Quarterly Newsletter April - June 2021

 P R I N T   |  R E P L I C A The June median price for single-family homes was $979,000 (27.1% higher than June 2020) and for condos was $460,000 (9.1% higher than June 2020).  The number of single-family home sales rose 49.3% in June compared to last year and the number of condo sales soared 134% compared to the previous year.  The number of pending transactions increased by similar percentages for both single-family homes and condos.  More homeowners appear to be taking advantage of the seller’s market with the number of new single-family home listings rising 23% and new condo listings 31.1%.  The additional supply is still not enough to satisfy current demand requiring buyers to bid up prices.  There is only 1.2 months of single-family home supply and 2.1 months of condo supply.  Inventory nationwide is very tight and completing a standard 1031 Exchange can be risky when the 45-day identification requirement leaves little room for error.  You may consider a reverse 1031 Exchange to improve your odds of success.

 The University of Hawaii Economic Research Organization (UHERO) published its latest economic forecast and explained that the recovery is occurring quicker than previously anticipated.  Daily passenger numbers in June were about 80% of the daily visitor counts in June 2019.  International visitors will remain low until other countries improve their vaccination rates and recover from a spike in COVID-19 cases this spring.  The Hawaii economy is currently short of about 100,000 workers compared to 2019 and UHERO expects that it will take several years before the employment numbers reach levels last seen in February 2019.  UHERO points to ongoing virus concerns, and the need to supervise school children until schools reopen.  It did not mention the enhanced federal unemployment benefits as a factor even though the debate is occurring at the national level.  Hawaii’s strategy appears to be that it will keep the enhanced benefits in place until schools fully reopen, enabling previously working parents to return to the workforce.

A Mixed Plate of Talk Story

 The Honolulu Star Advertiser reported how the federal government has failed to compensate the Native Hawaiian population for 960 acres of land specified in the 1995 Hawaiian Home Lands Recovery Act and how Hawaii’s representatives supported legislation to circumvent the federal law in subsequent budget related legislation.  Hawaii Senators Daniel Inouye and Daniel Akaka, recognized for their legislative efforts to compensate Native Hawaiians for land taken from them over the years, voted for budget bills that enabled the circumvention and more recently, both current U.S. Senators from Hawaii have supported similar budget bill provisions.  The federal government has turned over about 900 of the 960 acres to the Native Hawaiians, however, the land has been used for industrial purposes instead of residential homesteads because of the location or poor condition of the property received so far.  Transactions recently occurred where excess lands were sold to nonprofits and a company that intends to develop hundreds of private sector homes instead of offering the acreage to the Department of Hawaiian Home Lands (DHHL).  The property had easy access to existing infrastructure to support homesteads versus the land that has been turned over so far.  There are currently about 11,000 Hawaiians who are seeking residential homesteads on Oahu, almost double the figure when the 1995 act was passed.  The United States Interior Department announced a month later that it will transfer 80 acres of federal land next to existing Ewa Beach neighborhoods to DHHL.  DHHL expects develop about 400 homes on the parcel which will make a very small dent in the 11,000 Native Hawaiian households on the waiting list.

Governor David Ige issued his 21^st emergency proclamation on 6/7/2021 extending the eviction moratorium through 8/6/2021.  The governor announced that he intends to end the eviction moratorium when this emergency proclamation expires since most struggling tenants should have had the opportunity to apply for financial relief and the tourism industry has started to recover.

The governor relaxed social distancing requirements further on July 8^th as the state estimated 60% of island residents will be fully vaccinated.  Fully vaccinated U.S. travelers flying domestically will be able to avoid Hawaii’s quarantine restrictions provided they upload their vaccination records to the state’s Safe Travels website and arrive with a hard copy of their vaccination records.  Indoor social events can consist of 25 people and outdoor social events can consist of 75 people.  Restaurants may increase seating capacity to 75% of their maximum capacity if they do not seat groups of more than 25 people indoors and 75 people outdoors.  Ige plans on dropping all restrictions once 70% of Hawaii residents are fully vaccinated.

 The State Department of Taxation announced that it already collected $4.1 million in back taxes owed by vacation rental operators and expects to collect $12 million by the end of the year as vacation rental platforms agree to share data with state officials.  The state claims that 5,100 of 7,300 hosts have not been paying GET or TAT even though it declined to name the platform.  The state has been mailing letters to the hosts regarding the back taxes owed.  The State of Hawaii Department of Taxation has a brochure concerning taxes associated with investment real estate that you can review by visiting the website, https://files.hawaii.gov/tax/legal/brochures/Res_RP_brochure.pdf.

Most owners of condos in 377 older Oahu high rises face expensive projects to make their buildings compliant with a fire safety requirement passed in 2018 in reaction to the Marco Polo fire in July 2017 that killed four people.  The law requires condominiums without automatic sprinkler systems to Pass a Life Safety Evaluation that reviews 17 areas of the building's construction and systems.  The Life Safety Assessments are due to the Honolulu Fire Department no later than Spring 2024 and 102 of the buildings have completed the assessments.  Only six of those buildings have passed and the other 96 face expensive projects to upgrade the building's fire protection systems or install automatic sprinkler systems.  Condominium owners in these buildings likely face assessments totaling thousands of dollars.

 Honolulu Police Department (HPD) Chief Susan Ballard announced her retirement by June 1^st after receiving a poor grade for her performance in 2020 including two reported areas that fell below expectations, leadership, and management.  It was the first time the HPD chief received a poor review.  Specific criticism included that Ballard “had a tendency to be dismissive and did not accept responsibility for concerns raised against the Department.  At times, Chief Ballard did not accept constructive criticism and, within the Department, berated others in the front of their peers.”  The evaluation cited the chief’s failure to take responsibility for the overtime abuse within HPD’s COVID-19 enforcement teams.  The commission gave Ballard 60 days to address the list of items in her performance improvement plan that started on 4/15/2021.  The police commission has started a nationwide search for Ballard’s replacement.  The Honolulu Police Commission unanimously selected 21-year veteran Rade Vanic as interim police chief.

 The Honolulu Authority for Rapid Transportation’s (HART) interim CEO, Lori Kahikina, appears to be cleaning HART’s house by firing almost half of the staff thereby eliminating redundancies and inefficiencies.  While union officials fret about the loss of institutional knowledge, the Honolulu Star Advertiser’s David Shapiro counters that HART’s institutional knowledge of failure should not be a concern.  Shapiro goes further by encouraging Kahikina to ignore the Federal Transit Authority (FTA) even if it means forfeiting federal funds because following the FTA’s rules has also resulted in failure.  Mayor Rick Blangiardi publicly announced that HART’s rail system may not continue to Ala Moana as originally planned due to the $3.5 billion budget gap.

 The Merrie Monarch competition, Hawaii’s premiere Hula event, took place from Thursday, June 24^th, through Saturday, June 26^th with no live audience this year.  The competition and festival were cancelled last year due to the pandemic related restrictions.  KFVE broadcasted the event from July 1^st through July 3^rd when the results were announced.  Fifteen halau (hula schools) from the Big Island, Kauai, Maui, and Oahu will compete along with seven Miss Aloha Hula soloists.  The competitors perform hula kahiko, dancing to historical chants, and hula auana, dancing to more contemporary Hawaiian songs.

 Kapiolani Community College (KCC) celebrates its 75th anniversary this year and has opened Phase 1 of KCC’s Culinary Institute and is working on Phase 2 on the former site of the Cannon Club, the officer’s club of the United States Army.  The Cannon Club opened in 1945 during World War II on the slopes of Diamond Head offering magnificent views of Waikiki and the Pacific Ocean.  Both military and their civilian guests would dress in their finest dress uniforms, suits, and dresses to dine there.  The original Cannon Club closed in 1997.  The lounge of the future restaurant at KCC will be named the Cannon Club in honor of the prior establishment.

 The University of Hawaii (UH) men’s volleyball player, Rado Parapunov, was named the Big West player of the year by the Big West for the second time in a row.  The 6’ 9” senior led the team to a #1 ranking through the regular season.  UH won the national championship in dominant fashion be sweeping conference rival University of California Santa Barbara 25-21, 25-18, 25-23 and national rival and #2 ranked Brigham Young University 25-21, 25-19, 25-16.

 Mary Lou Stott passed away Sunday, June 6^th, with Tracey at her side.  Mary Lou touched the lives of many people with her vibrant personality and cheerful manner.  She continued to inspire people long after she retired from Stott Real Estate, Inc. in 2014 and she will be sorely missed.

Odds & Ends

 Eviction Process Modification:  Governor David Ige signed a law modifying the eviction process for one year after the eviction moratorium ends.  The governor announced earlier that he will not extend the eviction moratorium past August 7^th.

 The law changes the eviction notice period (demand letter) to the tenant from five days to fifteen days.  The fifteen-day demand letter must contain the following information.

1. The name of the landlord or the landlord’s agent and the landlord’s or landlord’s agent’s contact information, including, if possible, phone number, electronic mail address, and mailing address; 
2. The address of the dwelling unit subject to the rental agreement; 
3. The name and contact information of each tenant, including, if possible, phone number, electronic mail address, and mailing address; 
4. The monthly rental rate of the dwelling unit; 
5. The current amount of the rent due as of the date of the notice, after applying all rent paid from all sources; 
6. Whether the landlord or landlord’s agent has applied for rental assistance or been contacted on behalf of the tenant by any agency providing rental assistance; 
7. That any rental assistance received by the landlord or landlord’s agent has been credited to the tenant’s amount due; 
8. That a copy of the fifteen-calendar day notice being provided to the tenant is also being provided to the mediation center to be identified by the landlord and, in accordance with subsection (c), in order for the mediation center to contact the landlord and tenant to attempt to schedule a mediation regarding the nonpayment of rent;
9. That the mediation center will provide proof to the landlord that the notice was received and provide confirmation of the scheduled date and time of mediation; 
10. That the landlord or landlord’s agent may file an action for summary possession if the rent due is not paid and if mediation is not scheduled within fifteen calendar days after the tenant’s receipt of the fifteen-calendar day notice, regardless of whether the scheduled mediation session occurs within the fifteen calendar days; 
11. If mediation is not scheduled within fifteen calendar days after receipt of the notice, regardless of whether the scheduled mediation session occurs within the fifteen-calendar day period, then the landlord may file an action for summary possession after the expiration of the fifteen-calendar day period. If mediation is scheduled before the expiration of the fifteen-calendar day period, regardless of whether the scheduled mediation session occurs within the fifteen calendar days, then the landlord shall only file an action for summary possession after the expiration of thirty calendar days following the tenant’s receipt of the fifteen-calendar day notice. If the fifteen-calendar day notice was mailed, receipt of notice shall be deemed to be two days after the date of the postmark. If the fifteen-calendar day notice was posted on the premises, receipt of notice shall be deemed to be the date of posting. If an agreement is reached before the filing of an action for summary possession, whether through mediation or otherwise, then the landlord shall not bring an action for summary possession against the tenant, except as provided in any agreement that may be reached. The landlord shall be required to note the status of the mediation or settlement effort and proof of sending or posting the fifteen-calendar day notice to the mediation center in the action for summary possession. 
12. Notice that the eviction may be subject to additional requirements and protections under state or federal law and that the tenant is encouraged to seek the tenant’s own legal advice regarding their rights and responsibilities; and 
13. That the landlord or landlord’s agent shall engage in mediation if mediation is scheduled.

The law also modifies the timeframe when the landlord can start the process by serving the tenant the fifteen-day demand letter based on how much past due rent the tenant owes.

• 4 months or more rent:       The landlord can start the process the day the moratorium ends.
• 3 months or more rent:       The landlord can start the process 31 days after the moratorium ends.
• 2 months or more rent:       The landlord can start the process 92 days after the moratorium ends.
• 1 month or more rent:         The landlord can start the process 153 days after the moratorium ends.

A list of mediation centers can be found at the following website:

www.courts.state.hi.us/services/alternative_dispute/mediation/community_mediation_centers

If a tenant schedules a mediation within the fifteen-day period, then the landlord must wait 30 days before filing a summary proceeding for possession of the property.  Both tenants and landlords are encouraged to seek legal counsel when eviction proceedings start.

 1031 Exchange – Mililani to Arizona & Florida:   This article is a brief case study describing how and why Stott Real Estate, Inc. recently helped Stott Property Management, LLC clients successfully complete a 1031 Exchange.  The client hired Stott Property Management, LLC roughly four years ago to manage a Mililani single-family home that they were renting out to a long-term tenant.  The previous property management company managed thousands of accounts and experienced a lot of employee turnover.  The clients’ previous property manager resigned, the clients were not notified of the change, and their phone calls and emails were not returned.  The townhouse was in good shape and quickly rented once the interior received new paint.

 The clients sold the Mililani townhouse and used the proceeds to buy a house in Jacksonville, FL and Tucson, AZ.  They decided to conduct the 1031 exchange for two reasons:

 The combined rent was about 45% higher than what they received for the Mililani townhouse (50% higher when Hawaii General Excise Tax is factored in).

There is no capital gains tax in Florida and the capital gains rate is 4.5% in Arizona compared to 7.25% in Hawaii.

 The clients plan on renting out the houses for at least three years.  They chose the locations because they are near military facilities and considered the rental markets to be ideal.

 Do you have equity in an Oahu second home or investment property that no longer serves its original purpose?  Please call or email if you would like to discuss how we can help you invest your Oahu equity into an investment property in another state that better achieves your real estate goals.

Property Management Guidance

 Background:  Stott Real Estate, Inc. sells residential real estate and its subsidiary, Stott Property Management, LLC (Stott PM), manages residential rental property.  The two companies have separate staffs and share the same office.  Tracey Stott Kelley is the principal broker of Stott Real Estate, Inc. and Tim Kelley is the principal broker of Stott PM.  Stott PM currently manages approximately 375 rental units on the island of Oahu.

 There are many superb property managers (PMs) on Oahu.  Any negative comments made in this article are not directed at PMs as a group.  That being said, many of our clients had previously used another PM before hiring us.  The article discusses common errors made by owners and/or their PMs.  The article is designed to help owners increase their rental income by learning from the mistakes of others.

 Absentee Owner Managing Property:  By far the biggest mistake that we witness on a regular basis is an owner trying to manage a rental property while living thousands of miles away.  The owner does not typically have a good understanding of the Landlord-Tenant Code (Hawaii’s laws governing residential real estate), must rely solely on the tenant to maintain the property, and does not have the time and resources to address problem tenants.  The attorney that we use for evictions states that most of the difficult and expensive legal problems that he is hired to help solve involve owners acting as a PM that are not familiar with the Landlord-Tenant Code and proper check-in/check-out procedures.  Tim Kelley and Tracey Stott Kelley do not even attempt to manage their mainland rental properties despite their years of experience.  They have two PMs managing their investment real estate portfolio.

 Additionally, The State of Hawaii requires an absentee owner to obtain an on-island representative to manage the property.  We have witnessed a number of knowledgeable tenants create expensive headaches for owners that have tried to manage a property themselves.

 Poor or Inadequate Tenant Screening:  The best way to deal with problem tenants is refusing to allow problem tenants to move into a property.  Stott PM requires every adult applicant to fill out an application and then checks the following:  Credit Score, Employment, and Previous Landlord References.  By carefully screening tenants, Stott PM helps minimize tenant caused problems and protects their clients from arbitrary discrimination complaints.  Failure to properly screen tenants can result in several months of lost rent and thousands in legal fees to correct the situation.

 Improper Check-ins and Check-outs:  The State of Hawaii requires a Tenant to return the property to the Landlord in the same condition that the property was in at the time the Tenant checked in minus normal wear and tear.  “Normal wear and tear” does not include dirt.  One common pet peeve of investment property owners involves being charged for cleaning when a property is being made ready for the next tenant.  If a property was clean at the time of check-in, then any cleaning required after the tenant checks out should be paid for by a portion of the tenants’ security deposit.  The only time an owner should pay a cleaning bill would be if light cleaning was required because maintenance was conducted in a vacant property, or if a property was vacant for more than a month.

 The Landlord-Tenant Code requires that the Landlord must have a signed Property Inventory and Condition Form from the tenant at the time of check-in to withhold any funds for tenant caused damage after the tenant checks out.  If the Landlord withholds all or a portion of the funds, then the Landlord must mail the prior Tenant a letter stating the charges, provide copies of estimates or bills from contractors, and provide a check for any remaining funds within 14 days of the check out.  Stott PM has witnessed the small claims court judge order a Landlord to return the security deposit in full for failure to have a signed Property Inventory and Condition Form or meet the 14-day requirement even though evidence of tenant caused damage was presented in court.

 Failure to Conduct Routine Inspections:  A quote that is often used in leadership also applies to rental properties.  “It is not what you expect, it is what you inspect.”  Stott PM has taken over many rental properties that were not inspected because a “great tenant” was living there.  It appears the definition of a “great tenant” to a few PMs and/or owners is a tenant that stays for an extremely long time and pays their rent.  The owner is then shocked to find out that these tenants trashed their property when they did finally move.

 Landlords must regularly inspect properties in order to maintain the properties in good condition.  Over several years, normal wear and tear will turn a clean and desirable rental property into a run down looking home that fails to attract good tenants.  Failure to identify and address regular maintenance items like painting, replacing worn out flooring, and repairing small leaks can and will lead to lost rent and more expensive repairs in the future.

 Failure to Charge Market Rent:  In general, rent will increase over time at the rate of inflation.  One common mistake that owners make is charging below market rent to friends and family.  A misconception that some owners have is the thought that the tenant will be grateful for being able to rent a property for several hundreds of dollars below market rent every month.  These very same owners are then dismayed when their financial situation changes and they must either sell the property or ask the tenant to move and the tenant becomes a problem.  Instead of receiving gratitude for their charity, the owners receive scorn for taking away a rental subsidy.  If you feel compelled to help someone out, we recommend writing a friend or family member a check for an amount you are comfortable with.  You will enjoy the benefits of providing a gift without the liability of offering a subsidy for an indefinite period of time.

 Another common mistake that some PMs and owners make involves failing to increase the rent that a long-term tenant pays when market rents have risen.  Stott Property MM has seen some tenants paying half the market rent for a property because a PM or owner has failed to raise the rent on a tenant that has lived in a property for ten years or more.  Stott Property Management compares the actual rent to the market rent every time a lease is about to expire and then makes recommendations to their clients when, in their opinion, a rent increase is warranted.

 Tenant Repairs:  Asking or allowing a tenant to conduct repairs on a rental property in lieu of rent almost always ends up in failure.  The reasons behind the problems include failure to define and document the scope of the work for the agreed upon rent credit, the tenants lack of skill in completing the repair, failure to inspect the final work product, or a combination of these reasons.

 We have witnessed some property managers make the same mistake as owners.  We have even spoken to one owner who allowed a “handyman” to move into his property to conduct repairs and then had to evict this same “handyman” who lived in the property without completing any work over the span of several months.  The Owner had to bear the costs of an eviction for a tenant that never paid any rent.

 Befriending Tenants:  Some owners make it a point to become “personal friends” with their tenants.  As a result, they tend to stop treating their rental property as a business and end up losing money by failing to make difficult decisions that negatively impact their “friends.”

 Asking Above Market Rent:  One of the biggest myths in investment real estate is the idea that a property will attract better tenants by simply raising the asking rent.  In most cases, the best-qualified tenant prospects are also the most informed tenant prospects.  In order to successfully compete for well-qualified tenants, a landlord must offer a competitive asking rent.  Typically speaking, the only tenant prospects that apply for a rental charging over market rent are those people who have limited options due to poor credit and/or poor rental references.

 Instead of attracting the best tenants in a reasonable time frame, the landlord ends up with longer than normal vacancy rates, lower quality tenants, and higher turnover.  Since vacancy periods, problem tenants, and turnover expenses cost landlords more than standard repairs, overpricing a rental should be avoided.

 Fully Furnished Apartments:  Unless an owner lives in a property for part of each year, or the property is located in a high-end tourist destination, furnishing an apartment makes it more difficult to attract quality long-term tenants.  Most people looking to rent long-term have their own furniture, and they are less likely to move since they will have to take their furnishings with them.  The additional costs and headaches involved with maintaining the furnishings typically result in lower cash flow.

 Pets:  Some owners do not allow pets because they fear that the animals may cause excessive damage or ruin carpeting if the pet has an accident.  The State of Hawaii allows landlords to collect a refundable pet deposit in addition to the refundable security deposit.  State Law also allows tenants to move a “pet” into a rental that does not allow pets by obtaining a doctor’s note claiming the “pet” is an Emotional Support Animal.

 Stott PM recommends owners to allow a small pet (under 40 lbs.) due to the above-mentioned changes in state law.  Most tenant prospects that have great credit and rental references are responsible pet owners.  The combined security deposit and pet deposit would usually be large enough to replace carpet and padding if the pet has an accident.  The higher demand helps raise the rent and reduce vacancy periods and some pet owners will look past flooring defects in order to move into a rental that allows a pet.

 Remodeling:  Location and views have the largest impact on market rent.  In general, tenants look for clean and functional square footage in neighborhoods that meet their needs the best.  Installing granite countertops, expensive cabinetry, hard wood floors, high-end appliances and bathroom fixtures do not provide a sufficient return on investment unless the property is in a high-end neighborhood.  Since the State of Hawaii limits a security deposit equal to one month’s rent, one careless tenant could end up causing thousands of dollars in damage to a high-end remodel.

 If your property shows signs of wear and tear, a coat of fresh paint and decent rental grade carpeting should be sufficient to attract quality tenants.  If you do not want to replace the carpet every five to seven years, then consider installing ceramic tile or vinyl planks.  Don’t replace “dated” cabinetry and countertops unless they exhibit major functional problems (i.e. stuck drawers, rotten wood, broken hinges that can’t be repaired).

 Discrimination:  Federal and State Laws prohibit turning down a potential tenant due to race, color, national origin, religion, sex, familial status, or handicap.  Some owners of high-rise condos have voiced concerns over the safety of small children and the risks of falling.  Even though those concerns may be valid, turning down an applicant with small children for that specific reason violates the law.