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Quarterly Newsletter January – March 2020

P r i n t  |  R e p l i c a

The median price in March for single-family homes was $810,000 (3.5% higher than March 2019) and for condos was $435,000 (1.4% higher than March 2019). The number of single-family home sales was 9.8% higher than in March of 2019 and 12.2% lower for condos. The number of sales is expected to drop due to the impacts of the pandemic in May since many of the March sales were already under contract and closed or were ready to close before the full economic fallout from the pandemic was felt. Stott Real Estate, Inc. did have a few transactions fall out last month because buyers got nervous and some loan programs stopped being offered. Supply is still relatively tight because many sellers have decided to postpone selling until the federal and state governments allow non-essential businesses to reopen.

Stott Property Management LLC’s Tenants’ rent is considered late if not paid by the 5th of the month. Late rents jumped 478% in April due to the financial stress from layoffs and reduced hours. 15% of the tenants paid rent late in April when typically 3% of the tenants pay rent late for a variety of reasons on any given month. Tim expects the numbers in May to be worse since Oahu’s stay-at-home order does not expire until April 30th. May could be extremely messy if the federal and state government have issues delivering promised funds to out-of-work tenants.

During peak season, roughly 50,000 visitors arrive by plane. 159 people arrived on the second day that arriving visitors must complete a 14-day quarantine. 150,434 people filed for unemployment in March as the pandemic and government ordered stay-at-home measures decimated Hawaii’s tourist and service heavy sectors. The Department of Labor and Industrial Relations reported a labor force of 668,100 in January meaning roughly 23% of Hawaii employees lost their jobs in March.

A Mixed Plate of Talk Story

A tragic landlord-tenant dispute in the Diamond Head neighborhood resulted in death of two police officers, the landlord, and the tenant. The tenant also allegedly set the house on fire burning the structure to the ground and destroying six other houses. While the circumstances are extreme, it highlights the potential danger landlords place themselves and their neighbors in when failing to follow some common-sense guidelines. The landlord took three actions that we have recommended avoiding in our newsletters. The landlord allowed a handyman to stay at the property for free in exchange for maintenance on the home. The landlord continued to allow the tenant to live on the property despite the tenant barricading himself in the property four years beforehand when police came to the residence to arrest the tenant for assaulting a neighbor and after seven temporary restraining orders were filed against the tenant by four neighbors. And finally, the landlord tried to handle the eviction herself when she finally wanted the tenant to move. The tenant, who neighbors claim was mentally ill and had nowhere to go, erupted in a fit of rage that resulted in four deaths, the destruction of seven houses, and left at least eleven people homeless.

Hawaii’s housing shortage is unlikely to get any better according to another state study. Hawaii needs to build 50,156 new homes over the next five years and only a small fraction of that number will likely be built. A similar study conducted three years ago called for 60,000 homes and the only reason that the number has shrunk is due to Hawaii’s population shrinking due to outward migration. Hawaii averaged about 5,600 new homes before 2008, averaged 2,800 new homes from 2011 through 2014, and 2,675 homes from 2014 to 2017. Fewer new homes have been built recently and that trend is expected to continue through 2030. The upward pressure on prices (both rents and sales prices) due to a lack of supply has caused nearly 7,000 Oahu residents to become homeless in 2019. Governor David Ige pointed out that an average of 616 homeless people per month were placed in permanent housing in 2019 yet failed to acknowledge that the state is barely keeping up.

A major reason for the housing shortage on Oahu is the failure of the Department of Planning and Permitting (DPP) according to the latest city audit released on January 6th. The issues summarized by the auditor include that DDP has excessive review times and lax controls that allow private companies to “game” its appointment system, disadvantaging others. It takes DPP an average of 108 days to approve a residential permit; 157 days for approve a small commercial project (under $50,000), 206 days for a medium commercial project ($50,000 to $999,999), and 432 days for larger commercial projects, ($1 million to $10 million). The audit found that three applicants representing one company booked 21% of the total appointment slots during a thirteen-month period between January 2018 and April 2019.

Several local articles discussed migration in January and some numbers are worth paying attention to. A recent report by the rental website and database Apartment List highlighted that 30% of Honolulu county renters are looking to move from the state. Stott Property Management, LLC recently received two notices from renters that are breaking their lease to pursue opportunities in the Continental United States. Another article by the Honolulu Star Advertiser highlighted migration patterns on Oahu and traffic appears to be a major issue based on a poll of 2,140 random households. 85% Ewa residents want to move elsewhere and 49% of those want to move to East Honolulu. Ironically 75% of East Oahu residents want to move and 50% want to move to Urban Honolulu. The two areas were residents want to stay are Urban Honolulu (75%) and Windward Oahu (68%). A likely factor with people wanting to stay in Windward Oahu is that three major highways lead into Honolulu (Pali Highway, Likelike Highway, and H-3).

The Honolulu Department of Planning and Permitting (DPP) exhibited some common sense when it ruled that bed and breakfast homes and transient vacation units are permitted in the Kuilima Estates East and Kuilima Estates West neighborhoods in Turtle Bay on February 10, 2020. DPP surprised even the operators of the Turtle Bay Resort when it ruled earlier that Ordinance 19-18 made those operations illegal. DPP is still embroiled in legal issues from challenges brought forth by the Waikiki Banyan, Waikiki Sunset, and Waikiki Lanais associations in Waikiki. Supply and demand for vacation rentals rose 8% in January statewide while supply and demand for vacation rentals on Oahu dropped 13% as a result of Ordinance 19-18.

The state Department of Transportation (DOT) notified the U.S. Army that it is terminating its lease of Dillingham Airfield effective June 30th putting hundreds of jobs at risk on Oahu’s North Shore. Dillingham Airfield is currently the only home to recreational skydiving, glider, and ultralight operations on Oahu and located in an area where local jobs are scarce. The airfield is also a logical place for recreational activities because it is far enough away from the flight corridor of Daniel K. Inouye International Airport. The state DOT has been accused of mismanaging the airport for years resulting in the U.S. Army’s refusal to grant another long-term lease. As a result, financing for necessary infrastructure improvements is unavailable. Over 300 residents packed a recent town-hall meeting to discuss the issue and representatives of the state DOT didn’t even bother to attend.

The latest controversy over bus fares highlights future pain for Oahu’s taxpayers as rail crawls towards completion. A proposed bus fare increase has raised objections from some heavily subsidized riders yet projections from the fare increases will still fall short of providing revenue equal to 25% to 30% of operating expenses. One advocate is complaining that seniors paying $60 per year for unlimited rides on the bus system would create undo financial hardships. Oahu taxpayers are not only going to be stuck with at least a $9.2 billion dollar price tag for rail; they will also be paying for more than 75% of HART’s operating expenses every year. Based on recent projections that operating costs will run between $127 million and $144 million per year, taxpayers will be on the hook for at least $95 million per year when full service commences. The City and County of Honolulu recently agreed to pay about $88 million more to Hitachi Rail International over the first 13 years of rail operation for a total of $918 million.

 

It appears that the Honolulu Authority for Rapid Transportation (HART) will push out the scheduled December 2025 completion of its delayed and over-budgeted rail project. HART currently maintains that it will complete rail construction based on its current schedule even though it continues to miss engineering deadlines for the difficult downtown portion of the construction. The latest issue concerns HART’s failure to submit formal permit applications for restricting traffic flow on the four-lane Dillingham Boulevard to one lane in each direction. The city of Honolulu is concerned because about 10,000 commuters ride the bus and 30,000 commuters use the corridor daily. The corridor is also home to thousands of jobs. HART has yet to complete the design for the area, which is necessary to finish the permit requests. The project timeline originally called for lane closures beginning November 12, 2019. HART also announced that the first 11-mile segment would open December 20, 2020, two months later than a recent announcement.

Honolulu is one of 600 cities that take part in a National Community Survey conducted by National Research Center Inc. in Colorado. The survey results have shown a steady decline in Honolulu residents’ perception of the quality of life since 2009. 1,700 surveys were mailed out this year and 376 were received back. The survey has a margin of error of 5%. A report considers a positive quality of life rating as a resident response of either good or excellent. That positive quality of life rating has steadily slipped from a 77% rating in 2009 to 54% in 2019. In a nutshell, many more residents today believe that Honolulu is not a good place to raise children or retire and that has also been evident in the declining population numbers over the past few years.

A housing village for homeless individuals, Kahauiki Village, celebrated its two-year anniversary. The village was the brainchild of Hawaii businessman Duane Kurisu and it welcomed the first two families in January 2018. The village is now home to 79 families and the village will open its third phase this summer and welcome its 100th family. The village sits on leased land from the City and County of Honolulu and is run and operated by the aio Foundation. All rent paid goes into maintaining the community. It is a powerful example of what local organizations and businesses can accomplish when government gives them the freedom to make it happen.

A new solar telescope at the summit of Haleakala (the house of the sun) provided the first high-resolution images of the sun’s surface according to the National Science Foundation. The images captured a surface of bubbling plasma cells, each as large as Texas, covering the sun. The telescope will become fully operational in July. University of Hawaii (UH) astronomers hope to better understand how the sun impacts life here on Earth.

Japan suspended its funding for the Thirty Meter Telescope (TMT) this year since there is no apparent path available to start construction on Mauna Kea. A spokesman for the Japanese government stated that they are still committed to building the telescope in Hawaii, the preferred location for the project. India indicated that it wanted the project moved to the Spanish Canary Island in La Palma and China has reportedly supported the change in venue.

The UH Rainbow Warriors football team will start the 2020 season with a new head coach. Nick Rolovich accepted the head coaching job at Washington State University and marking the end of his successful four-year run at UH. The Warriors accumulated a 28-27 record and won two out of three Hawaii Bowl games under Rolovich’s leadership. He also introduced the phrase, “Live aloha, play Warrior,” which is displayed in two UH practice gyms and above the walkway to the Rainbow Wahine Softball Stadium. Former Arizona State coach Todd Graham has been selected as Rolovich’s replacement.

Hawai’i Volcanoes National Park has opened the popular Thurston Lava Tube roughly two years after the Kilauea eruption closed the 400-foot lava tube. A 6.9 magnitude earthquake on May 4, 2018 dislodged large rocks from the lava tube’s ceiling and new cracks appeared. During the closure, roots from ohia trees grew through cracks in the ceiling to the lava tube floor and large colonies of white microbes grew on the walls during the extended periods of darkness.

A study by a UH economics professor showed that the expansion of the Papahanaumokuakea and Pacific Remote Islands marine national monuments by President Obama did not lead to any losses to Hawaii’s longline tuna fisherman when the expansion was opposed by the fishing industry. Revenue was 13.7% higher in the years from 2014 to 2017 (after the monument expansion) than the previous three years prior. It turns out that 97% of the fishing already occurred outside of the expanded boundaries. President George W. Bush designated the Pacific Remote Islands Marine National Monument in 2006 and Papahanaumokuakea Marine National Monument in 2009 to protect coral reefs and endangered marine life.

The nonprofit Hawaiian Legacy Reforestation Initiative recently announced that it planted its 500,000th tree. Koa, ohia, mamane, naio, milo, and sandalwood have been mainly planted on two ranches on the Big Island and one ranch on Oahu. Charitable contributions and contributions from an affiliated for profit hardwood company have helped fund the effort.

Odds and Ends

Federal & State Stimulus & Relief: The federal government has passed a number of programs designed to provide temporary relief to individuals and families that have seen their income either deteriorate or evaporate from the strict social distancing measures that have been put in place to combat the Coronavirus pandemic. Please note that this article aims to highlight temporary relief at the federal level since state and local initiatives will vary depending on where an individual lives. Most of these topics have already been broadcast on a wide range of media and some may find this article redundant.

The federal government has recently passed three laws aimed at helping governments, businesses, and individuals to stave off financial ruin. Phase 1, passed on March 3rd, involved fund efforts to develop testing and a vaccine and assist local and state governments responses to the pandemic. Phase 2, the “Families First Coronavirus Response Act” passed on March 18th, provides tax credits for employers to offer sick leave and increased benefits to workers sickened by the corona virus or tasked with taking care of family members sickened or having to stay at home due to social distancing requirements. Phase 3, the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” passed on March 27th, provides financial aid to individuals and businesses. The purpose of this article is to highlight relief for tenants, homeowners, landlords, and investment real estate owners and some details may be missed or glossed over.

Most individuals and families, those earning less than the established thresholds specified by the CARES act, will receive checks totaling $1,200 for individuals, $2,400 for couples filing joint tax returns, and an additional $500 per dependent child under the age of 17. Payments are reduced or eliminated for individuals or couples earning more than the adjusted gross income thresholds specified in the law. Those that have established direct deposits of tax refunds and social security will receive their funds sooner than those that will have checks mailed to them.

The federal government will increase unemployment benefits by $600 per week for four months. The payments will be distributed to unemployed individuals by state governments and the timing of those payments to individual will vary state by state.

The Families First Coronavirus Response Act addresses benefits that business under 500 employees may have to provide through the end of the year and tax credits available to those benefits. No further details are warranted because the act does not directly relate to tenants, homeowners, landlords, and investment real estate owners.

On March 31, 2020, Governor David Ige issued an emergency proclamation that prohibits all evictions for failure to pay rent and all written notices to vacate by landlords to tenants whose leases will expire or who are currently on a month-to-month tenancy. The emergency proclamation lasts for sixty days unless the governor terminates the emergency proclamation early or issues a new proclamation that extends the timeframe. The emergency proclamation does not require the landlord to forgive any unpaid rent, just defer the rent until the emergency proclamation ends. The U.S. Department of Housing and Urban Development suspended all foreclosures in properties with federal guaranteed loans or participating in federal housing programs until July 26, 2020.

Homeowners and investment real estate owners with mortgages backed by the Federal Housing Association (FHA), U.S. Department of Agriculture (USDA), U.S. Department of Veterans Affairs (VA), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) are eligible for loan forbearance for up to one year without fees, penalties, or additional interest. Homeowners and investment real estate owners may receive the forbearance by submitting a request to their servicer stating that they are experiencing hardship due to the pandemic.

Stott Property Management, LLC has been communicating regularly with both tenants and investment property owners from about mid-March, when social distancing was ordered by Mayor Kirk Caldwell and Governor David Ige and people started experiencing the effects on their personal finances. The message to tenants has been simple and consistent. Stott Property Management, LLC understands the financial difficulties that many of our tenants are experiencing and we will simply be tracking any unpaid rent while the government imposes these extraordinary measures. Stott Property Management, LLC will work with tenants regarding any necessary payment plans once these measures are lifted. Stott Property Management, LLC then notifies those owners that the tenants can’t pay any or possible all of their current rent and that unpaid rent will be tracked, not forgiven. Owners that end up in a financial bind are encouraged to seek any financial relief offered by the recently passed stimulus packages.

Tim and Tracey encourage all homeowners and investment property owners to research the financial relief options available to them, even if they are not experiencing any short-term financial stress. No one knows how long this pandemic will last and how much damage to physical and financial health it will inflict. Knowing your options now will enhance your ability to make informed decisions quickly if the need arises.

Pet Friendly Lease Terms: Recent events have inspired an article describing the benefits to residential investment property owners of pet friendly policies. Stott Property Management, LLC has been encouraging its clients to adopt pet friendly policies when feasible ever since the state of Hawaii allowed landlords to collect a refundable pet deposit in addition to a refundable security deposit and the expansion of the Americans Disability Act to cover Emotional Support Animals (ESA).

Stott Property Management, LLC manages roughly 380 rental properties and has been in the business for over forty years. Properties that allow pets, all other amenities and lease terms being equal, experience lower vacancy rates (shorter vacancies and longer leases) and higher rents than those properties that have no pet policies.

The experience of Stott Property Management, LLC highlights that many landlords don’t allow pets because they over-estimate the perceived risks associated with the damage that pets cause. In all but a very few cases, the security deposit and pet deposit have covered all charges associated with making a property ready to rent after a tenant failed to prevent or address pet related damage. In some of those cases, part or all of the security deposit was used to cover unpaid rent and other charges in addition to pet related damage. In fact, some of the most messy and expensive cleanups have involved tenants that did not have pets. The latest case involved an evicted tenant that left behind an apartment completely filled with urine soaked belongings and debris. Removing the debris and sanitizing the unit cost more than $5,000 alone. The figure did not include the cost of painting, replacing the flooring, and replacing the refrigerator.

Tim and Tracey have had many pets over the years and currently have a dog, Buddy, and a cat, Snowflake. Both have created a little havoc over the years but the damage has been limited to personal items like shoes, decorator pillows, and furniture. The costs associated with these mishaps pale in comparison to the joy and happiness the pets have brought over the years. On one memorable occasion many years ago, Tim and Tracey were watching television with their son Mark when a commercial for a depression medication aired. Mark commented, “Why don’t those people just get a dog?” Tenants with pets tend to be more understanding and willing to overlook minor imperfections with a rental home since they understand that life can be a little messy, yet enjoyable.

One tragic incident in Diamond Head earlier this year resulting in the death of two police officers, the landlord, and the destruction of seven high-end homes lends credence to the therapeutic benefits of pets. The troubled tenant’s behavior seemed to deteriorate further when the landlord prohibited from getting another dog when his long-time pet dog died.

There are some very good reasons for not allowing a pet. Some owners or their family members are highly allergic to pets and plan on visiting or returning to the home. High end fully furnished homes don’t allow pets since pets can ruin expensive furnishings. And some condo and homeowner associations don’t allow pets. In the absence of these or other unique circumstances, landlords that don’t allow pets may want to reconsider their policy.

Rental Related Hawaii Tax Filings: The state of Hawaii requires investment property owners to file and pay General Excise Tax (GET) on rent collected on long-term rentals, Transient Accommodations Tax (TAT) and GET on transient rentals, and to file an Individual Income Tax Return. Hawaii residents file Form N-11 and non-residents and part-time residents file Form N-15. There are owners, particularly out-of-state owners, for one reason or another are unaware of these requirements or simply neglect to file and pay the required taxes. In some cases, the state will not be unaware of an individual’s failure to file and pay.

The Hawaii Real Property Tax Act (HARPTA) withholds 7.25% of the property sales price to help enforce Hawaii’s state capital gains tax on property owned by non-resident sellers. An out-of-state seller must either file Form N-15 or form N-288C (if the current year’s Form N-15 is not available) if the money withheld exceeds the actual capital gains tax and the seller wants a refund. There is a place requiring a GET and or TAT license number if the property has been a rental.

One common occurrence that can trip up non-resident property owners occurs when it comes time to sell the investment property. Prior to issuing a HARPTA refund, the state will check to verify that the seller has filed and paid the necessary forms and taxes and the state will go back much farther than three years (the federal requirement for maintaining copies of tax returns and associated records). The state has required non-resident owners that have failed to file and pay to do so and have charged late fees, penalties, and interest.

Another common mistake, particularly involving family transactions, is the failure to obtain a new General Excise Tax License when the property changes hands or the owner dies. Stott Real Estate, Inc. and Stott Property Management, LLC had to help recent clients that inherited a property. A different property manager previously managed the property, and that property manager failed to file and pay GET for one six-month period while the now-deceased owner was still alive. The heirs did not obtain a new GET License. Stott Property Management, LLC filed and paid the GET during the time that it was hired to manage the property under the deceased owner’s license until the heirs decided to sell. Had the heirs obtained a new GET license, the state would not have discovered the earlier failure because a different GET license number would have been filled out on the form. The state, however, did find the discrepancy, and Stott Property Management, LLC was able to file and pay the GET for that period after pulling the rental income figure from that year’s income tax filing. Stott Real Estate, Inc. was then able to guide the heirs through the process of obtaining a HARPTA exemption because there were no capital gains as a result of the stepped up basis.

One other example involved TAT. Stott Real Estate, Inc. helped a client sell a condo that was a vacation rental managed by another company. That company collected the GET and TAT and gave the proceeds to the client. The contract clearly indicated that the client was responsible for filing the required forms and paying the state of Hawaii the tax, however, the client failed to do so. The state discovered the discrepancy when the seller filed for a HARPTA refund. The taxes, penalties, and interest charged by the state were staggering and negotiations dragged on for over a year.

Hawaii residential investment property owners should heed and learn from previous owners’ mistakes. The financial and emotional stress involved due to failing to file and pay the necessary taxes can be substantial. Taking the steps to obtain a new license when family ownership changes hands will prevent a previous owner’s mistakes from punishing the new owners through no fault of their own.

Estate Planning Consideration: Many trusts designate one of the children as the trustee when the grantor becomes incapacitated or passes away. When setting up a trust, you should seriously consider adding an unrelated third party like an attorney or banker as an alternative in the event that having a child or relative becomes impractical for one of a number of reasons.

While parents hope that there children will always get along and remain close after they pass away, the grief of losing a parent may affect each child differently and some children may cope better than others. Family harmony can quickly give way to emotional turmoil in close-knit families and that does not factor in to the possibility of discord generated by spouses, ex-spouses, and grandchildren. The option of having a professional step in to take things over during a very disruptive and emotional time can provide the proper perspective needed to bring closure and allow all interested parties to move on.

Specific Power of Attorney: Note: States have different laws and procedures for real estate transactions. The following paragraphs pertain to Hawaii real estate transactions and may not be appropriate in other states.

A specific power of attorney (POA) is used to authorize one individual to sign for another individual to complete a specific transaction. For instance, a property management agreement includes a specific power of attorney allowing the property manager to handle the normal day-to-day activities of investment real estate like signing leases, collecting rents, paying bills, and disbursing rental proceeds on behalf of their clients. Both sellers and buyers may also use a specific power of attorney to complete a real estate transaction when one of the sellers or buyers is unavailable to sign documents due to planned travel, deployments, or other priorities.

Some prior legwork should be completed ahead of time before using a specific POA to complete a real estate transaction. The parties involved should ask the escrow company to review the specific POA prior to listing or entering a contract. Many escrow companies can assist in drawing up a specific power of attorney to be used for a nominal fee.

In the case where a trust is involved, the trust should be reviewed ahead of time. When Stott Real Estate, Inc. lists a property, we send the short form of the trust to our preferred title company to review the trust and instruct us on who must sign. Some trusts do not allow a power of attorney to be used and it can cause major delays when one is needed. If your property is in a trust, then you should review it to make sure that it will allow a specific power of attorney to be used if needed. If it does not allow one, then seriously consider having the trust changed to add that option. It may help prevent some major disruption to a future transaction if one is needed and the option is not available.

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