Potential investors, however, would be well advised to consider several unique issues that frequently arise in connection with the acquisition or development of hotel properties in Hawaii.
If the potential investment involves ground lease property, as many hotels and other commercial developments do, investors must analyze the rent provisions with great care. The standard form of ground lease provides for fixed rent for an initial period of 25-30 years, with the rent to be readjusted after such time to provide the landlord with a specified return based upon the then-current unencumbered land value. A great number of ground leases are approximately 25 years old and have rent provisions that are subject to renegotiation in the near future. Due to the dramatic increases in land value since the early 1970s, especially regarding beachfront property, the potential rental increases can be astronomical.
For example, an arbitration between a landlord and tenant was recently conducted in Honolulu to determine the fee value of a parcel for hotel-commercial use as the basis for calculating the new rent. The rent during the last fixed rental period was approximately $187,000 per year. In the arbitration the tenant contended that the land value was between $300 and $400 per square foot while the landlord argued that the value was in excess of $1,000 per square foot. The arbitration panel established a land value of $470 per square foot and, while the rate of return currently remains at issue in the case, the new rent will be at least $3,522,000 per year.
Further compounding the problem, most ground leases (including the one in the foregoing example) provide that rent is to be recalculated every 10 years after the date of initial recalculation. This type of provision may effectively preclude long-term financing or significant capital investment in properties because lenders and investors cannot calculate future ground rent with any degree of certainty.
Potential investors in Hawaiian hotel projects must also carefully consider a variety of employment related issues. Not only are hotel employees often unionized in Hawaii but investors acquiring hotels in Hawaii must take care to comply with both the federal WARN Act and the state plant closure laws. For example, unlike the WARN Act (which permits the transfer of ownership of a hotel within the 60-day notice period without penalty if the buyer employs the employees on the same terms and conditions that they enjoyed prior to the transfer of ownership, Hawaii law provides for stiff penalties if the transfer of ownership occurs within 45 days after notice of the impending transfer is given even if the employees are reemployed as permitted under federal law.
With respect to development (especially beachfront) projects, investors may confront the legal quagmire involving the rights of owners of property and need to protect and preserve historical and cultural sites and to protect the exercise of customary and traditional rights of Native Hawaiians. Although these issues were addressed as recently as 1995 by the Hawaii Supreme Court in Public Access Shoreline Hawaii v. Hawaii County Planning Commission, the recent judicial trend of expansion of the meaning and protection afforded to Native Hawaiian rights makes any development in an area that has arguable cultural, historical or religious significance to Native Hawaiians extremely uncertain.
The following additional issues should also be considered by potential investors and/or their legal counsel:
- Hawaii has a general excise tax of 4% on all "gross receipts" in addition to typical transient occupancy taxes. In addition, Hawaii has .001% mortgage recording fee and a .001% conveyance tax.
- Any development of governmental lands, including redevelopment projects, may raise issues involving claims of Native Hawaiians to the applicable property that could delay or impede the project.
- Investors considering purchasing a note secured by real property should be aware that foreclosures in Hawaii are done judicially, and often take a year or longer where the security is a significant commercial property.
- Buyers should be very careful to review all zoning restrictions applicable to the ownership and operation of the resort. Always ask for copies of what is known as the "SMA (Shoreline Management Area) permit" for the property. One can generally easily obtain a "County Confirmation of Zoning (TS-7)" on an over-the-counter basis.
- Always be sure to obtain a "Tax Clearance Certificate" from the Hawaii Department of Taxation pursuant to Hawaii Revised Statutes, Section 327-43, as amended, on a date as close to the closing date as possible, certifying that all taxes due the State of Hawaii from the seller up to and including the closing date, have been paid.
- When obtaining a liquor license for a hotel in Hawaii, the manager of the hotel (rather than the owner) is typically licensed. Be aware that certain Hawaiian liquor authorities are unwilling to transfer a license more than once every 12 months; therefore, be sure to arrange the transfer of liquor licenses in a manner that will avoid, for example, a back-to-back transfer.
- Many hotels in Hawaii are connected to private sewage systems of which the owner of the hotel may or may not own a part. Ownership is often in the form of stock and buyers should be very careful to acquire the stock concurrent with the transfer of the real estate.