the seller here.

[0:15:29] Randall Roth: But as I understand it, the Supreme Court said these laws are constitutional but only if the price is fair. Uh Clint, isn't there some mechanism to ensure that the price has to be fair?

[0:15:40] Clinton R. Ashford: Well, there there of course there are appraisal methodologies, standard appraisal methodologies which were applied to this.

[0:15:46] Randall Roth: Well, won't that tell us what it's worth?

[0:15:48] Clinton R. Ashford: Uh well, uh maybe because uh, you know, fairness is like beauty. It's in the eye of the beholder. I think it depends upon whether you're buying or selling when you when you think that a particular number is or is not fair. But if you compare it to a beauty contest and beauty is in the eyes of the beholder, you have to have the contest somewhere and you have to have people willing to participate in the contest. We've never heard anything from the Bishop estate that says, let's take a look in some kind of mechanism that would decide, uh, what the beauty of this is or what the valuation is. there are different theories, but the theories are all very academic because what we get as, uh, when we get our offer, uh, is an offer and the offer is based on a theory and the theory is an uncontestable theory as far as we're concerned. And that's what I mean about about process.

[0:16:37] Randall Roth: So, so do you, it's a cram down. It's not an offer, it's an ultimatum and it involves your home.

[0:16:42] Clinton R. Ashford: Yeah, that's exactly what. Hey, well, hang on a second now, gentlemen. We're talking not only about Bishop estate here. Bishop estate may have been a major player. They owned at one time about 18% of the condo units, but they no longer own them. They're offering them all. There are a heck of a lot more, uh, lessors, uh, people, Joe Kanaka Ole, and, uh, Mr. and Mrs. Souza, and Mr. and Mrs. Gomez, and, and John Q Brown, and all of those others who only own only one project. a lot of them have sold. Most of them don't want to sell. But what Bishop Estate does doesn't necessarily control, uh, them nor reflect on them either credit-wise or adversely.

[0:17:23] Randall Roth: Well, let's focus on Bishop estate first. How do you feel about Neil's comments, and I'm talking to Clint Ashford now. How do you feel about Neil's comments with respect to, uh, what I term the cram down and this ultimatum that you will pay X dollars, or someday you're going to be kicked out of your home.

[0:17:39] Clinton R. Ashford: Um, they, that is is an offer to sell on their part, which is, which is made voluntarily without being required to do it by any court or any agency. And if they want to set the price and say that they don't want to sell for anything less than X dollars or Y dollars, uh, I don't see anything wrong with that.

[0:17:56] Randall Roth: So at that point If the lessees don't want to buy, they don't have to buy.

[0:17:59] Clinton R. Ashford: So at that point, Neil and and other condo owners can use the law that's now in place to force the Bishop Estate to sell and if the Bishop Estate doesn't offer price they think is fair, then they can take it to court and a jury is going to decide what's fair. Is that the way it works? Yep, if if they are owner occupancy, owner occupants. The ordinance, uh, as it currently exists does not allow investors to go to condemnation.

[0:18:23] Neal Milner: That's that sounds like a process to me. What's wrong with that? Well, the, it's an interesting process because it means you either accept your offer now, or we go to court and go through this kind of process that we went through the last time that took a mere 17 or 20 years. Uh, I would hope that there would be some kind of other opportunities to negotiate a fair price, or to negotiate period, uh, that we're losing if we do things this way. I don't have any, I mean, certainly, Bishop estate wants to make me an offer and wants to make me an offer for to purchase my fee for a million dollars, they have the right to do it, and I suppose that I have the right to tell them to buzz off.

[0:19:00] Randall Roth: But that's not going to solve the problem and it's not going to deal with the psychic uncertainty and the moral indignation that is created by this kind of issue. We're not talking about small land owners here. We're talking about a huge player that is in a situation in which it tries to fragment its its people it's doing business with as much as possible. So, I'm not talking about whether it can do it or not. I'm just saying that I don't think it's the best way to do it, and I think that there are alternatives. You're listening to the Price of Paradise Radio Show. I'm Randy Roth, and my guests are UH professor of Political Science, Neil Milner, and Bishop Estate attorney, Clint Ashford. Neil, earlier, you said something about sovereignty and said you'd like to come back to it. How does sovereignty factor into this leasehold conversion issue?

[0:19:48] Neal Milner: Well, it's in an indirect way and and truthfully, I can't be positive that it's the case. But here is what I'm worried about. I am a supporter of Hawaii of Hawaiian sovereignty. Um I am concerned that people who understand the advantages of Hawaiian sovereignty, understand that it's a very sophisticated process by which a lot of us, non Hawaiians, of course, particularly, are going to have to learn that there are certain things that we are going to have to share with others, with native Hawaiians, there are certain things we may have to give up with native Hawaiians. It's a sophisticated political process that I don't think is moving along very well right now. I don't want to see another issue created here where there's a group of people who feel martyred and who feel suspicious uh of something called the Bishop Estate. And if you listen to what Henry Peters has to say, and I'm not saying every Bishop Estate trustee is like this, but these signals that come from Henry Peters always exacerbates this kind of conflict that I'm talking about. That's what I'm concerned about. If we're going to learn to live in a in a society in which there is Hawaiian sovereignty, we are going to have to do it in ways that avoid these kinds of uh splitting issues.

[0:21:03] Randall Roth: What about the other land owners other than the Bishop Estate, what about the Hanahano family or whomever it might be that we hear about from time to time. Uh, Clint, do you have some thoughts on that?

[0:21:14] Clinton R. Ashford: Yeah, but uh before I get to that, I just like to say in response of Neil's last comments that I don't think sovereignty, whatever that, however you define that term, and there's no agreement on its definition, but I don't think sovereignty has anything to do with issue, this issue. I think it's irrelevant. Now, going to the end I might, you might want to you might want to listen to some of the condo owners sometime when they get to talking. That's what I'm saying. I'm not making a logical link here. I'm making a political link. It's not a link that I like. It's one that I have to respect because I hear it.

[0:21:44] Randall Roth: Answering your question um uh Randy, it seems to me that uh that there are other ways in in which uh getting now into Neil's field of expertise, which is alternate dispute resolution, there are things that can be done and has been done uh even recently by Bishop Estate according to a newspaper report I read uh about ten days ago on the settlement that they made for some Black Point single family residential lots. They have shown flexibility and there are uh ways in which uh the the conflict between uh price asked and price willing to be paid can be resolved. Uh these include financing by seller, uh they include agreeing to a fixed period uh of rent and then sharing the profit uh on resale. Number of a number of schemes like that, which probably uh should be explored and can be.

[0:22:40] Neal Milner: I I couldn't agree with you more on that. Um I I I'm not as clear about the Black Point situation because that was never described in any great detail in the paper, but I understand what you're saying. I mean the heart of the matter to me on this is that these kinds of explorations, this kind of flexibility, this chance to talk about alternatives is simply not been there. Um it may be that Bishop is trying to get as much as it can the first time without doing these sorts of things. But I think distinctions that can be made and and I want to as an aside, mention how many of how few of these involve litigation or even legislation, but uh there are ways to work out things that uh maybe give a better a deal to a person who's not a uh who is an owner occupant. There are ways to work out maybe some kind of profit sharing devices. There are all kinds of things that aren't explored. When I've talked to my friends at the Center for Alternative Dispute Resolution, they say what's amazing about this kind of conflict is that the parties, and here I'm talking more about Bishop, um I'll come back to the small land owners in a second, the the parties have never sat down and said what's the what's the purpose here? What what are the goals here? What are we trying to do? Can we begin to establish the dialogue? I think that there are enormous opportunities in the with the small land owners. I'd let me just say one more thing, just to show you the difference between um the way just let me give you an example of the sorts of things that can get uh condo owners angry, and they kind of create an atmosphere that is so um contrary to negotiations. The letter from Savio Realty that you get, that the apartment owners get starts out the following, Good news, you have a chance to convert your unit in the from leasehold to fee simple ownership. Savio Realty and so on.

[0:24:11] Randall Roth: You know, that sounds like my draft letter.

[0:24:12] Neal Milner: Well, that's exactly right. It does sound like a draft letter, and it Congratulations. Yeah, congratulations. I mean, I have yet I would say this letter probably made some sense 10 years ago with with um uh single family home owners, but I have yet to meet a condo owner who sees what's happening as good news. It could be good news if the price was right, or the process was right, or if there was a process of negotiation. But this is the first words that you read when you get the letter.

[0:24:48] Randall Roth: Fairness is in the eye of the beholder. So Neil, you would say we need to sit down, we need to talk about this, we need to understand where each other's coming from, we need to understand there's more than just legal technicalities going on.

[0:25:09] Neal Milner: And we need processes of negotiation.

[0:25:12] Randall Roth: Okay, Clint, any final words in the five seconds we have left?

[0:25:15] Clinton R. Ashford: No, I I I agree that uh what what it's all about is negotiation and uh somebody is always mad in a negotiation.

[0:25:22] Randall Roth: Okay. Our guests this week were Neil Milner and Clint Ashford. This show is produced by Jill Center with technical assistance from Rick Stanley. We would like to hear your thoughts about what we've said, or not said. Those comments can be sent to me in Care of Hawaii Public Radio, 738 Kaheka Street, Honolulu, Hawaii 96814. You've been listening to the Price of Paradise Radio Show. I'm Randy Roth. Aloha.

[0:25:54] Speaker 3: This program is produced by the Consortium of Price of Paradise authors in cooperation with Hawaii Public Radio. The Price of Paradise is of interest for every concerned citizen of Hawaii. It is available in local bookstores and in public libraries. Please tune in next week when Randall Roth, one of his 37 co authors and a special guest will take on another question of importance to listeners in Hawaii. Cassette copies of this program are available from Hawaii Public Radio for $10 by calling 9558821.

[0:27:33] Randall Roth: like to hear your thoughts about what we've said or not said. Those comments can be sent to me in Care of Hawaii Public Radio, 738 Kaheka Street, Honolulu, Hawaii 96814. You've been listening to the Price of Paradise Radio Show. I'm Randy Roth. Aloha.

[Note: music/outro 1220s — no speech detected from 0:27:33 to end; audio signal confirmed by volumedetect.]