Hawaiʻi presents a unique set of challenges when it comes to property ownership. Particular issues may arise in connection with generational or family land, meaning land that has been passed down through multiple generations. With a limited amount of real property available and a high degree of interest from out-of-state buyers, it can be difficult for succeeding generations to hold on to or otherwise manage the properties that have been passed down to them.
As a financial matter, it may be challenging for present-day family members to retain land given the rising cost of real property taxes, which are primarily based on property values and tend to increase year after year as sales prices rise. The income potential for many properties in recent years has also been significantly limited by new laws and regulations restricting short-term vacation rentals, with that trend expected to continue. Costs of maintenance and upkeep as properties age are also an ongoing concern. Particularly for families who hold most of their assets in real estate rather than capital (sometimes referred to as a “land rich, cash poor” scenario), the financial burdens of property ownership can be difficult to sustain.
From a logistical perspective, current generations may also face issues in managing the property. With each new generation typically being larger than the last, ownership interests in the property may be divided among numerous parties. This can lead to questions and disputes with respect to who is entitled to use or occupy the property, who makes decisions concerning the property, and who is responsible for maintaining the condition of the property.
Changing land use laws present further challenges. Over time, properties can become nonconforming with current zoning ordinances and building codes, limiting the development options that are available to owners or otherwise requiring significant investment to bring the property into compliance with current regulations.
However, there are mechanisms that families can use to help address these issues. For certain properties, a viable option may be to subdivide the land into separate parcels, enabling multiple owners to hold their own individual piece of real estate and thus alleviating some of the issues described above. Another possibility to explore is the submission of land to a condominium property regime, which is a form of property ownership whereby multiple units can be created on a single lot. The owners in a condominium project have exclusive ownership of their respective unit or units and an undivided ownership interest in the common elements of the project, which is held in common with all other unit owners in the condominium. Common elements are those portions of the condominium project that are available for use by all of the unit owners, as opposed to the portions of a project that are included within the individual units themselves or reserved for the exclusive use of less than all units. Each unit in a condominium may be transferred or sold separately from other units in the project. The subdivision and condominium options above provide owners with flexibility in terms of sale or financing ability and have the added benefit of creating a smaller, more manageable piece of real estate for maintenance and real property tax expenses.
For properties that cannot be subdivided or condominiumized, owners can consider negotiating and entering into a tenancy in common agreement to clearly document agreed-upon rights of use, decision-making, and management responsibilities among family members, thereby reducing the likelihood of disputes. Owners can also consider forming a limited liability company (LLC) or trust to hold the property. With the use of an LLC, family members benefit from limited liability protections and hold membership interests in the entity that holds the property, rather than a fractional interest in the property itself. Those membership interests may then be transferred among the extended family members of the LLC, allowing some members to easily liquidate their interests if desired. Placing a property into trust similarly provides flexibility in dealing with multiple family members who may have varying claims to the property as the trust document can dictate the terms for how trust assets are allocated. Trust documents and LLC agreements can also be advantageous in establishing management responsibilities and use rights for a property and may be amended as needed to account for changes in family dynamics or other considerations.
Any party who is interested in buying or selling generational land is encouraged to seek assistance from competent real estate professionals, accountants, and attorneys. On the buyer side, potential purchasers should consult with such professionals to ensure that thorough due diligence is performed and that buyers are aware of any issues with the property before closing on the purchase, particularly with respect to any title concerns or rights of other parties to use the property. On the seller side, owners should endeavor to compile relevant documents in advance and anticipate any issues with the property before they list. Land held over generations often tends to have unpermitted improvements or setback issues, and sellers may want to consider including an “as-is” addendum in the purchase contract. As many of these properties are in valuable and highly regulated areas, sellers should also consider having an attorney review the listing agreement and any proposed purchase contracts before signing. Sellers may also wish to investigate the potential for a tax free exchange by talking with an accountant or tax attorney.
When it comes to dealing with generational land matters, there is no one-size-fits-all approach. Determining the mechanism that best serves a family’s needs will be highly dependent on the property itself, as well as the family’s goals and objectives, and consulting with a legal professional may be key to understanding the pros and cons of each alternative. Property owners who are facing any of the issues described above, as well as any potential purchasers of generational land, are encouraged to reach out to our team of attorneys for guidance.
This article was originally published in the Spring/Summer 2024 issue of ke kumu, Cades Schutte’s client newsletter.
