 Welcome to Inside Hawai'i Real Estate, a show dedicated to providing up-to-date information used to Hawai'i home buyers, homeowners, and investors. I'm Will Tanaka with my co-host, business partner, and wife, Leone Lab, a realtor with over 20 years of experience in various leadership roles in the Hawai'i real estate industry. Thanks, Will. Will is a full-time realtor with a background as a lawyer, and he was the former head of a Hawai'i title and astral company, and we work as a team to keep you informed about the latest in Hawai'i real estate. And did you know that over the last four decades, our guest today, Mitch Umanaka, has done significant work. He is considered to be an iconic real estate attorney, and he also happens to be an amazing person, has been and fathered to two very successful sons. And our focus today is going to be talking with Mitch Umanaka about affordable housing in Hawai'i. Welcome, Mitch. Hi, Leone. Hi, Will. Hi. Good to see you guys. Yeah, welcome, Mitch. And, you know, what an honor, and we're so grateful to have you on our show because when it comes to real estate law, you have the highest regard by attorneys, clients, and the public. But, you know, for the viewers who are just getting to know Mitch, you know, he obtained his law degree from the Georgetown University Law Center. He's a co-editor of Hawai'i Real Estate Law Manual, and I still refer to that manual, so thank you, Mitch. And, you know, when you think about the go-to attorney, the expert attorney, the lawyer, for condo development, time shares, affordable housing, Mitch Umanaka, and, you know, not only is he recognized leader in Hawai'i Real Estate Law, but his nationwide, his company and he himself won the Member of Company of the Year by NAIYOK, the National Commercial and Real Estate Development Association. And, you know what, I think you're just global, Mitch, because, you know, you have clients Hilton, Marriott, so you're just international. And, you know, as to that, Mitch has also been a Hawai'i Real Estate Commissioner and an adjunct professor at the U.H. Rutgerson School of Law, and he has been an advisor to the state of Hawai'i on matters with subdivisions and time shares. And so regarding affordable housing, Mitch reminded us that the issue of not having enough affordable housing in Hawai'i has been an issue for many, many decades. And we hear about it on the news, and I remember Ian Tonghi even said in American Idol that his family had to move to the mainland because they were praised out of paradise. And so, Mitch, you've made significant impacts in supporting real estate developers, which are vital to increasing our supply because they build the affordable housing. And just wondering if you could please tell us more about your work in this area. Sure. Well, first of all, thanks very much to both of you for that very generous introduction. I really appreciate it. Affordable housing, as you point out, Leone, is not a new issue in Hawai'i. I can remember way back in the 80s. I think it was 1988. There was a mayoral campaign going on. And I was on a panel with, I think it was, let's see, Patsy Mink and Marilyn Bornhorst and Dennis O'Connor and a few other people. And the subject of the day was, guess what, affordable housing. So it's been a huge issue here in Hawai'i for many, many years, as long as I can remember. And it's an issue that persists and has reached a critical juncture, I think, right now in our state. How I was involved initially in the early 90s, I had the privilege of representing a company by the name of Nansi. They had purchased large parcels of land on the big island of Hawai'i. And that was in 1992. And guess what happened? They had big plans, but the Iraq war happened. And so there was no market for market rate units at that time. Everybody was very concerned about what was going to happen. And so they pivoted to do affordable housing to fulfill their entitlement requirements. So I was retained as counsel for them to help them through two large projects. I think we produced maybe four or 500 units in Waikaloa and in Kauai High using tax credits. So that was the first exposure to affordable housing in a meaningful way way back then. Flash forward to today, the firm was very fortunate in representing Sam Koo on the very first affordable 201H high-rise project on Kapiolani Boulevard called Kapiolani Residences. So it's been a long journey, a lot learned in between. And I think we're in a much better place today than we were back then, at least in terms of what the requirements are. That's great. And thank you for sharing us the history because affordable housing with the governor and it's always a hot topic. And let's talk about the median sales price on Oahu because for condos over 500,000 median sales price for single family homes over a million. And in terms of I mean, how serious is the housing crisis right now and how many units are needed? And I think we have a site for that as well. Yeah, I don't think it's any secret that we have a crisis. It's all over the media. Everybody's talking about it. And a lot of good people are trying to put their thinking caps on to try to figure out a good solution. I think a study done by DBED a few years ago said that we need as many as 26,000 rental units and 10,000 for sale units by 2025. And everybody has their own numbers. This is a study that was done by SMS for DBED at the time. But that's a huge number of units. I know that we've chipped away at that since 2020 and since the study was done. But we're still short of that number. We have a couple of years to go. We'll see if we hit it. Do you think that that number is still sort of, I mean, I'm sure it's valid, but because there's so many people leaving Hawaii, it was reported 15,000 people left Hawaii to move to somewhere that's more affordable just last year. So do you think that that number is still accurate today? That's a very good question, Leonie. And I guess I do for the reason that the demand is so high. It would take a much larger number of people leaving to leave us with enough housing for our people. So yes, it's a legitimate concern. And you know, when we're talking about affordable housing and there's so much information out there, and even for me, sometimes it could be overwhelming. And we hear a lot about the term AMI, Area Medium Income, as one of the eligibility for affordable income or affordable housing. Can you kind of unpack that a little bit for us and why it's important for families who are applying for affordable homes in Hawaii? Very well, that's a great question. Area Medium Income is simply put the income that a person or a group of people in a family make in any given year, and half of the people in Hawaii that are working, I suppose, make less than that. And the other half make more than that. So for a single individual, the AMI for Honolulu and each county is different. The federal government does this housing and urban development, does this and publishes it. For Honolulu, the AMI or Area Medium Income for a single person is about $113,000. What you see on your screen there is 140% of AMI, which is the maximum amount that someone can earn, a single individual can earn under guidelines published by HHFDC, which is the Hawaii Housing and Finance Development Corporation. So that is the number that they use as a maximum amount for a lot of their projects that they approve in Hawaii. I see. So for example, just going back to that slide, if it's one person, one individual making, so they could make up to $128,000 a year and still qualify for affordable housing potential. That's correct. I think that that's 2022 numbers, so it might be a little higher this year from 2023. So then in terms of, because it's above the median and then of course, there's a lower threshold, maybe 50 to 60,000, there's a lot of families with children that probably make that much total in order to afford. And that's always been a dilemma because you have to be in a certain price range because you also have to be able to afford the mortgage. So how do you, how does the government and the developers, how do you balance that out? Well, that's another good question. So there are people more qualified than me to tell you how that calculation is done. But the AMI is just a touchstone to tell you how much, up to how much you can earn in order to qualify for different levels of housing product. And so one interesting thing that your viewers should know is that the increase in interest rates, there's an inverse relationship between the increase in interest rates and the likely targeted about that someone can pay for quote unquote, affordable housing. So every time the rates go up, the purchase price, if you will, for an affordable unit actually goes down. And so that's something to keep in mind, in a high interest rate environment or higher, now we're experiencing that right now, what that means is that the amount of someone can sell the unit at is actually at a lower price level. And I can't get into the details, it's very complex, but there are tables that are published that will tell you precisely how much, given what the AMI requirement is at a different interest rate, you can charge for an affordable unit. The federal government publishes that every year. And then I guess for the affordable housing, there's requirements that are involved in being able to qualify for an affordable housing unit. And then maybe you can kind of walk us through some of those requirements, like for example, do we have to be a first-time home buyer to qualify for an affordable unit? Yeah, that's another good question. There are lots of requirements that government uses to qualify people. But being a first-time home buyer is not one of those. So you don't have to be a first-time home buyer. You cannot currently own other real estate, that's a dwelling unit as an example. And I think for the city's purposes and each governmental entity has its own specific requirements, by the way. So at the city level, you cannot have owned real estate in the three years prior to your application. That's one of their qualifying requirements. But yeah, if you put the others up, you have to be a Hawaii resident. Let's see, yeah, U.S. citizen or permanent resident alien, 18 years of age. Yeah, you need to physically reside in the unit and obviously have enough income to qualify. And then, you know, in those situations, let's say that they're somewhere within the AMI, but they can't afford to get that mortgage. Can family members help out and still qualify? If they can qualify on their own? Family members often do get involved. As an example, you know, there may be a down payment requirement for the acquisition of the unit and they're able to gift a down payment. That's just one example of how a family member can help another acquire a unit, assuming that they don't have the down payment to acquire it. Yeah. And then, so when people are applying to buy these affordable units, it's really, I think the programs are in place so that they're able to get into the housing game, right? At a, maybe at a price that's more affordable. So the question kind of goes towards, I've heard of a lot of these affordable units or projects having shared appreciation. And so I was wondering if you could kind of explain to us, what is shared appreciation and do you think that's a good thing, you know? Yeah, that's another good, you're asking great questions, by the way. You know, shared appreciation can be defined as the government entity sharing in any appreciation that occurs after someone acquires a unit in that unit. So, and I think to your last question, I think it's very fair because the buyer of that unit is actually buying that unit at a price that is below market rate, okay? So, you know, the government entity, whether it's HHGFDC or HCDA or the city, you know, should share in any appreciation that occurs because they're subsidizing the acquisition. So they have an investment in that unit, if you will, that you're buying. So as an example, you know, if someone is buying a unit, say at a $500,000 level and the market value of that unit when they acquire it is actually 600,000, government is subsidizing $100,000 of that purchase by that particular buyer. And how shared appreciation works is you take the market value and you subtract the purchase price of the unit and you divide it by the purchase price, the base price of that unit. So you come up with a fraction that's applied against any gain that's realized on the sale of the unit. So as an example, 600,000 and the original price was 500,000 that you bought it at and the base price, let's say it's 500,000 just for calculation purposes. It comes out to one-fifth, so upon a sale of the property, if they're selling it at a million dollars or whatever it is and you gain half a million dollars, one-fifth of that goes back to the government. And it's a good thing because the government uses that money to flow right back in to creating more affordable housing. So I think it works from just a logic standpoint and it certainly helps and it will help even more because there's a lot of affordable housing now being built in certain areas of Honolulu as an example. And when those start to sell and a shared appreciation kicks in, you're gonna have more funds flow into the funds that are available to build more affordable housing. So it's kind of creating like the sustainable sort of system and it just kind of re-exuses every time so that it can create more opportunities for other people. That's the concept basically. That's right, exactly right. And so for shared appreciation, that never goes away. That never expires even if the homeowners are in there for like 20 years, right? Right. Okay, and then just kind of along the same lines, there's like a buyback provision where applicants or homeowners for affordable housing, they have to stay in for a certain amount of time between I've heard anywhere from two to 10 years possibly. Yes, different agencies, again, HCDA has two, five and 10 year restrictions and HHFDC has 10 year restriction and the city has their own chart. So depending on how long you commit the unit for in terms of affordable housing, it just depends on how long that obligation is and that it's tied to the percentage of units that are created at any particular project. But yeah, that's kind of how that works and so if there is a sale or if someone wants to sell the unit or dispose of it in some way, then the governmental entity will usually have a right of first refusal, if you will, they have the right to purchase it from that buyer and if not, in some cases, a nonprofit entity will have that opportunity. So that's another way that government protects that unit from becoming a market rate unit, if you will. Yeah. Can you see me? Okay, so just to kind of combine the two topics about shared appreciation and the buyback provisions. So let's say there was a 10 year buyback hold and in five years in your example, they bought it at $500,000 balloon to a million dollars but they're selling it a year of five. They still have five years remaining. So they can't try to take advantage of that gain. They would have to sell it back at what they bought it for or at least just so that they can't take advantage of the huge gain that they would otherwise have. I think it's that plus the value of any improvements plus I think it's 1% a year and you got to do that calculation to figure out what that amount is. Yeah. Learning so much here, Mitch. And then switching gears to developers. So there's definitely a pressing demand for affordable housing in Hawaii and of course we need the active participation of the developers. So beyond that philanthropic perspective, what kind of incentives encourages developers to help engage in construction of affordable homes? Yeah, that's a great question. Developers are always engrossed as they should be in their performance. It's all about making the numbers work and pencil because if they're gonna lose money when they build something, they might wanna do it themselves by the way but no one else is gonna let them do it because they're not gonna be able to convince a lender to give them money unless they're actually making some money on the deal. It's just too risky for the banks to finance that because the banks are not, although the banks are highly philanthropic in our community, they're not philanthropic to that degree where they will give money to build affordable housing. So ultimately, it's really the lender's money that's on the line at risk as well as the developer's equity if any. But yeah, so you really need to make sure that the numbers work. So bottom line, there are opportunities and Hawaii Revised Statutes chapter 201H gives government a great opportunity to lift some of the heavy financial burdens that a developer faces in trying to make the numbers work. As an example, there's their opportunities to lift parking requirements. Creating parking stalls is a huge financial obligation. There are opportunities to increase density, to increase height, to enable the developer to create more units, perhaps encroach on certain setback requirements to gain the advantage of not paying the general excise tax which is huge, especially on Oahu at 4.6, whatever that number is percent. And by the way, that flows through all the way to the consultants working on the project. So that can make a huge financial difference in terms of whether someone can make a project financially viable and therefore, financeable. Because under 201H, so I hear the different percentages like when you're constructing even a condo development for example, maybe 20% of the units are required to be affordable housing, up to 50%. Yeah, so under 201H, you need to build about 50% plus one of all of the units in the project have to be affordable, and that would be up to 140% of AMI or below, and with regard to city requirements if you're doing a city project, you don't have the benefit of 201H unless you specifically apply to get that designation from HHFTC, but the city's affordable requirement and touchstone is up to 120% of AMI. And as we're kind of winding down, I wanted to quickly just touch upon the department of Hawaiian homelands if that's okay. So I know they give direct benefits to Native Hawaiians by providing 99 year leases, homestead leases for a dollar per year. And but there's a long waiting line or waiting list and land is limited. What other affordable housing opportunities does THHL provide for Native Hawaiians? That's been in the media quite a lot recently because the Department of Hawaiian homelands, THHL, is getting $600 billion to expand on affordable housing and creating affordable housing. So it could, if it's handled properly, take a lot of beneficiaries off the list. I think there are about 29,000 beneficiaries on the list right now. The new director, Kali Watson, is very excited about the opportunity to reduce that number, obviously. One opportunity I know that the director is currently looking at is a rent-to-own option where traditionally under THHL leases, it's just all about rental. And at the end of the term, you have to give back the property, basically. Under this new model specifically for condo projects, as an example, at the end of the term, the tenant would have the opportunity to acquire the unit as an owner. So they would actually have equity in the property going forward. So the details have to be worked out, but I understand the department is moving in that direction. And I think it creates a great opportunity for people who qualify as beneficiaries to create equity that they wouldn't otherwise have if they were mere renters under a 99-year lease. So it's an exciting new thought that director Watson is looking at very seriously. No, I think that's great. And I feel like this could be a whole series, Mitch, because we've learned so much already within this half an hour. And I feel like there's so much more to talk about. So in terms of, I mean, how do people reach you, first of all, if they could reach you directly or through someone else? And what would be the last message that you wanna leave for our viewers? Thanks. Well, today with Google and everything, just Google and you'll find me. I'm always reachable and available, but a message I guess is, let's not give up hope as a community. We have the smarts to do it. We have now the political will to do it, I think. And we have the financial resources to do it, and we have good people trying to solve for this vexing issue. So let's give it a chance and let's work hard toward that end. It's always discouraging to me when I hear negative comments about what's going on or why we can't do something. I think as a community, we really need to say, hey, we can, we can do it. And let's get our minds around that and move forward. So anyway, just my two cents. Well, I think you've exemplified the can because of all of the hard work that you've done. We're just so grateful for you and for the time that you spent with us. And I do agree with Will that this could be an entire series, so hopefully we'll join us again soon. Well, thanks Will and Leonie, it was a lot of fun. I appreciate the opportunity. Thank you so much, Mitch. Really appreciate you. Thank you, Mitch. Aloha. Aloha. Thank you so much for watching Think Tech Hawaii. If you like what we do, please click the like and subscribe button on YouTube. You can also follow us on Facebook, Instagram and LinkedIn. Check out our website, thinktechhawaii.com. Mahalo.