 Hey, it's a pop-up edition of Kondo Insider here on a given Monday morning, and I'm Jay Feidele, and I'm here with Jane Sugimura, who is the true host of Kondo Insider, who called her today special host guest. Hi, Jane. Hi, Jane. What we want to talk about today is something that is not necessarily discussed on Kondo Insider, and it's the history of Kondo's in Hawaii, and the history of Leesold, which is kind of integrated, wedded. The history of those two things, they're integrated together. They're part of the same ball of wax. And so in the first part of our show, we'll talk about the history of the model of Kondo's. The second part of our show, we'll talk about Leesold, which is not popular anymore, but it's still around. And it's coming back. And coming back. Oh, okay. All right, let's talk about the history of Kondo's. Kondo's was an idea, Hawaii was one of the first places that did Kondo's, and the years I remember for the horizontal property regime statute, now codified in Chapter 514A. 514A was repealed effective the beginning of this year. Oh my goodness. Yes. You're going to have to straighten me out. So now it's 514D. Now it's 514D. Is that same effect? Right. So 1960 was the year it was just looking back, it was one year after statehood, one year after statehood, and the state of Hawaii came up with this idea. It has had a profound effect, a hugely profound effect on real estate in Hawaii and housing in Hawaii, don't you think? It has because it's offered people an alternative housing, and in Hawaii, where land is very scarce and very valuable and expensive, that seems like the economic and efficient way to go is to go upward. It seemed then anyway a really good fresh idea, and Hawaii was one of the first states to adopt such a statute with a horizontal property regime, which was both horizontal and vertical and all that, and it changed the real estate industry for sure, it changed brokering, it changed the marketplace, valuations, it changed the opportunities for a buyer, and for that matter a seller, because it was much easier to buy, much easier to sell, a condo unit, no? Yes, it was. And so it was at the same time imperfect, wasn't it, because we didn't have that much experience with it, and in those days, as I remember, the people who lived in condos were the owners of the condos. Things were owner occupied, in fact, you got a better price if you were owner occupant, I don't know if that's so today, and you know, my wife and I lived in condos for a few years, and gee whiz, it was like being in a community, in a family, because they all knew each other, and they were all owner occupants, yeah? But somewhere along the line that changed, didn't it? It did, and I think it had something to do with the visitor industry, because I think the first, and I was not here, but I was told that there were Canadians who came, they were called snowbirds, and they bought units in Waikiki, that became very, very popular, and so you had these outsiders who would come and basically buy these units, and then the next wave would probably have been the Japanese in the 80s. You mentioned Waikiki, because I think Waikiki was one of the first places where condominiums were built and developed, and where they thrived, and before that time, Waikiki, a good part of Waikiki was called the jungle, back towards the zoo end of things, and it was a run-down area, it was even dangerous, it was shacks, there's still some left by the way, but that's where development was, and it was for visitors who wanted a piece of the rock, they could spend some money and have that, and they went like hotcakes, and the other area I recall was Moe, Ely, and Maikiki, especially Maikiki, small condos, the ones in Waikiki were bigger, the ones up the hill there were smaller, we're talking about, you know, half a dozen stories and, you know, not too many more units, and every man, every woman, Jack you could find, was developing one of these condos, and it was a, it didn't work well actually, there were a lot of fights among the partners, a lot of fights with the internal revenue service, how you set up limited partnerships to develop these projects, it was the wild west, wasn't it? Yes, and in fact a lot of the earlier condominiums were diesel. Right, which is another part of the story, so if we look back to 1960 and we see the number of lawyers writing condominium documents in the state, it would be just a handful. Hiroshi Sakai, remember him, he was one of the guys, one of the guys who actually started writing his papers, but as time went on it looked profitable, so other lawyers got involved, and they were experimenting, and sometimes their documents didn't work so well. Have you ever seen condo documents that didn't work so well, Jane? Yeah, I mean they didn't have the details that the modern declaration, in fact the way the statute is set up, the way you create a condominium is you prepare something called a declaration, and the declaration basically says what a condo is, I mean it's one tower with 300 units, and how big are the units, and how many parking spaces belong to each unit, and what are the common elements, and who takes care of what, and basically the declaration is a document that creates the condominium under the statute, and it's created by statute, so it's what we call, it's very specific, in other words if you go to court that your rights under the condominium are determined by the declaration and the bylaws, which are the governing documents based on the statute, because the whole concept of a condominium is created by law. This facilitated transactions, because it is very clear what you're getting and what you're giving when you sell, and it facilitated investment, facilitated escrow companies, they could do transactions very easily. It made for bank loans that could rely on those documents, and so you could get a bank loan much faster that way. The whole state was going to benefit by this. It sounded like a terrific idea, this is, you know, this is flapjacks over the place, and so I mean I suggest to you that we would not be the same state today if that statute had not been passed, and if the condominium form of doing business had not been established, but you know there were shortfalls to it. There were failures to envision the way a condominium project would work in the in the later years. We'll talk about, we'll talk about lease all in a minute, but you know they were all, they all had a shelf life, a termination date, because of the termination of the lease, but there were problems in dealing with that timeline. Yes, and in fact, in fact the earlier condo documents didn't have in it a provision about budget and reserves, and budget and reserves, you know, require condominiums to set aside money. In other words, the condominiums right now, and in the beginning, called for payment of maintenance fees. In other words, if you owned a unit, you paid like a monthly dues, and the monthly dues paid for the operating expenses of the condominium. The problem with those earlier condo documents is that there was nothing in it that required the building to set up reserves for major repairs. The building is brand new, right? Who knew that, who, you know, why would you be setting aside- You didn't know the useful life of that infrastructure. Right, a new roof are replacing the pipes, which is a big issue now 50 years after the buildings were constructed. Right now, replacing pipes in a building is commonplace. The problem with that is back when the these documents were created, there was no provision for budget and reserves. And we have to thank, you know, we have to thank for budget and reserves. Senator Macy Hirono. Interesting. Good for her. Back in the day, she was the house, I don't, she may have been conserved protection or housing in the house of representatives. And I can remember her calling me and saying, you know, I'm tired of getting the, I get these calls from people in Waikiki, you know, where the snowbirds are. And, and somebody buys a unit and they're assessed $10,000 for brand new roof. And it's she's, and, and they feel it's not fair. Why do I get assessed when I just bought this condo unit? It doesn't sound fair at all. It doesn't sound fair. But if you buy the unit and it's 15 years old and needs a new roof, then you have to pay your proportionate share. That's how the documents are set up. And so the only way the building can get that money is to specially assess you. Yeah, that was the only technique. That was the only technique. Yeah. And finally, if you didn't pay the assessment, you'd be foreclosed by the condominium association. And so, you know, so Macy, this happened like two or three years. And I was ahead of, right now, I was the lobbying, I was the legislative director for the Hawaii Council of Association of Parmentals. I am now the president of that organization. But back then I was a legislative person. And so Macy would pull me up and she'd beat me up every year. I'm getting more complaints. I want this to stop. And if you don't stop it, I am going to pass a law and you'll be sorry. And sure enough, she passed this law that require, and you know, some buildings, because they had business people who were managing it, voluntarily set up a budget and reserve system as part of their fiscal structure. But now we had a law. And then it took forever. But a lot of condos, you needed the law, they weren't going to do it. And then the UH had to set up a manual, you know, to instruct the condos how to do a budget and reserve, how to have a reserve specialist come in, figure out what components, what their useful life was, and how to figure out how to set aside a little bit of money every month, to pay for that roof in 20 years. And you know, so it's very sophisticated. It's very sophisticated. You know, you have a building, sometimes it's many tens of stories high. You have the roof, you have walls, you have leaks. And you have elevators, pipes, you have electrical. And you know, back then, pipes are supposed to last clay pipes are supposed to last 100 years. Now we find out we found out in the last five years, five or six years, that they don't last. They don't last 40 years. And then you put on top of that, the fact that these at least they started as owner occupant, where people, you know, had a kind of an emotional stake in their investment in their unit and in the relationships with other people. And as time went by, it became investors. And so the board, the nature of the boards changed from owner occupants to investor occupants. When Maisie was beating me up, her complaints are coming from Waikiki. And Waikiki, like I told you, were the snowbirds. They were the Canadians who came down there. And they bought these units and they would come down for vacation. They have their friends stay there while they were on vacation. These people were not interested in deferred maintenance, right? They just wanted a place to stay when they came for vacation for the part they didn't care. And they didn't care. And so and so if you had owner occupants, and you had, you know, people who, you know, cared about what was going to happen to their building, these are the people who voluntarily set up budget and reserves system is part of their minority group, a minority group. And until Maisie passed that law, condos were not required to do budget reserves position was the board of directors of a given of an average condo were clueless. Right. The people there were not professionals. They didn't have a clue on how you manage your property, how you do accounting, and, you know, establish reserves for a property, even how you fix a product or how you engage contractors to fix a property, nothing. And so they stumbled and bummeled around many of them. Then they would hire management companies who had no experience in this either. And the management companies would have a paid very well in my opinion, managing these multimillion dollar properties, no clue. So you had a board with no clue, a manager with no clue, and a building that was relentlessly deteriorating right in front of you. Right. This leads to a bad place. Yes. And, and, and people are feeling it now, 30, 40 years later, when they are faced with a situation where they, they're building leaks like a sieve and they had they hire an engineering company who says you have to replace your pipes. And there's no money in the reserves to pay for the replacement of the pipes, because nobody knew or had a clue that the pipes would deteriorate in 30, 40 years. We're talking about in money. I mean, you know, for example, it was a shock to me to find out that painting my condominium building would cost $300,000. Replacing pipes, I think one of the buildings of Pearl Ridge Condo and Gardens last maybe three years ago is $20 million. $20 million. Oh, wow. And so that's got to be paid by the owners. Right. And if you don't have the money in your reserves, the way the building, the association gets it is you do a special assessment. That's a big assessment per unit. You take the amount of $20 million and you divide it up among the people. And luckily, because the interest rates are so low, and condos are, you know, especially if you're, you have a high percentage of owner occupants, you're a good credit risk. And so the banks in town are just salivating to get that business. You know, the other thing, just to throw it in the, in the fire here, is that in the early days, and it's probably still continues, I know you see it in the paper all the time, is that the contractors who built the condo in the first place may have skipped on stuff. They may have done a bad job. And so there follows construction litigation. You know, it's almost as if every building that got built had some kind of construction litigation against the original developer and contractor. And the board has got, and the manager, they got to be Akamai enough to know when to do that, how to do that, how to pay the legal expenses, and how to manage the settlement issues. And it's very complicated for a board that's not sophisticated. This happened in really most condominiums you can think of. And it's still happening now. I mean, they're talking about Kakaako and the building boom. And what's going to happen, follow the building boom are the construction defect cases. And in about 10 years ago, the contractors went to the legislature and they said, they said, oh, you know, we just can't take, you know, fighting with the condos with the condo because you're talking a huge problem, millions of millions sometimes. Right, kind of fix the the defect. And so there's got to be a better way. And it's very expensive. So now they, you know, the law has changed so that if it's a condominium, and it's a construction defect case, you've got to go through mediation and arbitration. You don't go to litigation because that becomes complex litigation, right? And it's very expensive and time consuming. It goes on for years. Yeah. When we come back from this break, I want to ask Jane about comparing condos with co-ops. It's a different art form, a different business form, different real estate ownership form. It started around the same time in the 60s. And where that has gone relative to, in comparison with condos, I also want to talk to her about her favorite subject. Not only is Jane the president of the Hawaii Council Association of Apartment Owners, but she's been that for a long time. And she's also the one person in the state of Hawaii who knows more and was more heavily involved in the leasehold initiative here. She's a living treasure in that regard, okay? We come back, we're going to find out why. Whoo! We'll be right back. Aloha. I'm Wendy Lowe and I'm coming to you every other Tuesday at two o'clock live from Think Tech, Hawaii and on our show, we talk about taking your health back. And what does that mean? It means mind, body and soul. Anything you can do that makes your body healthier and happier is what we're going to be talking about. Whether it's spiritual health, mental health, fascia health, beautiful smile health, whatever it means, let's take healthy back. Aloha. Aloha. I'm Warren Pear, a host here at Think Tech, Hawaii, a digital media company serving the people of Hawaii. We provide a video platform for citizen journalists to raise public awareness in Hawaii. We are Hawaii nonprofit that depends on the generosity of its supporters to keep on going. We'd be grateful if you go to ThinkTechHawaii.com and make a donation to support us now. Thanks so much. We're back on Kondo Insider with Jane Sougimura who is the true host. Today she's a host guest of Kondo Insider. We're talking about a little history for Kondo's and Leesol. We're going to get to Leesol in a second, I promise. But co-ops, no discussion of Kondo's without, could be complete without comparing them to co-ops. What's the deal on co-ops? Co-ops are the form of ownership. It's a corporation and it's governed by, I think it's HRS 415, which is a corporation statute. And so the corporation has got shareholders. And so if you are a unit owner, you become a shareholder of the corporation and then you are given a proprietary lease. And the board of directors is just like a regular corporation. I mean the unit owners, you know, vote and you vote for board of directors and the board of directors runs the association, you know, the residential association. And there was talk, there's always talk about, because it's a different type, it's not subject to 514b or a. And we also have another statute for community associations, that's 421j. And so there have been talks about making one complete, one statute that would cover community associations, Kondo, condominiums and co-ops. And because there's something called common ownership residential units. Common denominator. Right. And there is a statute in California that we've looked at, but there's just, you know, too many divergent interests that we're not going to get everybody on the same page. We haven't been able to get a consensus to do that. But there has been discussions over the years to make one statute that that would govern all those three types of, you know, community associations. How are co-ops different, you know, in terms of living in them, buying and selling them, managing them? Well, you know, it is a residential association, but you're, it's like buying stock shares in a company. You're buying stock. And so when you sell it, you sell your stock. You sell your stock. Is it as marketable as a condo? I think it is in most situations, but you know, the difference between a condo and a co-op, and I don't know if the co-ops in Honolulu and in Hawaii still do this. And most of the, I think all the co-ops of this are here in Honolulu. Yeah, Waikiki. Yeah, Waikiki. They're not a lot of them. Yeah, on the Malkus side of Cuyo Avenue. And, but you know, with co-ops, they have to approve, the board has to approve of you as a buyer. That does not exist in the condo model. No, no. Anybody can buy into it. So that's slightly offensive and it, I mean, because you never know what the reason is. Even if they say it's one reason, it could be another reason. Well, but the other, the other thing that bothers me about it is it, it hampers the free transferability sale of your interest in the co-op. Well, it's just one additional step that is not, I mean, you have to be approved by the board. Yeah. And so you have to basically apply and you bit, you're interviewed, and if they say you're okay, then... It's not the way out, it's nobody's doing it anymore. Are there any developers actually developing co-ops these days? I don't think so. And I don't think they've done that. I mean, I don't think any developer's done that in many decades. It's a, it's a handful of them. They're in Waikiki. If they were smart, they would convert it into a condo somehow. And they can. They can do that. They can convert. I've heard of them doing that. Yeah, okay. All right, so moving on to the main subject of this part of our show, leasehold. You were instrumental in developing the Hawaii leasehold conversion ordinance, was it? Back when you worked night and day on having that happen? I don't, yeah, I can't say that I was instrumental because there was a bunch of us and it was a group called the Holly Coalition and we were, we kind of modeled it on something called the Baltimore Act, you know, which converted the leasehold in Baltimore so that people who lived in leasehold property could buy their fee. Now until that, and that, it's an ordinance, right? It was an ordinance. Until that ordinance, a leasehold tenant, a long-term leasehold tenant, had no right to buy the fee under his property, right? Right. I mean, he was completely shut out from that unless he, he had a really terrific relationship with the fee owner, which was usually not the case, and he couldn't do it. It was not an option. Well, in Hawaii there was something called the Land Reform Act, and the Land Reform Act, because there were leasehold residential single-family residences owned by Bishop estate, and that case went all the way up to the Supreme Court. That was in the 50s and 60s, and in that case, you know, the Supreme Court held that a person owning their home was a public purpose, and for that the state could condemn. And that, before the ordinance ever happened. Right. And so that's what we were modeling our idea. We figured, you know, if single-family homeowners could buy their leasehold property, why couldn't condominiums? And we were told, we were different. You know, you're different. I mean, with a single-family homeowner, you're talking about one home. But when you're talking about, you know, condominiums, you're talking about 300 families, or 600 families, or 100 families. The bottom line is they didn't want to sell it to you. Right. They didn't want to sell it to us. It was better economically for them to hold on through it and collect a lease rent. And two, they argued that with the single-family homes, there was the court found that it was an oligarchy, which was a single landowner that owned the fee. With condominiums, you had small landowners, and small landowners, and to give you an example, Discovery Bay. Discovery Bay basically where that building is now, there were five homeowners. Okay. And so the developer goes to the five homeowners and says, give us a lease for your land, and you know, after 50 years you'll get it back. That was the deal. And so they signed off on it. And I think Bank of Hawaii became the trustee for the lessees and the developer built Discovery Bay. I think it's 600 units. This creates a big problem when you're trying to buy the fee out. Right. Because it's a patchwork of fee owners under the leasehold condo. Right. And so that's the one, and Yacht Harbor Tower was three, three, three Robinson trusts, and I can't remember. And you know, so there's a lot of, especially in Waikiki, I mean, Waikiki. Waikiki. There were lots of, in fact, all the condos in Waikiki were these small landowners, and the developer would come to them and say, give us your land, and you know, we're going to make it worth your while. Yeah, we'll make it worth your while. We're going to build this condo, and 50 years from now you get it back. And you get lease rent the whole time. Right. What a sweet deal. Right. You know, the truth, though, is looking back down the road, Jane, from all that you know, wouldn't it have been better when they established the condominium statute in the first place to say it's only fee? You can't have this patchwork because there's too many unknown problems that come back to bite everyone if you make it a patchwork, if you make it lease home. Just sell out the fee. No, it's not in the condominium statute. And you know, the back then, the argument or the pitch was that most people can't afford to own a home in Hawaii. But if you take a leasehold property, which is not fee, that eventually goes back to the fee owner, we can sell it for cheaper. Right. Oh, this is like an installment sale. Right. You pay less now and you have unknown problems later. Right. And it's good for the people who buy in the beginning. And they can spin it, right? They can sell it off and it's not their problem anymore, you know, the next fool theory. But then it catches up to you at some point. Yes, it catches up to you because the lease has got a provision in there that says that after 25 years there's a rent renegotiation. The problem is if you bought the leasehold property before the leasehold disclosure law was passed in 1991, which most affected most people because the condominiums are built in the 60s. And the leasehold disclosure law didn't come into effect until 1991 after the fight had already started because that's when the fee owners would be giving their rent renegotiation proposals to the leasehold, lesseys, and it was like, oh my god, who, we never knew that our lease rent would go from something like, you know, $500 a year to $1,500 a year. Multiple's a multiple. I remember that whole period of time and it's just still possible that would happen too. And that's when they found out that not only do you have rent renegotiation, now you've got to pay a lot more for your leasehold property, it's going to be harder to sell the closer you get to the end of the fee, the lenders won't lend money unless you have 20 to 30 years fixed. And so when you get to that time where there's not 25 years left on the lease, the lenders won't give your purchaser a mortgage to buy your leasehold unit. And that's why it's so important, it was so important to have a conversion. That started the dispute way back then because people finally, well that led to the leasehold disclosure law that says when you with leasehold, if you have leasehold property, when you sell it, you need to tell people what the underlying lease says. You have to give the rent renegotiation dates, the reopening dates, and the formula on how you determine. Yeah, but you know what, some people just never look at that, they say well I'm not going to worry about that, I want to sell it out more than before that. With the leasehold disclosure, it, well the funny thing about the leasehold disclosure, when it passed, it didn't get implemented for almost three years, you know why? The realtors hated it because they said it was going to kill the market. Well, it would certainly slow the market down if people read it and became concerned. You know, Jane, this is a fabulous discussion. You know, there aren't many people really in the state of Hawaii who've been through it the way you have, who've seen it evolve, who's seen the pits and falls, and who've seen people get burned, and who've seen the need for changes. And we still have a huge need for change now. It's an ongoing thing, but you know, you should write a book, or at the very least, you should cover this on your condo insider show on a regular basis. It is so rich, it is interwoven with our history economically, our culturally, socially. Especially now since the state of Hawaii has got a bill in the legislature calling for leasehold, you know, taking state land and doing leasehold sales for affordable housing, 50-year leases. We'd better be really smart about that. And it's like, haven't they, don't they realize that, you know, it's, it's, it might be a good thing now, but what happens 25 years into the program? You gotta look 25 years down the road and figure it out so it doesn't burn anybody. Right. Anyway, Jane Sugimura, thank you very much for coming down. You are the original host of condo insider. We sure appreciate this special show with you. Thank you. Mahalo.