RICHARD WALKER / RWALKER@STARBULLETIN.COM The land under the Kahala Beach condominum complex near the Kahala Hotel & Resort will revert to owner Kamehameha Schools in 2027, which precludes buyers from getting 30-year mortgages or completing Section 1031 exchanges.

Kahala condos hobbled by leasehold

Oceanfront apartments are selling for less than otherwise because the land reverts in 20 years

It's a sign of unusual times that actor Jack Lord's prime oceanfront apartment in the swank Kahala Beach condominium complex is on the market for a mere $2.8 million leasehold -- and some studios in the plush building have sold for less than $300,000.

Kahala Beach, with only about 20 years remaining on its lease, has become a marketplace anomaly -- an only-in-Hawaii real estate tale. The property, which is easily one of the most prestigious oceanfront addresses in Honolulu, also has become one of the least expensive to acquire, due to its firmly entrenched leasehold status.

"Kahala Beach has become unique in the marketplace because it has been in a condemnation action for years," said Mike Pang, principal broker of Monarch Properties Inc., who has specialized in representing condominium associations in fee negotiations.

The land under the Kahala Beach complex, which was built in 1967 at a cost of $4 million, will return to lease owner Kamehameha Schools in 2027. That precludes buyers from getting a 30-year mortgage and investors from completing Section 1031 tax-deferred exchanges, which has cut values drastically.

Lord's tranquil oasis across from the Waialae Country Club and next to the Kahala Hotel & Resort would likely have been listed for three times the amount if the property owners had been granted the right to buy the fee, said luxury real estate broker Pat Choi, the president and principal broker of Choi International Realty.

Still for some, like Choi and many of her affluent clients, the choice to live at Kahala pencils out, she said.

"If you want to be here, it's the least expensive place on the ocean," said Choi, who currently has two listings at the Kahala Beach, including Lord's condominium.

"It's not an investment choice, it's a lifestyle choice," she said. "People buy into this condominium because they want to be here."

Before the early 1990s, the public's perception of leasehold and fee-simple development in Hawaii recognized few differences. At the height of the Japanese bubble, leasehold condominiums like Kahala Beach often fetched higher prices because they were built in sought-after locations and offered a great array of amenities.

Nearly all of the residential properties in Waikiki and much of Makiki were developed as leasehold, Pang said. But after the bubble burst, the market changed, as the subsequent round of quick sales and fee negotiations left some owners high and dry, Pang said.

Suddenly leasehold became a type of ownership more often reserved for young couples looking to break into the market cheaply, older couples who didn't care if they could take their property with them, or investors looking for prime rental locations, he said.

"As some of the controversy of residential leasehold exploded and fee owners got aggressive with their rents, the demand for leasehold went down considerably and created a gap between what people would pay for leasehold versus fee-simple," Pang said.

Since 1990, the vast majority of leasehold properties on Oahu have been converted due to public sentiment and legislation, he said.

The number of leasehold condominiums on Oahu has declined from 53,000 to about 20,000, Pang said, and there has been no new residential leasehold development since 1991.

"The residential leasehold market is dying out," he said.

In another 20 years, most of Oahu's leasehold condominium market will have been converted to fee simple; however, a few properties in prime locations such as the Kahala Beach will likely revert back to their owners for redevelopment, Pang said.

Kamehameha Schools once owned more than 16,000 leasehold units, but since the late 1970s has converted most of these properties.

It is now down to 2,400 multi-family units and less than 100 single-family units, said Kekoa Paulsen, community relations director for Kamehameha Schools.

"We began volunteering to convert multi-family properties as the pressure mounted to force legislation," Paulsen said. "Kahala Beach is one of the few projects that we are not offering to convert."

Kamehameha Schools has no immediate plans for the 6.8-acre tract of land that the Kahala Beach condominium sits upon, but the location of the property offers great potential for redevelopment, he said.

Late last year, the Hawaii State Supreme Court threw out a lawsuit seeking to force Kamehameha Schools to sell the fee interest in the Kahala Beach complex. The ruling has caused leasehold sales prices at Kahala Beach to plummet.

Despite a dip in prices, buying into Kahala Beach is still an "expensive proposition," said Cathi Uyemura-Reyes, a Realtor and principal broker of Global Executive Realty LLC.

On top of the mortgage, buyers of a standard two-bedroom, two-bath unit in the complex will likely pay another $2,000 or so a month in lease rent and maintenance fees, Uyemura-Reyes said.

Even so, the beauty and spaciousness of the property is enticing for many affluent buyers, especially those with second, third or even fourth homes, she said.

Kahala Beach is such a unique property that,despite its declining lease term, could continue to seduce buyers for some time, Pang said.

"It's not unbelievable that people would continue buying at Kahala Beach apartments," Pang said. "For guys like you and me, it doesn't fathom to buy into a place that you'll have to return in 20 years, but for wealthy people, it might pencil out."

Stranger things have happened before, Pang said.

"There are only nine years left on the lease at 3003 Kalakaua and people are still paying $700,000 for units," he said. "It's a different market than you or I would do."