Good Times

Kauai's real estate boom – is it hurting locals?

July, 2003

In early May, Nalani Ching sat glued to her television, as an Entertainment Tonight reporter dished the latest on Friends’ star Matt LeBlanc’s wedding ceremony, held on a private North Shore estate on Kauai. “Great, that’s just what we need, more publicity, so more Mainland investors can come build their big, fancy homes in our back yards,” said 63-year-old Ching, a lifelong Kauai resident. Her son, Jake, a local contractor, shot back quickly, “Eh, no forget, those big, fancy homes are keeping me alive.”

Indeed, real estate and construction activities on Kauai – primarily upscale housing and resort projects on the south and north shores – have been going gangbusters over the past few years, and are fueling the island’s economy. Kauai had the largest growth rate (6.4 percent) of general excise tax revenues statewide in 2002, as money from these projects poured into the economy.

Architects and contractors are doing so well, they’re actually turning work away. And hundreds of realtors are trying to get a piece of the action. Kauai Board of Realtors Executive Officer Karen Ono says membership has increased 60 percent, from 295 to 469 members in just three years. Construction jobs also grew 4.5 percent in late 2002, compared with the year before.

The biggest indicator, however, is real estate sales. Between 1998 and 2002, total sales of condominiums, residential units and vacant land increased 70 percent, from 798 sales to 1,356 sales. The total sales dollar volume during the same period doubled, from $228 million to $462 million. Ono says she wouldn’t be surprised if sales top the half-billion dollar mark by the end of this year.

The boom, however, isn’t necessarily entirely good for the island. The market is going so hog wild that, at $330,000, the median sales price for a single-family home on the island has grown out of reach for the majority of the island’s residents.“Supply and demand for real estate on Kauai is way off balance right now,” says real estate appraiser Dennis Nakahara. “In a three-year period, property values have increased anywhere from 50 percent to 100 percent, and it’s causing a growing disparity between the haves and the have-nots on the island. The average person on Kauai simply can’t afford to buy a home.”

Which begs the question: How has it come to this, and more importantly, why don’t developers and landowners just build more affordable housing? It’s certainly not for a lack of land, as only 5 percent of the island’s 500 square acres is actually urban. It’s not for lack of funds either, because several developers have expressed interest in developing a range of projects, from small subdivisions to expansive residential communities. What it boils down to is the island’s failing infrastructure, which is in dire need of a major overhaul, and the fact that no one’s got the money to pay for it.

Barriers To Better Development
Inadequate infrastructure is a problem islandwide. There is a mounting ground-water shortage in the Lihue Basin and surrounding areas of eastern and southern Kauai.

The majority of Kauai’s 13 water systems (which pumps water from 48 ground wells and tunnels) date back to the plantation era, and large portions of the 400 miles of pipeline are 80 to 100 years old. Areas of the island that don’t suffer from water problems (such as Waimea and Kekaha on the west side) have sewage issues. And the island’s teeming single-lane roads produce daily traffic snarls.

County planning officials admit they’re between a rock and a hard place, when it comes to strategically planning for growth on the island, because they’re understaffed and underfunded for the monumental task. Even though the sign on the door might read “Planning Department,” only one person in the 20-member staff actually spends time working on the county’s development plans. The remaining 19 staffers provide administrative support and respond to daily permit and rezoning requests.

Value of Taxable Properties
by Zone (Millions $)
2002 2003
ZONE 1 Land
Building
88
106.2
101.1
107.1
ZONE 2 Land
Building
216.1
271.8
265.4
290
ZONE 3 Land
Building
176.5
223.3
180.2
239
ZONE 4 Land
Building
239.6
287.9
250.2
309.1
ZONE 5 Land
Building
194.6
174.6
228.7
193
TOTAL Land
Building
914.9
1,063.9
1,025.7
1,138.0
Source: County of Kauai Department of Finance

Most of the county’s six development plans, which overlay projected growth onto existing areas of the island, haven’t been updated in nearly 30 years, according to Ian Costa, the new planning director for the county of Kauai. The plans are supposed to be updated every 10 years. “That’s a real luxury to effectively plan proactively, because each plan costs anywhere from $100,000 to $500,000. Also, we’re short-staffed,” says Costa. “We can’t just drop everything and say, ‘We’re not going to sign anymore permits until we get the development plans taken care of.’”

Eventually, the plans will be updated, but even then, they aren’t the end-all solution. They provide the county with a roadmap for growth, but they don’t cover the costs of development. Since the glory days in the late ’80s, that burden has fallen on the developers.

“Government used to pay for infrastructure, because they were getting a lot of federal grants. But when they saw that everything was growing in the late ’80s, they said, ‘The developers are making all the money, so let them put all the infrastructure in,’” says Allan Smith, vice president and chief operating officer of Grove Farm Co. Inc. “The end result was that developers couldn’t afford to pay for infrastructure improvements, their projects were stymied and they couldn’t develop.”

Smith speaks from firsthand experience. When Grove Farm began planning its 600-acre, mixed-use project in Puhi during the robust ’80s, the company thought it couldn’t go wrong. Despite a county requirement that Grove Farm sell a sizeable 60 percent of its total units at “affordable” rates, instead of at market value (nowadays, county-mandated affordable-housing requirements are closer to 15 percent per project), the company stood to turn a nice profit overall.

“Instead, the project nearly bankrupted the company,” says Smith. “Developers automatically lose money on affordable housing projects, because it costs the same as doing a market-value project. On top of that, we had to put in a sewage treatment plant, dig a water well and install water tanks. Over the last 10 years, we’ve spent close to $40 million on infrastructure. This is exactly why we aren’t seeing more affordable housing going up – regulatory and infrastructure issues.”

Kauai Mayor Bryan Baptiste acknowledges that, “Kauai has had a tendency to put a lot of barriers in front of development. It is very hard for developers to build affordable housing because of the requirements we put on them.”

Property Tax Valuations
County of Kauai
(In Billions)
Fiscal Year
1998-99 $6.0
1999-00 $6.1
2000-01 $6.4
2001-02 $7.0
2002-03 $7.5
Source: County of Kauai Department of Finance
Property on Kauai is worth $1.5 billion more today than it was five years ago

Grove Farm Vice President and Assistant Secretary Michael Furukawa says the costs hit small developers twice as hard. “The small [developers] have to spend the same kind of money that we are, to drill wells and put in sewer lines,” says Furukawa. “They just can’t afford it. That makes me really concerned for the local people, because we’ve got tons of land, but it’s so difficult to develop.”

Outsiders On The Inside Track
Not everyone is having difficulty developing. While landowners are busy cutting through tape to get affordable housing projects up, timeshare developers and high-end home contractors are moving along briskly. Peter Robson, president of Unlimited Construction Services Inc., says these are good days for Kauai’s construction industry, with even better days ahead. “[UCSI] went through a real survival period in the late ’90s, where sales were real grim – in the $18 [million] to $20 million range. Now, we do somewhere between $40 million to $50 million annually,” says Robson. “It’s because time-share business is robust here, and there are some good government projects. Between that and all the million-dollar homes being built, I don’t see the industry letting up anytime soon.”

The boom in high-end home construction has also contributed to the lack of affordable housing for residents. “We’re seeing lots and lots of high-end homeowners, mostly from the Mainland, who are moving here with drawbridge syndrome,” says Ed MacDowell, principal broker of Vision Properties Inc. “Once they move in, they want paradise to stay the same, so they pull the drawbridge up, and they start lobbying against development, which stops the creation of affordable subdivisions for the local people.”

Former Kauai Mayor and current Councilwoman JoAnn Yukimura says that while the hot upscale market might be shoring up the economy, some longtime homeowners complain it’s also needlessly driving their property values sky-high. “One testimonial that we heard in council hearings was really illustrative of how these extremely high-value homes are affecting the real property taxes,” she says. “One Anini homeowner’s tax in 2001 was $7,000, and by 2002, it was $17,000. That really illustrates the extreme upswing of the market, and some people just can’t afford those types of increases.”

Property values are increasing predominantly on the North Shore, where several local families who have lived on the island all their lives are being taxed off their lands. “A year and a half ago, my mom was forced to sell one of her prime, oceanfront lands that’s been in the family forever, because the property value went up and up and up, and eventually the land tax grew to the point where she couldn’t afford to keep it,” says Lahela Correa, visitor program manager of Limahuli Gardens and lifelong resident. “It’s really sad, because I see that happening to a lot of the longtime locals, not just us.”

Even the county’s real property tax manager, Les Brown – whose staff assesses and assigns property values – is empathetic. “I had a piece of property in upstate New York, and its value quadrupled, and so I said, ‘Nope, can’t afford to live here anymore,’ and was forced to sell,” he says. “So I am really concerned about not taxing people off of their property, because I experienced that.”

However, Brown admits that island residents haven’t seen the worst of it yet. Because the department only does assessments once a year in January, there’s a lag between real estate cycles and actual assessments. “Based on real estate sales since last October, I’m anticipating that residents will see more [property value] increases this coming year,” he says.

Hospitality Hogs Rental Inventory
Thanks to a relatively healthy timeshare market, visitor numbers on Kauai have remained fairly strong. As of March, visitor arrivals were 84,294 (up slightly from the year prior) and occupancy rates averaged a respectable 72.6 percent. However, tourism too, has its own special affect on the island’s housing market. As the resort market continues to be very bullish, more visitors are opting for nontraditional stays in vacation rentals, as opposed to conventional hotel rooms. This has led thousands of Kauai homeowners to convert their homes – which were traditionally long-term rentals for residents – into vacation rentals.

“When the visitor industry is soft, we’ve got anywhere from 3,000 to 5,000 condo units and multifamily homes that become available for the community to rent,” says Ken Rainforth, executive on housing for the county of Kauai. “But conversely, when the visitor industry is stronger, all those units are taken off the long-term rental market. On Kauai, where you’ve got only 30,000 parcels islandwide, 3,000 units is a significant number.”

Supply and demand are so far out of line with each other that the average rental rate for a three-bedroom, two-bath home has more than doubled in the past few years. “You used to be able to rent one for as low as $600,” says Vision Properties’ MacDowell. “Now, if you’re lucky enough to even find one at all, you’re looking at $1,200 or more.”

The tight rental market makes it doubly frustrating for residents who can’t afford to buy. Left with the options of shacking up with relatives or paying outrageous rents for tight quarters, some residents ultimately leave the island in search of more affordable digs.

Planning For Slow Growth
Overall, there is a renewed sense of urgency in the County government, to do what it can to better plan for growth and bridge the affordable-housing gap. The County’s housing agency – which made the shortsighted decision several years ago not to develop affordable housing because private developers complained it was creating an additional layer of competition – is getting back in the mix. “We feel confident now that we have the skills to get involved in the development of both for-sale and rental housing,” says Rainforth, the County’s executive on housing. “I see the County’s role as co-developer, financier, providers of construction management and technical assistance.”

Planning Director Ian Costa also sees his department playing a larger role by putting the updating of the County’s development plans high on its priority list. The government is also working to take some of the pressure off private developers to build infrastructure, by offering tax credits and doing joint-venture projects. For example, the County is joining forces with Grove Farm to build a 3-million-gallon-per-day water plant to service the Lihue and Puhi areas.

The County is also taking steps to thwart extraordinarily high property-value hikes. The mayor and the County Council assembled a nine-person task force earlier this year, which will analyze the County’s archaic property tax system and suggest changes to it by the end of the year.

“There is definitely an urgency to put steps in place to ensure that growth doesn’t adversely affect us, and we’re working to make corrections and put legislation in place,” says Mayor Bryan Baptiste. “It’s tough when you live on an island with a finite amount of land and the prices never go down. But we’ve got to find a way to balance things out, so that people aren’t getting taxed off their lands, and so that the people who were born and raised here can still afford to live here. We all realize that the children who are born here should have the right to live here.”

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