Why Hawaii Commercial Leases for Exactly a Five Year Term Should Be Avoided

Hawaii real estate landlords have a tendency to offer to prospective Hawaii commercial tenant leases for a three or five year term. The Hawaii landlord does not want a tenant for just a year because the amount of paperwork and because they would have to be possibly marketing the space again in six months.

A Hawaii landlord therefore wants a longer term but not too long because the rent could be locked in and the fair market value might eventually exceed the lease rent payment. As a result a five year term is especially desired because it locks up the tenant for a good period of time but not too long for the fair market value to exceed the rent. Unfortunately, such action lacks a full understanding of Hawaii law and should probably be avoided.

The reason it should be avoided is the Hawaii Conveyance Tax must be paid on all leases or subleases with full unexpired terms of five years or more. Thus, offering a tenant a lease term of four years and eleven months avoids the Hawaii Conveyance Tax, but adding a month more to round out a full five year term results in the Hawaii Conveyance Tax requiring payment by the Hawaii landlord based on the annual rent to be paid over the life of the lease and also on improvements.

Thus, a Hawaii landlord has to pay up front on its supposed income even if a tenant defaults in year one or does not put in the improvements. As you can see, there has to be a very strong reason for the additional month in order to justify the Hawaii Conveyance Tax kicking in. There are other issues that you will need to consider when entering into a Hawaii lease.

Contact us and we’ll guide you safely through this process.