MAINTENANCE AND INSURANCE: The lessee is usually held responsible for the maintenance and upkeep of the property, including paying all real property taxes and assessments, insuring the apartment against loss or damages by fire, and for maintaining public liability insurance.

In addition, the Veterans Administration will not guarantee a mortgage beyond the actual time remaining on the fixed rent period of the lease, and the Federal Housing Administration insurers mortgages only up to 5 years beyond the fixed rent period of the lease.

These policies may make it more difficult for an apartment unit owner to sell the unit as the fixed rent period or the entire lease term shortens. Lenders are cautious about lending money against leases with short fixed rent period because they are concerned that the borrower may not be able to make the monthly mortgage payment if the renegotiated lease rent increases substantially.

What are the lessee's options when the lease term is less than the loan term?

If you are considering purchasing a leasehold apartment unit and only a few years remain on the fixed rent period of the lease, it may be helpful to contacts an appraiser to estimate approximately what the lease rent would be if renegotiated at this time.

Under all but the last method, leases generally provide that if the lessee and lessor cannot agree on the new lease rent before the beginning of the renegotiated rent period, the rent will be determined by an arbitration procedure. For example, the lease may specify that the market value of the land will be decided by three impartial real estate appraisers, one to be chosen by the lessee, one by the lessor, and the third selected by the first two. In deciding the market value, the land is usually treated as though it had no structures on it.

After the market value of the land is determined, it is multiplied by a percentage rate of return specified in the lease (or, if not, then determined by the appraisers) to compute the rent for the entire apartment unit project. Then this figure is multiplied by the lessee's percentage share in the common interest in the project to determine the amount of the lessee's individual rent.

Many leases have the rate of return set at a specific rate. Other leases may provide that the rate be based on the prevailing rate of return for similar properties at the time of renegotiation. The prevailing rate of return for similar properties will depend on market conditions existing at the time of renegotiation.

As you can see, this method of calculating renegotiated lease rent is tied closely to current land value. Since their is no upper limit on land value other than current market conditions, the new rent may increase greatly. This increase will reflect the rise in land values since the beginning of the lease 25 to 35 years ago.

Hawaii law provides that all ground leases for condominium and cooperative projects must contain a provision for the mandatory arbitration of any renegotiated rent. This means that if the lessee and the lessor cannot agree on a new rent before the renegotiation date, either may request that the rent be decided by an impartial party. For example, this impartial party would include a panel of real estate appraisers.

If the lease does not provide for the arbitration of lease rent and if the parties are unable to agree on the rent upon renegotiation, than the law specifies the process to follow. The law does not, however, specify or limit the amount or rate of rent to be paid. Here is the required procedure:

The new rent shall be determined by three impartial arbitrators who are recognized real estate appraisers.

The lessee and lessor will each select one appraiser. The first two appraisers will select the third.

The three appraisers will determine the renegotiated rent and their decision will be final and binding.

The lessee and lessor will share the costs equally.

Hawaii law provides a ceiling for renegotiated rent for cooperative apartment projects that qualify under the law. This law does not apply to rent renegotiation of units in condominium and PUD projects.

The law applies to all cooperative proprietary leases which call for rent renegotiation. It provides that renegotiation of rent cannot take place more than once every 10 years and the first renegotiation can be no sooner than 15 years following the commencement date of the lease. It also provides a formula for determining the maximum amount of renegotiated lease rent to be paid by the cooperative housing corporation.

If the lessee corporation and the lessor cannot come to an agreement on the new lease rent, the law requires that the rent be determined by an impartial Third Party through arbitration proceedings conducted by the State Housing Finance and Development Corp.

Several possibilities exist at the expiration of the lease term, and most leases contain a reversion and surrender clause.

REVERSION: The typical apartment lease provides that the land reverts to the lessor at the end of the lease term. In other words, when the lease expires, the lessor retakes possession of the land. When you buy an apartment unit on leased land, it is important to consider what happens to the unit after the lease expires.

SURRENDER CLAUSE: Apartment unit leases typically contain a surrender clause providing that, upon expiration of the lease, the land, all apartment units, and other improvements become the property of the lessor. The clause generally requires that the lessee surrender to the lessor, upon expiration of the lease term, all apartment units, garages, roads, landscaping, and swimming pools, even if these improvements where built and maintained at the lessee's expense.

ATTEMPT TO NEGOTIATE AN EXTENSION OR NEW LEASE: The lessee could attempt to negotiate a new ground lease or extend the ground lease even though the lessor may not be legally obligated to do so. The lessor may be unwilling to extend or enter into a new lease if the lessor has plans to redevelop the property. On the other hand, a lessor who plans to maintain the project as a residential property may be willing to grant a new lease. In this situation, however, the new lease rent could be the market rental price of the land and the apartment unit, as both became the property of the lessor at expiration of the original lease.

SURRENDER IMPROVEMENTS TO LESSOR: If the lessee is unable to negotiate an extension of the existing lease or a new lease, the lessee may be forced to surrender the apartment unit to the lessor and move out.

REMOVAL OF IMPROVEMENTS: The surrender clause may instead require the apartment lessees to remove the structure and restore the leased land to its original condition at the end of the lease term. In the case of a condominium or cooperative, the initial apartment owner would be legally required to pay his or her proportionate share of the expense of removal of the building that contains the apartment unit when the lease expires.

Hawaii does not have a law requiring the lessor to sell to the lessee the leased fee interest under a condominium, cooperative or PUD leasehold project. Still, some lessors decide voluntarily to offer for sale the leased fee interest to apartment owners (referred to as a fee conversion).

The appraiser calculates the amount of lease rent due over the fixed period of the lease and estimates the projected rent over the renegotiated lease period. This amount is then reduced (discounted) using present value tables. This reflects the fact that lease rent dollars received in the future are worth less than dollars received today. In essence, the appraiser asks how much would a person need to invest today (as in an immunity) to receive a stream of income equal to the amount of rent projected for the entire lease term.

Present value of reversionary interest in land (market value of raw land discounted to present worth): $500,000

CONCLUSION