Quarterly Newsletter January - March 2021

P R I N T   |  R E P L I C A The March median price for a single-family home set a record of $950,000 (17.3% higher than March 2020) and for a condo was $451,000 (3.7% higher than March 2020).  Even though there were 12.6% more single-family homes and 17.2% more condos listed for sale in March, demand continued to grow at a faster clip and the supply of homes tightened.  There is only 1.3 months of single-family home inventory and 2.9 months of condo inventory available.

 Tim & Tracey listened to a Zoom call in March featuring one of Hawaii’s leading economists, Paul Brewbaker.  While the media headlines routinely proclaimed the lack of affordable housing on Hawaii, Brewbaker pointed out that housing prices were very affordable historically in 2019-2020 and not nearly as expensive as 1981 and 1990 when compared to the median income for a family of four.  More than half of Hawaii four-member households could afford a 30-year fixed mortgage higher than the median priced Hawaii property from 2019 to 2020.  The latest price-appreciation reduced the affordability and the median income for a four-member household can afford about 85% of a conventional mortgage.  He described a recent divergence in single-family home inventory versus condo inventory on Oahu.    Single-family and condo inventory historically tracked each other, however, the Honolulu City Council’s 2019 ordinance to aggressively enforce a ban on vacation rentals initially caused stagnation in the condo market and the COVID-19 pandemic aggravated the problem by shifting sales from Honolulu’s urban core to the suburbs and exurbs.  The increased condo inventory has dampened condominium median price increases while single-family home prices have accelerated due to record low interest rates.  Brewbaker considers the Oahu single-family home market frothy but does not consider it a bubble since prices still track long-term appreciation trends within a margin of error.  He does not see median prices following the roller coaster of the 1990’s and 2000’s and describes the current market as an escalator instead.

A Mixed Plate of Talk Story

The Pacific Fleet Submarine Museum, previously known as the USS Bowfin submarine museum, opened on February 15^th after a $20 million renovation.  The museum memorializes the Pacific submarine force’s history from World War II through to the present day and consists of three main galleries, World War II, the Cold War, and the present-day fleet and fleet of the future.  It is the last of the four Pearl Harbor attractions to reopen from the COVID-19 pandemic related shutdowns.  The other three attractions are the USS Arizona Memorial, the Battleship Missouri Memorial, and the Pearl Harbor Aviation Museum.

 A public hearing was held on April 8^th to discuss the long-awaited draft of the rules to regulate Oahu’s short-term rentals related to ordinance 19-18 that was passed in the summer of 2019.  The Department of Planning and Permitting stated that the final draft would be ready by August, one-year permits were supposed to be issued and seven months after an earlier announced extension.  The draft rule would allow homeowners to apply for a limited number of Bed and Breakfast (B&B) certificates.  The application process would be open annually from August 1 through August 30 and the order of applications processed would be determined by lottery.

 Newly elected prosecutor, Steve Alm, has submitted a motion to dismiss the charges against U.S. Surgeon General Jerome Adams and his aide for allegedly violating then-Mayor Kirk Caldwell’s emergency order at Kualoa Regional Park in August.  City prosecutors had continued to pursue charges against Adams even though roughly sixty thousand other cases had been dropped or dismissed.  The U.S. Surgeon General visited the island to help kick-start Hawaii’s COVID-19 testing program since state officials were failing in their responsibility of providing sufficient testing capacity to Hawaii residents.  Hopefully, other city and state officials will take note and start spending their time and money on helping Hawaii’s sick instead of harassing Hawaii’s residents and visitors.

Beaches and beach access continue to be sources of concern and tension in Hawaii and have been a source of repeated coverage by the Honolulu Star Advertiser.  Protestors held a sign-waving demonstration near the entrance of the resort community to raise awareness that the Ko Olina Community Association has coned off half of the public parking spaces to Ko Olina’s lagoons limiting easy access to the beaches.  Then-Mayor Kirk Caldwell and the association came to this agreement after a public outcry in October when the parking lots were closed to the public in preparation of welcoming tourists back to the resort community.  The campaign hoped to catch the attention of Mayor Rick Blangiardi and convince him to restore public access to all parking spaces.  The association announced that it would make all public parking stalls available starting February 1^st to the public in response to the sign-waving event consisting of roughly 30 people.  Coastal hardening has been repeatedly covered in the past few months and it appears that the Honolulu Star Advertiser has become frustrated with the lack of action by state officials and resorted to publicly shaming various homeowners for installing and repairing seawalls or installing sandbags and boulders to slow down the erosion threatening their lots and homes.  The people identified include former President Obama, famous surfers, and owners that rent their beachfront homes to vacationers.  The paper’s complaints focus on the state’s preferential treatment afforded to some, the haphazard and arbitrary decision-making process for approving emergency measures, the failure to follow up when the emergency measures expire, and the failure to enforce fines imposed on property owners.

 The bad news and communication gaps continue to plague the Honolulu Authority for Rapid Transportation (HART) despite having a new leader.  Interim CEO, Lori Kahikina, only notified the HART board chairman and vice chairman that HART was facing a more than $3 billion budget deficit before mentioning it in a video program produced by the Honolulu Star Advertiser.  Neither Kahikina, nor the board chairman and vice chairman, notified the rest of the board members of the shortfall catching them by surprise.  The following week the city council and the HART board learned that rails price tag ballooned to $12.45 billion from an $11.2 billion figure that ex-Mayor Kirk Caldwell submitted just five months ago and Kahikina had no proposed solution for the $3.6 billion budget deficit.  In the latest setback, Kahikina disclosed that the train’s wheels do not fit properly when the tracks cross each other.  She learned of the problem a few weeks ago while HART learned of the problem late last year.  Two other issues related to the tracks must be addressed before train testing can continue.  The first involves improperly welded side switch plates that HART originally pinned on shoddy work by Kiewit but has been reversed since HART provided fabricated switch plates to Kiewit.  The second incident involved cracking of track switching equipment that requires repairs.  It looks like the city may never successfully finish the rail project even though city council members committed to talk about the issue further.  Meanwhile, the city continues to borrow money to fund an organization in charge of this white elephant of a project.

 Federal charges filed against five Honolulu Department of Planning and Permitting (DPP) employees and an architect have validated what many people in the construction agency and real estate community have suspected for years.  The six individuals were charged with giving and receiving bribes to expedite the permit review process.  The investigation follows a statement by a civil engineer and permit router who stated during a 2018 city council meeting that “I don’t want to blatantly say bribery, but there are gifts and favoritism.  I have multiple real estate agents and many, many clients ask me to pay a gift to a ‘friend’ in DPP to have their permits, you know, passed through, and I refuse.  I shouldn’t have to pay a civil servant a gift to do their job…I don’t want to go to jail by bribing a city official no matter how long (it takes to get a permit), and how desperate I am.”  While former Councilman Ron Menor cautioned her about being careful what she said, former Councilwoman Kym Pine started investigating DPP and came up with plans of reform.  One of the accused is charged with soliciting and accepting $89,205.81 in return for expediting the permit application according to the complaint.  Opponents of Honolulu’s monster homes controversy think it is a start, but they also think more digging is required because this blatant behavior was ignored by other DPP employees and allowed to happen.

 A Waikiki Beach sand replenishment project began in late January with the goal of dredging 20,000 cubic feet of sand from a canal 2,000 feet offshore and pumping it on a stretch of beach between the Kuhio and Royal Hawaiian groins.  The first sand replenishment project pumped 24,000 cubic feet of sand onto Waikiki beach back in 2012 and the sand will be screened this time to prevent depositing dead coral rubble on the beach, a complaint that surfaced during the last project.  The three-to-four-month project will close parts of the beach that receive the sand and other parts of the beach will be temporarily closed during the day to allow operation of heavy equipment.  

Hawaii residents are constantly reminded that ocean can be an unpredictable and dangerous place in the form of drownings, wave induced injuries, and shark attacks.  One area of concern that is being studied is the significant number of snorkeling deaths identified in a new state study.  Health officials are looking into rapid onset pulmonary edema (ROPE), when bodily fluids fill the lungs, as a cause of people drowning while snorkeling.  A former director of ocean safety stated that “people think snorkeling is benign, easy to do, but unfortunately it isn’t.  Lots of times at Hanauma Bay you found people floating face down and what caused it, we don’t know.”  Researchers have determined that equipment with high air-flow resistance, which makes it harder to inhale air, may lead to ROPE.  They are also looking that flying recently may make people more susceptible.  Officials are recommending the following when snorkeling:

• Inexperienced snorkelers should stay in water depths less than those where one can stand with water at chest level.
• Learn to use the simplest snorkel safely before venturing to deeper water.
• People with cardiovascular health problems should avoid snorkeling.
• Shortness of breath can be a sign of danger.  Remove the snorkel and get out of the water immediately.

 The empty track and trestles from a deactivated tramway leading to a deactivated military radar station at Koko Crater Summit were turned over to the City and County of Honolulu in 1966 and became the popular hiking trail known as the “Stairmaster from hell.”  The trail has suffered significant erosion and more than 250 of the wooden tramway ties remain.  The city has allocated $1 million to a public-private partnership with the Kokonut Koalition to procure supplies and immediately start repairing and improving the trail.  Many hikers have spontaneously volunteered to help coalition members while they are working on the tramway and carried up buckets of gravel to the repair site.  The summit closed for three weeks starting March 29^th to mitigate safety issues from the aging and abandoned tramway.  The mitigation project includes removal of debris from tunnels and shafts, sealing the shafts, vents, and tunnels, and installing signs warning visitors of unstable conditions.  The city will not remove the summit’s platform until a separate replacement project can be organized over the next 18 months.  Hikers successfully completing the “stairmaster from hell” will still be able to take in the breathtaking views at the top in about three weeks.

 Kilauea’s fissure 8, the most prolific vent of the 2018 eruption, has a new name, Ahu’aila’au.  The name refers to the altar of the volcano deity ‘Aila’au.  Spouting lava 200 feet in the air at times, Ahu’aila’au was the main source of lava that fed a lava river that vaporized Green Lake, destroyed hundreds of homes, and filled in Kapoho Bay.  It was the eighth of 24 vents that opened during the 2018 Kilauea eruption that is now marked by a 100-foot cinder cone.

 Patch reefs in Kaneohe Bay were threatened ten years ago by from non-native seaweeds brought to Hawaii in the 1970s for experimental aquaculture projects.  The seaweed escaped and spread when the projects were abandoned.  A bio-control program breeding native sea urchins introduced by the University of Hawaii turned things around for Kaneohe Bay.  Parent sea urchins are collected from local reefs and taken to a hatchery to spawn.  The UH facility has as many as 15 million sea urchins growing at any one time and the young urchins are then planted where needed.  The sea urchins are like goats feeding on the invasive algae that at one point grew as thick as two to three feet thick and smothered the reefs.  A study in 2018 found that the sea urchins had reduced the invasive reef smothering algae by 85% and now are used to spot treat areas in Kaneohe Bay as needed.  Kaneohe Bay is home to one of the only barrier reefs in the United States that shelters a wide variety of aquatic wildlife.  UH plans on introducing the sea urchins to reefs off Waikiki Beach and officials in the Caribbean plan on using the strategy to protect their reefs.

 Love’s Bakery is closing its doors after almost 170 years in business.  Hawaii’s largest bakery was already struggling when the COVID-19 pandemic restrictions reduced its revenue by 20% from lower restaurant, hotel, and other tourist-relates sales.  The company was “seriously delinquent in rent” and failed to qualify for a second round of Paycheck Protection Program (PPP) funding.  Love’s delivered goods to 1,800 customers and bakes 400,000 loaves of bread weekly.  Pacific Northwest-based Franz Family Baker has bought the rights to market their baked goods under the Love’s Bakery name and packaging.  While the baked goods will no longer be made in Hawaii, the items will be shipped to Hawaii and still show up on grocery store shelves.  The Oahu bakery closed its doors for good on March 31^st, laying off its 231 employees.

Odds & Ends

Federal, State, & City COVID-19 Updates:  The federal government has passed two stimulus packages in the first three months of the year.  President Trump signed The Coronavirus Response and Relief Supplemental Appropriations Act, and President Biden signed the American Rescue Plan Act.  The two bills provide individuals payments up to $2,000 and up to $600 for each child.  The Child Tax Credit has been from $2,000 to $3,600 for each child under six and to $3,000 for older children.  The federal government will provide an additional $300 per month in addition to each state’s unemployment benefits through September 6, 2021.  The first $10,200 of unemployment benefits for individuals making less than $150,000 will not be subject to federal income tax.

 The federal government has allocated $25 billion to provide rental relief to households that have been unable to pay rent and utilities due to the impact of the pandemic restrictions on their income.  Eligible households will receive up to twelve months of assistance plus an additional three months if extra funds are needed and there is still money available.  The application may be submitted by the eligible household or the landlord on behalf of the eligible household.  Eligible households must meet the following criteria.

• Qualifies for unemployment or has experienced a reduction in household income or experienced financial hardship due to COVID-19.
• Demonstrates a risk of experiencing homelessness or housing instability.
• Has household income at or below 80% of median income.

The City and County of Honolulu developed the Rental & Utility Relief Program from federal COVID-19 relief funds.  Qualified people on Oahu will receive funds to pay their rent and utilities based on the person’s financial situation.  The city launched the program on April 5, 2021.

The following people can qualify for the program:

• Oahu residents who are renting on island.
• Proof of COVID-19 pandemic related job loss, unemployment, or pay reduction.
• Proof of difficulties paying for rent and utilities.
• One person per household.
• There will be income limits for eligible households.

Documents Required:

• Government-issued photo ID.
• Proof of Oahu residency.
• Rental Agreement
• Tax documents or pay stubs of two (2) months most recent income.
• Proof of COVID-19 pandemic related hardship, such as an unemployment insurance letter.

The website, www.oneoahu.org/renthelp has additional information.  Tenants could apply at www.oneoahu.org or submit a paper application on April 5^th.  The website took applications for approximately four hours on Monday and was then closed to new applicants because the limit of 8,000 applicants was reached.  The city will announce the next day new applications will be considered.

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 has been repeatedly extended through April 13, 2021.  Landlords may give tenants on a fixed lease written notice to vacate however month-to-month tenants may not be given notice unless the landlord is moving back into the property.

The Centers for Disease Control and Prevention (CDC) extended the national eviction moratorium through June 30, 2021 for tenants that have fallen behind on rent.  The CDC’s eviction moratorium has been challenged in court and three federal judges in Tennessee, Ohio, and Texas have ruled the moratorium unlawful while a federal judge in Louisiana ruled the moratorium lawful.  These lawsuits may end up at the United States Supreme Court.

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.  The foreclosure moratorium for federally backed loans has been extended through June 30, 2021.

Stott Property Management, LLC has been communicating regularly with both tenants and investment property owners from about mid-March 2020, when the pandemic related restrictions were ordered by Mayor Kirk Caldwell and Governor David Ige and people started experiencing the effects on their personal finances.

Rental Related Hawaii Tax Filings:  Tim and Tracey speak to several clients of investment property each year who have not filed all the tax forms required by the state of Hawaii and who owe back taxes as a result.  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 occasion that trips up non-resident property owners occurs when it comes time to sell the investment property.  Prior to issuing a 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 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.

Nosy Neighbors:  The harmless term, nosy neighbors, usually refers to curious neighbors that visit open houses to see the interior and back yard or get a feel for prices in the neighborhood.  Some use the opportunity to glean possible interior decoration tips while others may take advantage of snacking opportunities like shopping at Costco.  The purpose of this article is to highlight the direct danger to your finances as a landlord if you fail to recognize the issue and let it fester.

Many landlords previously lived in the house or condo and have decided to rent it out in the hopes of returning at some point in the future.  They hold onto the property because they have fond memories of the neighborhood and the friendships that they have cultivated while living there.  Stott Property Management, LLC has some clients that fit into this category and Tim has spoken to them when first meeting with them and throughout the business relationship.  On more than one occasion, Tim has been told that the client would rather wait for the perfect tenant versus upsetting the neighbors.  Finding tenants that get along with the neighbors is the goal of most property managers.  There is nothing more frustrating than to be pulled into a dispute between two neighbors and having no real authority to resolve the dispute.  It ultimately comes down the neighbors either settling their disputes or hiring lawyers and taking their complaints to a judge to decide.  Most of the public overestimate the power of the lease and the landlord’s ability to enforce that lease and some neighbor complaints stem from misunderstanding and misconception.

Some of Stott Property Management, LLC’s clients follow Tim’s advice and encourage the neighbors to speak with the tenants to see if the issue can be resolved amicably.  In most cases, the initial animosity gives way to a mutual understanding and in some cases, friendship.  There are other clients, that feel the need to “protect” their neighbors at all costs and the pattern repeats itself with every tenant that moves into the property.  In one extreme case, a client has given up tens of thousands of dollars in lost revenue due to lower rent and unnecessary tenant turnover because the neighbor had been crowned the “ruling authority.”  The owner had tenants that absolutely loved the house, agreed to market rent increases, and would have stayed “forever.”  The neighbor, however, did not like the tenants and the owners decided to force the tenants to move because of the constant complaints.  Stott Property Management, LLC had to lower the asking rent several hundreds of dollars per month to find a new tenant and the problems did not end there.  The same nosy neighbors complained about each successive tenant and harassed some to the point that they moved as soon as their lease expired.  A couple of employees including Tim have told the client point blank that the neighbors are the problems, not the tenants, and that information fell on deaf ears.

It is unfortunate that some people get a high from these petty power plays and investment property owners need to be aware when it is occurring.  This same dynamic plays out in condominium associations, neighborhood boards, and with local authorities.  Failing to recognize and appropriately address the problem can be extremely expensive.  The best way to address a dispute between your neighbor and tenant is to encourage your neighbors to speak with your tenants if you are managing the property or to contact your property manager.  A good property manager will get involved if the tenants are violating the terms of their lease or encourage the neighbor and tenants to work it out directly if no violation is found.  In many cases, simple misunderstandings get resolved when neighbors speak to each other.

1031 Exchange - Mililani to Maryland:  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 5 ½ years ago to manage a Mililani single-family home that they were renting out to a long-term tenant.  The house needed cosmetic repairs and the tenant was paying below market rent.  Stott Property Management, LLC successfully raised the rent in increments while keeping the tenant in place resulting in a 100% occupancy rate.

Like many clients, they held onto the property to keep a piece of paradise that they could check on from time to time while generating modest cash flow.  As time progressed, they realized that they were not traveling to Hawaii as much as they were in the past and then they reassessed their priorities in the pandemic.  Tracey spoke to them about investing the equity elsewhere and partnered them with Steve Ritchie of Railey Realty, Inc. in Maryland to find a suitable replacement property.  The condition of the Mililani house did provide some challenges, but Tracey was able to stage the house and put it on the market with a minimum of make ready repairs.  Tracey successfully helped the clients sell the home despite several buyers backing out of the sale for various reasons.  

Steve Ritchie then found them a beautiful home overlooking Deep Creek near Wisp Ski Resort to invest their equity and defer capital gains taxes.  The new property generated 2.8 times more revenue in 2020 than the Mililani property and the clients will be able to use the property for their family vacations as well.  

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.