About The Investor Offering
Q. Why is Kamehameha Schools selling its leased fees?
Kamehameha Schools has decided that being a 'residential' lessor for most projects on O‘ahu is not part of its long-term objectives.
Q. What is this investment?
Investors have the opportunity to purchase the leased fee interest under specific condominium apartment units around O‘ahu, and assume the lessor’s position for those assets.
By purchasing the leased fee, you receive the benefit of lease rent income either monthly or semi-annually, and the ownership of the condominium apartment unit (land and improvements) at the end of the lease term. Pursuant to the lease contract, when the lease terminates or expires, you would own the unit in fee simple and the then lessee is required to vacate the unit. You should have the benefit of the fee simple market value of the unit at that time.
Q. What types of investors would benefit from this opportunity?
Ø Those that have a longer time horizon for their investment needs
Ø Investors who want to use real estate to transfer assets to children and grandchildren
Ø Those that would like to own one or more properties by using less cash up front
Ø Investors who want to diversify their real estate investment portfolio
Q. What are the costs?
Besides the purchase price and closing costs, there may be costs in the future to renegotiate the lease rent amounts at specified intervals in the lease term and rent collection costs. Because each lease has various renegotiation dates and some leases have fixed rent for the remaining term, we are not able to accurately predict the cost of renegotiation at this time. However, during the lease term, you do not incur costs that are normally associated with the ownership of “traditional” investment or rental property, such as improvements, property upgrades, property taxes, and maintenance and association fees. These costs are the responsibility of the lessee.
Q. How do I purchase a leased fee asset?
The process is simple – to start, you will complete a one page reservation letter, and provide a check of $10,000 to confirm your interest. Because the lessee and the AOAO have specific time frames in which to consider their first right to purchase, the purchase may take up to 180 days to close. The process does require patience.
Q. What happens to the lessee when I purchase the leased fee?
Nothing happens to the lessee. Their obligation to pay lease rent continues and you receive the lease rent as the lessor. At the end of the lease term, the lessees are contractually obligated to return the condominium apartment unit (land and improvements) to you. At that time, you should have all rights, opportunities, and responsibilities of fee simple owners of condominium apartment units. You may also decide to sell the leased fee interest at any time while the lease is still in force, however, you will need to comply with statutory procedures established by Hawaii Revised Statutes, Section 514C, which will require you to provide the Association of Apartment Owners of the project a right of first refusal to purchase prior to consummating a sale with another third party investor. You may also sell to the lessee or acquire the leasehold interest if the lessee is willing to sell.
If you decide to purchase, then upon your acquisition of the leased fee, Kamehameha Schools will notify the lessee of the ownership transfer and the contact information that you provide.
Q. What are the risks?
Like all investments, there are risks. We are not able to guarantee or quote any specific returns on this investment. It is possible that during the term of the lease, the lessee may default on the lease rent payments. It is possible that at the end of the lease term, the lessee may refuse to return the condominium apartment unit (land and improvements) to the lessor, which may require legal action by the lessor against the lessee. There is also the risk of new legislation that may affect your contract rights.
Q. How will lease rent renegotiations be handled?
If the lease has a rent renegotiation, you and the lessee, through the Association, will attempt to determine the renegotiated lease rent by agreement. If the parties are unable to reach an agreement, the lease allows renegotiated lease rent to be determined by arbitration. In general, the parties will share the cost of the arbitrators equally, except that each party will pay their own appraisal and attorney’s fees, if any.
Q. What happens if a lessee defaults on its lease rent payments?
In the event of default, you may move to cancel the lease. If the lessee cooperates, you may reach a mutual agreement with the lessee for a cancellation of the lease. For lessees with mortgages, most leases allow the mortgagee 120 days to bring the delinquency current. Should they fail to do so, you may then proceed with legal action for a cancellation of the lease. In the event of cancellation of the lease, the condominium apartment unit (land and improvements) would revert (be returned) to you, however, you may not able to recover the costs you incur to cancel the lease. In many cases, the lessee will sell its leasehold interest and the selling lessee or the buyer of the leasehold interest will pay the delinquent rent or face a cancellation of the lease by the lessor. If you have these concerns or additional questions, we recommend that you discuss these risks with your attorney.
Q. What are the benefits?
Ø Allows for the transfer of assets via real estate to children and grandchildren with little cash up front generally without the need to get a mortgage
Ø An opportunity to own real estate for a smaller cash investment up front than in a fee simple purchase.
Ø The ability to purchase multiple properties with less cash up front
Ø A stream of lease rent income paid monthly or semi-annually, and in many cases subject to increases over time at intervals specified by the lease
Ø The benefit of fee simple ownership of the actual condominium apartment unit at the cancellation or expiration of the lease
Ø The benefit of any appreciation in fee simple values that take place during the lease term
If you have any questions, please call the agent at Prudential who has been assigned to assist you.