Aloha Coast Realty’s Blog of the Big Island

44th Merrie Monarch Hula Festival Hilo Hawaii — Halau O Kekuhi #2

Originally uploaded by SparkyLeigh

Its Merrie Monarch week!

Very interesting article about property tax assessments in the Hilo and Puna areas in the Hawaii Tribune-Herald (you may have to register and after another week or so it will be gone).

A couple of quotes:

“Despite declining Big Island real estate values, many landowners are facing higher property taxes — some up 100 percent or more — due to the new way Hawaii County assesses homes, stores and other buildings.

Annual tax notices mailed last week reflect a preliminary 12.2 percent — or $3.2 billion — increase in county-assigned property values.

That means the county stands to collect an extra $25.8 million for the fiscal year starting July 1. New construction accounts for only 3.3 percent, or $7.1 million of the increase, with the rest attributed to higher property tax assessments.”

But one big question comes to mind: why, if values are down a bit?

Stan Sitko, the county’s newly appointed property tax administrator, maintains the timing is right because previous assessments were low and depreciation excessive.

“This year, I took the big step. We recalibrated,” he said regarding how the value of improvements is determined.

“Why are our assessed values still coming up when the market is correcting itself?” Sitko asked in an internal e-mail shared with the Tribune-Herald. “Two very good reasons: Our level lagged far behind the market in 2007 and 2006; and the volume of sales may have gone down in 2007, but the prices didn’t radically drop.”

A couple of things to consider:

Just remember, owner-occupied properties cannot increase in assessed value more than 3% per year. If your homes are owner-occupied (and you bought more than a year ago) they should not be making any dramatic adjustments. KathyH, since you just bought, they may be making an “on-sale”-type adjustment this year, and next year you’ll be subject to the 3% cap — however, I’d still call them and make sure they are assessing properly.

As for not having received it yet — don’t sweat for a while. March 15th (yesterday) was the deadline for the County to mail them — give it a while to get there. Some of us just got them early.

Another note — if your house here is a rental and falls below the “affordable housing” rental rates, you can also file for special tax rates that the County gives to homeowners that provide “affordable housing” to renters. You have to provide a copy of the lease and fill out some forms, and its not a huge amount of money anyway, but its worth knowing. In some cases it makes sense. Hypothetical example — you could rent for $1100 a month, but the affordable rental rate for your house is (for example) $1080. If you dropped the rent to $1075, you might save enough in taxes to more than make up for the lost $25 a month. But then your rental expenses would change and that could have income tax implications…so, its not a simple thing, but you should get the info to be informed.

Homeowners are also assessed at a lower rate (per thousand) than non-owner occupied properties. Live in your home and you can avoid a lot of property tax. I am not kidding when I say that I pay more in property taxes for one lot in Kapoho than I do on my home and that’s been true for years.

Another thing to keep in mind is that (at least for me) the standard homeowner’s exemption is $40,000 but starting in 2005, an additional exemption of 20% of the total assessed value was passed. For example, my exemption is actually almost $70,000 after the 20% was added on. However, this 20% addition may not be law and could be currently granted as a gift from the County Council that they could also take away.

photo credit: HVX Silverstar

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Interesting — it appears that the population on the islands may be shifting a little bit. Today’s Star-Bulletin has this article about some minor population shifts in the islands. What is interesting is the growth of part-time residents. I know I’ve seen signs of this on the Big Island. We have a lot of part-time residents as well as a number of full-time residents that never even considered O’ahu due to crowding, cost and traffic. Many are retirees, so the lower amount of conventional employment is less of a concern.

photo credit: Michael (mx5tx)

A lot of people think that being more “green” in real estate is something that is difficult or can only be done as part of a new construction or major remodeling project. That is far from the truth. Very often, simple things can be done to reduce home energy usage and improve the “greenness” of a house.

For example, I was recently asked about “what would the energy savings be if I replaced the hot water heater with a solar one?” My questions back to them were “do you have an insulating blanket around the existing hot water heater?” and “have you put the hot water heater on a timer so its turned off when you’re not around the house to use hot water?”. The answer to both questions was “no”.

Sometimes the simplest things are great places to start. I’d rather put on an insulating blanket and install a time for (at most) a couple of hundred bucks than to have someone tearing up my roof and spending thousands (even after the tax breaks) on a solar hot water heater. Now when the hot water heater is worn out and its time to replace it, that’s a different story.

Of course, I gave this advice to a number of people BEFORE I bought my own insulating blanket and timer and now our local Home Depot is sold out…darn.

Many things that are great ideas for the mainland don’t apply here in Hawaii (ceiling insulation, heating ducts — what are those?), but the advice of “start with the basics” definitely applies.

On one house I own, I had a solar attic fan installed at a cost of around $600 (it was a few years ago, so forgive me if I have the amount wrong). When the sun hits it, it turns on and sucks hot air out of the attic. The temperature in the house dropped by about 5 degrees immediately. Its not a “cure-all” for hot houses, but it sure helps. And there’s no on-going cost and I expect it to last many years.

Of course, ceiling fans are a way of life in Hawaii – often we have at least one in every room. What I did not know until fairly recently was that older ceiling fans can be quite energy-inefficient. Newer ones are much better. Again, if you don’t have to replace them, the energy savings is probably not enough to justify it, but when it is time to replace one, look for an energy-efficient model.

Speaking of appliances and other durable goods in general, its not the most “green” thing to do to replace anything unless there’s a pre-existing need. To use the ceiling fax example, removing a functional ceiling fan in order to replace it with a more energy-efficent model is probably not a good idea unless you have someone that can use the old fan or you can use it yourself (perhaps in a little-used guest bedroom). To take out the older fan and have it end up in a landfill defeats the purpose.

I often hear of people replacing the main refrigerator in the house with an EnergyStar model and then taking the old one out to the garage or carport and using it a secondary or “beer” fridge. Again, that kind of defeats the purpose – you now have the old energy-inefficient model AND the new one both running. It would be better to have one, larger, energy-efficient fridge.

If you haven’t encountered it yet, FreeCycle is an amazing thing where you can offer up, for free (and only for free) anything you have that may be working, but you no longer need. The person wanting it will usually pick it up (or at least meet you at a convenient location), get the item and put it into use. Less in the landfill is always “green”. Check it out at http://www.freecycle.org.

Just a few tips to make life in your existing home a little “greener”.

A lot of people are saying right now “oh, don’t buy now, things are still going to go down”. Whether or not that’s true, I don’t know, but I think people are forgetting the inherent advantages of home ownership. This is all obvious, so if you’re familiar with this, you can skip this blog entry. Same thing for people that already own a home; this may not apply to you.

Let’s say you are renting a 3 bedroom house for $1200 a month (a common price here on the East Side of the Big Island). That’s $14,400 a year.

Now, let’s say that you find a great house for $200,000 or $250,000 (you can find a really good house, pretty new, for $250,000 in HPP right now). Let’s say you have nothing to put down, but have really good credit (yes, 100% mortgages ARE still possible). Your payment will be in the $1700 a month range (including taxes, insurance and private mortgage insurance). So, at first blush, it looks like you’re taking a loss of $500 a month.

Factor in the tax advantages though and the picture changes. First of all, the interest is deductible from your income, so on the $250,000 mortgage you’re paying about $14,400 a year in interest plus another $1200 in private mortgage insurance and about $600 or so in property taxes. All of these are deductible and total just over $16,000 a year. So, if it totals $16,200 (the total of the example figures I used), you can deduct that from your taxable income. At a 25% tax rate (a common one), that will save you $4,050 a year or $337.50 a month. So the actual amount paid, in real terms, comes down to $1362.50 a month.

Still higher than rent, that’s true. But if you look at the equity build-up, you’ve paid down the mortgage by somewhere near $3000.

Note: these figures are rounded and are generalizations – everyone’s situation is different, so trust a tax person or your accountant to give you the real figures for you. Your actual cash out of pocket is about the same, but you’ve stuck a few grand in the “bank”, so to speak.

Let’s look at the scenario where prices decline another 10%. So that $250,000 house is now $225,000. Man, you’ve lost money! Not really. You’d save about $200 a month in the payments, so maybe now you’re at breakeven versus the rent. In the meantime, you’ve lost months worth of tax savings and have paid someone else’s mortgage. Its not like your rent went down.

If you have a job or other income, decent credit and don’t plan to leave the island in the next year or so, homeownership always makes sense. Gyrations of the market not withstanding.

One of the areas of Hawaiian real estate that is not clear to a lot of people from the mainland is the issue of “leasehold” versus “fee simple”. If fact, this confusion (especially on the mainland) is so prevalent that I’ve had people say to me “well, you can’t own property in Hawaii, can you?”. Of course, that is completely false. While fee-simple ownership is the most complete form of ownership, its not as if leasehold ownership is without any of the rights or privileges of ownership.

It is true that until recently, up to 85% of all non-governmental land was occupied under a long-term lease. However, in recent years that has changed. There have been a lot of legislative changes, as well as changes in public opinion that have lead to more land becoming available through fee-simple ownership.

Let’s start by defining the terms:

Leasehold: the land remains in the hands of the underlying owner (the “lessor”), however, the lessee (the person occupying the property) has a long-term lease giving them the right to use or sell the improvements on the property. Since many leases are 55 years or longer, this has the effect of the giving effective ownership to the leaseholder. The leaseholder just never owns the underlying land.

Fee simple: this is the type of ownership that most people know. You own the land, you own what’s on the land and you own them both forever or until you decide to sell.

Leased Fee: this is the interest in the property that the underlying owner (“lessor”) has in the property. Sometimes, the person, trust or entity will decide to sell their interest in the property and will offer the “leased fee interest” in the property to the existing leaseholders.

In Hawaii, leasehold property is still common. Its far less common on the Big Island and actually, its quite rare on the Hilo side of the Big Island. Of the properties on the market at any one time, less than 5% are leasehold, at least here (it is more common on other islands).

Leasehold properties can be bought and sold just like any other, with this one big caveat and exception. A leasehold property always has an end date – and on that end date, the current leasehold owner may have nothing. It seems strange, but you can live in a house for 30 years, have enjoyed all the benefits of owning it and one day, without the building or anything changes, you own nothing. The lease has expired and the property has reverted back to the fee simple owner.

For this reason, leasehold properties tend to sell for less than “fee simple” properties, because the ownership in fee simple properties never ends. The law of supply and demand limits the prices of leasehold property. After all, if you had the choice of two properties, one where the ownership was unlimited and perpetual and one where your ownership ends on a specified date in the future with no compensation for loss of use of the property, obviously you’d pay less for the one with an expiration date.

Another thing to consider when considering leasehold property is the limitations on financing. For reasons that should be fairly obvious, a bank is not going to give you a thirty-year mortgage on a property whose lease expires in 22 years.

Another variable is that most leases have clauses in them for lease rent “renegotiation” or even statements that automatically adjust the lease rents at fixed intervals. Interestingly, the lease rents tend to go up and almost never down. Hmmm…. All joking aside, the possible lease rents increases are governed by Hawaii law and do have established ceilings. However, if someone is considering a leasehold property, its is vital that they know the current lease rents, the lease expiration and when the rent reviews/renegotiations are scheduled in the lease. These dates are fixed at the beginning of the lease and will only change if the lease is renegotiated for some reason (significant change in the property, new owners of the fee simple interest, and other factors of this kind).

One important thing to know is that, by law, any leasehold property MUST clearly state that it is leasehold property. In many advertisements, this is abbreviated to “LH” but the advertisements must make it clear that the property is not “fee simple” but “leasehold”.

As alluded to earlier, a common question is “what happens when the lease expires”. The worst-case scenario is the leasehold owner will end up with nothing. The building may be intact and everything could look perfect, but the leaseholder no longer owns anything. Of course, depending on current zoning, the owner’s plans for the property and just about any other factor you can think of, other events could occur – bulldozing and redevelopment of the property, condemnation by the county, a new lease – just about anything. Many leases contain a “right of first refusal” that give the current leaseholder the first rights to any new lease, should one be offered.

So, given these limitations, are leasehold properties out of the question to buy? Of course not. It depends on your wants and needs. Many leasehold properties are in very desirable locations (which often is why the fee-simple owner chooses to lease rather than sell – they can keep their valuable interest in the land, but still generate income from it). Its like everything else in real estate, it depends on your wants and needs. Condominiums may be right for some people and totally wrong for others. A house on several acres may be right for some and wrong for others. In the same vein – leasehold properties may be right for some and completely wrong for others.

photo credit: Claire L. Evans