 Inside Hawaii real estate, I show dedicated to providing up to the information used to Hawaii home buyers, sellers, and investors. I'm with my co-host, business partner and wife, Leonie Lam, a realtor with over 20 years of experience in various leadership roles in the Hawaii real estate industry. Thanks, Will. Will is a lawyer and also was the former head of a Hawaii title and escort company. And now we work together as a team to bring you the latest in Hawaii real estate. All right. And, you know, in terms of the interest rates, you know, today is actually below 7%, conforming rates 6.75%. So it's a really positive news for both buyers and sellers looking at Hawaii real estate. And today we have a very special guest, Richard Emery, a colleague of ours on Think Tech Hawaii, is also a real estate commissioner. Hawaii real estate commissioner, principal broker of Hawaii First Realty, vice president of Hawaii Affairs for Associate Hawaii out of their corporate office. And did you know he's also an expert witness and instructor for continuing education classes for realtors. Wow. So today is all about the future of condo ownership. So we're going to talk about the future maintenance fees, reserve studies, and affordable housing in condos. Welcome, Richard. Welcome, Richard. Both of you. Nice to see you both again. Thank you for inviting me. Thank you so much for being with us. And Richard, you do such a fantastic job with educating realtors and the real estate community. And so based on your current courses, I just was wondering, what are the key trends that we should know about in Hawaii real estate? And what about the legislation, legislation and everything like that? Can you kind of give us some ideas of what you're seeing or what you're teaching? Well, with regard to the legislation, we see our legislators always interested in more consumer protection. So you see new laws passed every year that fine tune or add consumer protection requirements for buyers of real estate and or condominium association boards, whatever they may be. So you're seeing a lot more consumer protection driven. And today, more of the this past year in 2023, we had about 70 bills introduced affecting condo associations. Only four or five pass, but every year they're trying to tweak the consumer protection side of this. And so we saw some major shifts in legislation this year with regard to condo association particularly. What can you tell us more about the major shifts that we saw or that we're going to be seeing? Well, you know, there were several, I'm going to call them major events in the last couple of years. We all heard about the Florida condominium Champaign Towers West or South, I think it is, that collapsed, you know, and people lost their lives on top of that, lost their homes and they had mortgages. That's another story. Well, then on top of that, we've read in the paper here locally of several larger condominium towers where they've had major multi-million dollar assessments that were not planned for resulting in major assessments, special assessments to the homeowners of up to $50,000 per unit. And so, you know, we had a reserve law adopted in 1992. So how can that happen if you're doing your reserves correctly? So the laws we've seen have been impacted was to bring our budget reserve studies side more in line with national standards. And number two, a greater emphasis on disclosure, which is our core classes, your disclosure, disclosure, disclosure. And more requirements for associations to disclose more in summaries in the budget when they distribute it to the homeowners or potential buyers. So a lot more emphasis on the reserves and the financial situation of the association. Well, that's good news. Well, you know, Richard, you know, you had mentioned that there's over 2000, like 2073 condos in the entire state of Hawaii. Over 400,000 condo residents. And there's millions and millions of dollars in special assessments. On average, maybe close to $300,000 in special assessments per condo. And I think you had mentioned on one of the slides, there's, you know, of course, residential, multi-zone, commercial, I mean, just a whole myriads of types of condos. So when it, you know, when you're talking about $600 million in special assessments, what type of assessments are we really talking about with these buildings? Well, probably the correct term would be regular assessment. And that is the maintenance fees that are charged on a monthly basis to the owners. I've never particularly liked the word maintenance fee because you get water sewer, you get insurance, you may have some of these cone shares level condominiums, cone shares and front desk services. So it's more of an operating fee, but over the decade, we've called it a maintenance fee, which kind of tells people it's for maintenance, which is not true. It's really an operating fee. The problem is when 514B, originally 514A was written, it really established a condominium as an organization. And as an organization, the legislature has a little power to change that contractual relationship between a board and the owners who are in the governing documents and the founding documents. The legislature can't interfere with private contracts. So you're kind of stuck with that, to live with that aspect of it. But these maintenance fees, you see, for some reason, my experience has been, boards have this thought. The third goal is to keep from raising maintenance fees. That's their purpose in life is not to raise maintenance fees. If they didn't do, if they do, they've done a bad job. But in logical perspective, under the law, a condominium budget is prepared on what we call a zero sum basis. That means you add up all the operating expenses, you add up what your reserves should be based on a reserve study, and you multiply it by a percentage of common interest. So that's what the maintenance fee is, or the operating fee, regular assessment under the law. But what happens if you underestimated the electricity? Electricity is $100,000 more this year. But where does the money come from? You didn't collect enough from everybody to do it. It comes typically because they don't fund the reserves because they're short money and they got to pay the electric bill, and they haven't been putting enough aside that they can fund the reserves per the reserve study. So what we're seeing is a problem in the industry is all this with these older buildings now is hitting the fan. That's a huge assessment for those associations that did not properly plan and put enough money aside. Richard, let me ask you, that's a great point in perspective. And in terms of these budgets and reserves and the financial aspect of it, is it the board members who's overseeing this? Is it the property managers who's actually ultimately responsible to make sure that each of the condo buildings have enough funds and they're looking 10, 20, maybe even 30 years out? Well, that's a good question. The short answer I always tell everybody is that in the end, the board is ultimately responsible for everything under the statute. They have the ultimate responsibility. They may hire lawyers or reserve specialists or property managers to guide them. But there's nothing the law says that the board has to listen to them. And so the board ultimately is responsible, but one of the standard of care for a board is relying professional advice. You can't stick your head in the sand because you know nothing about this topic and ignore what professionals are telling you. So I think the overall problem has been is that the boards just don't want to raise maintenance fees. They don't look at the true cost of what it costs to maintain a building. And they want to skimp on the budget saying, well, we'll make it work at a lesser amount than it's actual. If you take the one recently in the paper, which was I think one Archer Lane at $17 million was the assessment if I remember correctly. I have a database of all the reserve contributions of all the maintenance fees for most of the projects in Hawaii. You can take that one project and look at their comparison of maintenance fees with other like projects or similar projects. And they were paying per average unit about $200 a month less than similar projects in the state. Well, if you take $200 times 400 units times 15 years, there's the $17 million short, you know, around term. So I think at the end of the day, the board is ultimately responsible. But what's interesting in the current legislature 2023, they passed the law because under the current law, the board can do the reserve study themselves. They don't have to hire professionals. So the law was amended and changed the effect of 2023. Every board, not less than every three years has to have that reserve study, if not prepared by a certified professional independently reviewed for adequacy. Now the interesting thing about laws are you can say a board can say, okay, I'm going to go hire somebody to do that. And they can get the review and the board can then shrug his shoulders and said, thank you for the review review. I'm still not going to do that. So it's not a perfect world because under the national standards. And you may, I may have mentioned to you that I'm in the National Task Force Republic Policy and Reserve Studies. So the title is, it's a budgeting tool. It is not science. You don't go out and get engineers and architects to look at issues. It's kind of budgeting a cash flow to give you the best chance of having enough money when the money comes due. And if thoughtfully done, works out really well and you see associations not having major assessments and problems with the reserves. Richard, I'm so curious, like how did you get, how did you become so passionate about condominiums in Hawaii or real estate in Hawaii? Like how did it all begin? I had bills to pay. I needed a job. Now, it's, you know, it's interesting. I shouldn't say this probably, but I use this as kind of a joke because there are kind of many management, the top business with all the homeowners, the agendas, the private issues. You know, all the condos are different. There isn't one size fits all. So I got into the industry in 1992 and fell in love with it because I have a good ability to talk to people and bring common sense to the table. And that caused me to get more and more engaged in the various technical aspects. But the joke I use often is that, you know, two guys are talking and are looking at me and they're saying, you know, he's in condominium management. They're saying, no, not condominium management. And he looks so bright. And the other guy says, well, just remember that the speed of sound is slower than the speed of light. You know, but no, I am passionate about it because I feel the boards, even management companies today, don't have in all cases the technical expertise to understand the options. Even if you're underfunded reserves, there are choices today you can make to get yourself back on target without it being too punitive. You know, I have a condo project I do consulting for and they this year raise their maintenance fees 50%. Now, why would they raise it 50%. Well, prior to then the old board took honor and in fact they hadn't raised their maintenance fees in 10 years. And what do you think they did that a reserve contributions over 10 years because cost went up. They reduced the reserve contributions every year, every year. So this large project. At the end, before I got to be a consultant for 400 units was contributing on an annual basis $5 a month per unit towards reserves. Wow. I mean, that's horrible. So I think that we need to have more education with board members, more workshops, more solution based answers because it's solvable. I'm not going to say you don't have to raise fees because in that case they had a race fees 50%. You know, but they had 10 years of a free ride. You know, so I just think boards need more education. They need to understand that their fiduciary duty is to the association and the preserve and protect the assets and make the place a nice place for people to live. That's the equity portion of it. You know, as it pertains to the condo owner themselves when they are when an assessment's imposed, I mean, what are their choices really because what if they're not financially prepared to pay whatever assessment it is if it's, you know, 10s of thousands of dollars and what have you seen in that in those cases. Well, what I say to boards when we come across that, let's just say they have a $10,000 assessment per unit. And I mean, no disrespect by saying this. You have haves and have nots. Some they'll write you to check for 10 grand or they have the bank ability to just go borrow from a bank. But then you're going to have the have nots. So if you're assessing the amount of money you need and only 20% don't have the money. You're 20% is shorting and paying the vendor. So what are you going to do sets the other 80% the ballot to pay the vendor you have to pay the vendor. So we always promote a dual choice. One, approve a loan. Over you get up to 20 year amortization and maybe that's $100 a month. And those owners who want to pay the present value and not have the $100 a month for the loan can do so. So you give the house and have not the chance to keep their home and not be affected by that. So we promote loans and borrowing. If you build the concept correctly, we have present value payoff. So that owner sells this unit. The new buyer demands the present value be paid off at all sorts of self out over time. So we promote don't stick your head in the sand. Come to the financial plan. Because if the answer is $100 a month, you know, even that's a lot of money to some people, you still have to deal with it. And what I've been saying all along to the legislature just everything they do and they make these legislative mandates only make it harder for affordable housing because the money has to go to somebody if it goes to the association. And it all for me goes to the owner. So someone's got to pay for it. So we need better planning and better analysis of how this works. Not so bad really what you really turn looking where your choices are. Hey Richard. So, you know, in terms of perspective buyers looking at condos. So if you are a buyer now, you know, with all your knowledge and expertise. And, you know, you're looking through the condo documents and you're trying to get information. What would you be paying the most attention to? Good question. In July of 2023. Governor signed a new law that required seven specific disclosures in the condominium budget. I'm very familiar with it because I wrote it. And the problem is that people who are new time first time owners even long time owners. Don't understand these documents and they're usually about three or four inches thick and they don't know what to look for. So the new law that was adopted mandated. Beginning with all practical purposes 2024 was effective in 2023, but most condo budgets are calendar year mandated seven specific disclosure. And they were kind of as follows in short firm. Number one, how much money do you have in reserves? How much money did the reserve study say you're supposed to put in? Did you last year put that amount of money in the reserve study? If you did not, what is the impact on the future contribution? What does the reserve study future contributions show? Because you can do a reserve study that shows 10% increases in contributions every year. Not main list fees, but the reserve portion of the main list fees. And then you have to disclose all these future financial obligations that either weren't done in the prior year or need to be done next year. If the budget summary is included as required by law. That's the first thing I would look at at the seven things, which because you're really lit this test on the financial condition of the association and simple layman's language. Awesome. So definitely by 2024, we should see that sort of summary with the seven, seven things to look for within the condo docs that are like you said, three inches, three inches high in most cases. I'm hopeful the managing agents get engaged and the board get engaged in this because I'm telling you right now that mortgage companies going to be looking at reserves closer. And it'll be harder to get them. I know projects today can't get a mortgage because the reserves are such bad shape. And so you're going to see that aspect of it. I see often they do this expert work where new owners buy and there's a special assessment. And they sue the board and the managing agent saying your budget and your reserves, they didn't comply with the law. I mean, there was no identification that there's going to be a we're underfunded. They needed to have a special assessment the year after they bought in that particular unit. So you're going to see more and more lawsuits regarding that issue. And that's why I'm hopeful the managing agents take this mandatory budget disclosure and put the time and energy in to make it worthwhile because I think the industry is going to work itself. If we have the penalizing the board and say we're going to find the board $1,000 is not going to work. Nobody's going to serve on the board. You know, so you need to have more disclosure and that the mortgage companies and the banks and and the buyers affect the real estate values. And then things will start to write itself. My opinion anyway. So, you know, just those seven items that you discussed. I mean, I think that's really vital for any prospective buyers. So if if you see something like, okay, there's a big special assessment coming up or increase in maintenance fees of 20% or there's pending litigation. How do you view those items? I would look at what it says and determine how much it may not bother me that they have a loan and they're going to fix everything. I love the building and it's still affordable to me to pay the loan and the and the maintenance fees. So it may not bother me may make it more positive because they're fixing the building and taking care of it. Right. So I have to take each case separately and look at what what the report says, but the fact that it's a mandatory disclosure. There really is no excuse for a buyer not to read that one page or two pages depending on the complexity and understand fully what they're buying into with the financial future it's going to look like for that project. And I do a lot of consulting on reserve studies and and there's some good reserve studies out there and there's some very bad reserve studies. And I teach a CE class called understanding condo financial statements. It's written for licensees is not written for property managers. I think that's all the financial document pointing out the areas you should use a licensee should be aware of, but again, a licensee is not trained at this either they're not going to want to offer professional opinions on something. They can always say, I would talk to a reserve expert or this is what the document says, not opine on whether they agree with it or disagree with it. You know, but I think the more disclosure we can have the better off with the industry. You know, another part of your sort of the way that you're serving is I understand that you're a Hawaii real estate commissioner. Yes. Yes, and I'm wondering, can you just kind of generally just what what are the responsibilities of the Hawaii real estate commission. What is their function, what do they do, what do you do. Again, there's the staff, which is the real estate commission staff, which is the full time employees of the state, who really handle the operations on a day to day basis. The real estate commission is a part of the Department of Commerce and Consumer Affairs and everything I'm saying to you as an individual, I'm not speaking as a commissioner. So, when you look at that you have basically with the DCCA when it gets to licensing to agencies which are separate. One is called the regulated industry complaint office, which handles complaints for all licensees, whether it be a hairdresser use car dealer real estate licensee. And then you have the real estate commission, which sets the policies of the real estate under the laws and the statute. So what do we do as a commission. Well, first of all, we're approving those people who pass their tests and have qualified to be a licensee were approving their licenses in some cases because they have some prior legal baggage. We're giving them predeterminations that if they take the classes and pass them and they're not wasting their money, we would still approve them as a licensee because people get drunk driving violations, all sorts of things in the past. They don't want to spend the money for classes and if they aren't going to get approved because of whether they have to have the real estate commissions approval. Then we have matters where Rico has negotiated a settlement on a violation of the real estate law. They are handled by the real estate commission for approval. So we will have three or four cases a month where there's been some issue could be misrepresentation could be failed to keep the trust funds correct. There's a zillion of those where the Rico has negotiated a settlement and and and we approve the settlement. Now, if they're unable to agree upon a settlement Rico and and the licensee, they would actually go to a formal hearing before the real estate commission where you present your case and do depositions and and make arguments. We don't see that too often. Usually these things resolve themselves pretty quickly. People may not agree with all the resolutions, but there is a fairly significant penalty to a licensee for not following the law. You know, so that's kind of what we do. We approve CE classes. We approve core classes. We have subcommittees for condominiums and laws. We do lobbying into legislature and proposed laws and things like that. It's done by nine member commission. Some are from the public at large. Some are frienders. Some are licensees and from wide variety of brokerage firms. And they're pointed by the government by the Senate and the chair is appointed by the governor. Thank you for sharing about that because I think that's good to know, right? Not everybody knows about the real estate commission. And so you find it so eloquently. Thank you. And simply to understand. Well, it's interesting because it's a volunteer job. You don't get paid for it. And this is a three to six hour a month commitment. It has very regulated policies and procedures to public hearings and openness and sunshine, all kind of stuff. But you can aid the community and the licensees as a whole and the consumer protection by having people who are knowledgeable and not no conflict of interest trying to keep the industry safe and solid because in the real estate world, we have very few lawsuits on real estate matters compared to the other licensee type organization. So it says a lot about our training and our ethics and integrity. That's great to know. And you know, just kind of going back to the condo topic. Would you actually consider yourself an advocate for condo owners or for the associations? That's a great question because I'm an expert witness, right? Probably three out of four of my cases I represent condo owners. And one out of four I represent associations. I'm very proud of the fact you can take all my expert opinion and you'll never find I ever contradicted myself. I've been consistent on the four pillars of good governance and what, you know, either the owner is wrong or right or the board's wrong or right, but I advocate trying to get together and resolve the issue versus spend lots of money on legal fees. That's great to know. And, you know, from your perspective and, you know, especially for reviewers because today was jam packed and I mean you have so much knowledge to share. I mean, this could be like a five part series. You know, with that said, is there any last message that you want to share with our audience? The thing I say always to the audience is remember this. A condominium is a organization established by statute or by laws. As soon as you live or buy an economy and you're subject to statute and laws. And that means you have to give up certain rights. The appellate court recently ruled on a case that sometimes condo owners don't know they have to give up certain rights like on how they walk their dog or when they can. I do a wonderful class on rulemaking. Like, can you can a board keep you from flying or flying the American flag? That's quite an interesting one of my core cloud or my CE class. But the reality is we live in a condo. You have to give up certain rights and you're better off. You have a problem. Go sit down with your board and talk about it before you go and get angry and start using insults. You know, you're you're just so genuine and you can tell that you sincerely care about. All the areas of expertise that you have and we were just so appreciative that you came on inside Hawaii real estate to share your knowledge and we learned a lot. Well, thank you for inviting me. We wouldn't want to come back on another topic someday. But I have a passion for the industry and and we have a good industry, not that we don't have areas we can improve. But I think that was the national liaison for all the states for CAI Community Association Institute. Our laws are more robust and work into our protection than most any other state. The one thing all condos have in common Hawaii with every other state is a function on self governance. Well, thank you so much, Richard. We really appreciate all your time. Yep, I hope we get together sometime and talk story. Thank you. Thank you, Richard and Aloha. Aloha.