Posted on: Sunday, October 3, 2004
COMMENTARY
Leasehold trend hurts small firms
By Jerome G. Manis
As a former board member of the Hawai'i Leaseholders Equity Coalition, I am saddened by ongoing reversals of our earlier progress.
In the 1960s, the Legislature allowed owners of single-family homes to purchase fee-simple ownership of the land they had been leasing. The City Council extended that right to condominium homeowners in the early 1990s.
Efforts to expand that right to businesses on leasehold land soon followed in the City Council and the Legislature. Council members submitted a 1998 bill to allow lease-to-fee conversion of commercial land. Committees of the 1999 House of Representatives discussed legislation that would allow commercial leasehold land to be purchased at market value by leaseholders.
Both proposals failed.
For leasehold reform, 2004 is a year of significant reversal. In August, the Leasehold Reform Action Group, or LRAG, was deactivated. It aimed to help businesses on leasehold land buy their land. They had come across a report in which I had described the origin of the leasehold system in Hawai'i. After inviting me to speak to their group, they asked me to become one of their directors.
As a former LRAG director, I am dismayed to see the failure of another attempt to preserve small Hawai'i businesses. More than 100 LRAG leaseholders of land owned by the Damon Estate had offered to negotiate the purchase of those lands for the leaseholders. Damon leaseholders are in the last 20 years of their contract, and had only 10-year renewals.
Small-business leaseholders pay the taxes on land they do not own, and fear sharp increases in leasehold rent each decade. Any improvements they need to make are financially very risky, since leaseholders must remove or lose their improvements to the landowners upon lease contract terminations.
LRAG officers were told that ownership of Damon lands was central to the trust and could not be sold. Now Damon has sold its lands to HRPT, a real estate investment trust, at an estimated billion-dollar benefit to 22 Damon heirs. Their former small-business leaseholders now believe they can never rely on remaining in business anywhere in Hawai'i.
Nor can other commercial leaseholders in Hawai'i gain parity with Mainland firms.
The City Council is now considering a bill that would repeal the condominium lease-to-fee conversion law. Under most leasehold agreements, lessees also pay city taxes on land they do not own.
Feudal roots
To understand these matters, we need to understand why leasehold in Hawai'i is unique in the United States.
For that, we need to look at the sources of our leasehold system. Many land policies in Hawai'i still are rooted in colonial feudalism. These stem from medieval feudalism.
Medieval feudalism refers to a European socioeconomic system in which land was held by kings or lords (hence, landlord) and made available to their tenants in exchange for services. These include providing food and labor or military service for the manor's rulers. Similar feudal-like practices have been identified in many other parts of the world, including Hawai'i.
For more than a thousand years, English royalty owned much of the land in their country. Landlords completely dominated the lives of peasants who lived on their property. Before the French Revolution, many landlords in that country allowed only short leases to tenants, often less than 10 years and with no assurance of renewability. For centuries, Russian serfs lived in a state of near-slavery. They could even be sold with the land. That practice was not changed until the mid-19th century.
As feudal England, France and Spain established overseas colonies, they set up land-lease ownership arrangements. Maryland was an example of colonial feudalism. When Lord Baltimore established the Maryland colony, he was authorized by the King of England to own the land — just as with English manorial estates — and much of his lands were leased, not sold.
In 1884, however, the Maryland state legislature finally abolished the practice by requiring land holders to sell the land to homeowners who lived on it and wished to buy it at market value. By the late 19th century, the leasehold system was declining worldwide — except in Hawai'i.
Throughout precolonial Hawai'i, ali'i ruled their people in feudal-like systems. Land belonging to royalty required tenancy work and services. With the arrival of American, British, Russian and other colonials, trade in sandalwood, whale products and produce began to alter the land-tenant relationship.
Start of problem
Today's leasehold system in Hawai'i began its first growth early in the 19th century. The "Great Mahele" of 1820 divided all the lands: about one-third each to the monarchy, the chiefs and the commoners. That policy has been attributed to the kingdom's minister of the interior, Dr. Gerrit P. Judd, a former missionary.
It has been described as a way to provide lands for the native people of Hawai'i. Alternatively, it could be viewed as a basic source of the Hawai'i linkage between feudalism and colonialism. Through purchases and gifts, much Hawaiian lands fell into the hands of colonists — sea captains, traders and missionaries.
Today, many Native Hawaiians are apt to be leaseholders, renters or homeless rather than land holders.
The mainly haole landowners kept buying, but rarely selling, Hawaiian lands.
That practice is revealed in the experience of a Mainland director of the Big Five firm American Factors. When he recommended selling some land in the 1950s to finance a large resort development, "Another director with strong Hawaiian ties rebuffed him in words that became celebrated: 'But Mr. Butcher, we in the Islands don't sell land.' " (Cited in Cooper & Daws, "Land and Power in Hawai'i," page 208). The policy of the major Hawai'i landholders was (and still is) to use land, save land or lease land.
Since Hawai'i real estate tax rates are estimated to be only about 30 percent of the national average, unsold land is especially valuable to owners of potential commercial and industrial properties. Their low taxes and rising land prices makes such possessions financially rewarding assets. The benefits are not only to the landowners, but also to investors and financial institutions. Those benefits help to maintain high land prices.
The most valuable properties in Hawai'i, as elsewhere, are commercial and industrial land. Short-term leases allow owners to keep raising land rents and capturing the improvements built on their land. The result is a self-perpetuating system that favors the highest bidder for leaseholds of commercial-industrial land.
Local liability
The most harmful effect of monopolizing commercial-industrial land ownership is on other businesses, especially small businesses. Our leasehold system is a uniquely Hawai'i barrier to small-business survival.
A major operating cost of many small businesses, compared with those on the Mainland, is leasehold land rent. Those who operate on small profit margins could be driven out of business or into bankruptcy by steep raises in their lease rent. High-profit businesses, such as luxury and high-fashion goods, are able to pay high rents. Although many Japanese tourists have been able to buy costly products, Hawai'i residents find that stores selling local or less-expensive products are disappearing from the marketplace.
The new Wal-Mart is an example of recently disappeared small-business leaseholds. Until about 1990, that land was the site of more than 100 lessee enterprises — groceries, restaurants, studios, a gas station and many others. None of their leases was renewed.
The colonial-feudal system of home leaseholding still retains a significant influence upon Hawai'i's lands and residents. If the city government eliminates leasehold-to-fee conversion, thousands of lessees will lose the right of home ownership.
Commercial-industrial land may remain entirely under the influence of our feudal lease-holding heritage, with its declining survival rate of small businesses.
Jerome G. Manis, a Honolulu resident since 1983, is a former university professor and director of the Social Research Center at Western Michigan University.
