Owning a coffee farm is a wonderfully rewarding experience. Knowing that you produce one of the finest coffees produced anywhere on the planet and probably the universe, and that you can brew a fresh pot of pure Kona instills a sense of well being comparable only to Nirvana. The path to ownership however is fraught with perils and uncertainties. The following guide is for you to use so that you may gain some insight into the process.
LAND TENURE: There are two kinds of land tenure or types of ownership that are common in Hawaii. They are FEE SIMPLE AND LEASE HOLD. Simply stated, fee simple is the way most of America owns property. You have a deed proving that you are a vested land owner. Here in Hawaii, most of the land is owned by huge estates which are remnants of the old Hawaiian monarchy. The Kingdom of Hawaii owned all of the land. Bernice Pauahi Bishop Estate is the largest of these land owners. They own 341,546 acres or approximately 23% of all of the land. I would guess that approximately 80% of all of the land suited for growing coffee in Kona.
When you buy any property you should always follow some basic guide lines. You should always get a survey, title insurance, and it is usually a good idea to consult an accountant and an attorney. Buying fee simple land is not very complicated so I will not go any farther in depth.
When you buy a Residential leasehold property, the state law requires the seller to provide the buyer with a copy of the lease and all of its amendments of record along with a leasehold disclosure prepared by a licensed attorney, within 10 days of opening escrow. The buyer then has the right to review these documents and may cancel the transaction if he does not like the terms. This is not the case if you buy Agricultural Leases, even if they have a residence on them! Be sure to stipulate your offer is contingent upon review and acceptance of the subject property’s lease. If you do not understand the lease seek legal counsel.
The things to look out for in a lease are:
TERM: How many years remain on the lease.
FIXED LEASE RENTAL PERIODS: How long the rent is fixed for. There are usually several periods with fixed rents or formulas for fixing rents. This is extremely important to know if you intend to finance the property through a lending institution Alllenders require A CERTAIN FIXED PERIOD IN THE TERM OF THE LEASE. They will only lend for a term of 10 years less the length of the lease. This means that if you purchase a lease with 25 years remaining on it, you will probably only get a 15 year mortgage (that is if the fixed periods of the lease are at least that long.)
EXCHANGING: If you plan to exchange into a leasehold property under the I.R.S. section 1031 tax deferred exchange rules, make sure the lease term has at least 30 years remaining or it may not qualify.
AMOUNT OF RENT: This figure needs to be considered as part of your cost to own the property along with property tax and mortgage payment (debt service).
SURRENDER CLAUSE: Many leases say that the lessee (you) must surrender the lease back to the lessor (i.e. Bishop Estate ) at the termination of the lease. Some leases say that you can keep all of the improvements with you when you leave. Imagine hauling away not only your home, but your orchard!
ASSIGNMENT CONDITIONS: Many lessors condition the sale of assignment of lease on several conditions. These may include paying considerable fees. Most Bishop Estate Ag Leases run about 10% of the sales price but can be 20% or higher. Thelessor also usually requires that all other conditions set forth in the lease have been fulfilled. This means that you need to have the land developed and in good shape prior to any sale.
HOUSE SITE: Some leases do not allow a dwelling to be built on them. Others allow not only a main residence, but also a farm worker’s house. You must not only read the lease to know, but also check with the Building Department to know if the dwellings on the property are legally permitted.
OTHER SALIENT POINTS: Some leases have provisions that allow the lessor to take a portion of the property back without compensation to you in order to build roads, power lines, dig or bore for water or create easements.
SO WHY WOULD ANYONE IN THEIR RIGHT MIND BUY A LEASE?
1. They cost half as much as fee simple property
2. Buying a lease has tax advantages to investors. Call your accountant and ask him about allocation of purchase price and depreciation.
3. The Kingdom Of Hawaii left the best of the Kona lands to Bernice Pauahi Bishop.
4. Farming is at best a marginal business. If you add a huge debt service because of higher land costs, you reduce cash flow.
New Bishop Estate Leases. Recently, Kamehameha Schools Bishop Estate, issued new 35 year leases in North and South Kona to some of the lessees. These documents are totally different than the old leases. They have many terms and conditions that I find onerous. The North Kona Leases have a higher rent schedule than the South Kona leases. If you sell the lease during the first 10 year term, KSBE wants an assignment fee of 30% of the sales price (even if the seller is losing money). The second ten year period the percentage is reduced to 20%, and the following period it is 10%.There is also a provision for KSBE to remove any part of the acreage for a higher and better use.
LOCATION, LOCATION, LOCATION.
Coffee grows best at the 750 to 2500 foot elevations. It is this author’s opinion that the higher the elevation the better the bean. This is due to favorable climatic conditions on the higher slopes. I also strongly recommend finding an orchard that is planted in soil and on a fairly mellow and even slope. These conditions make maintaining an orchard a lot easier. If you plan on planting a new orchard, I strongly suggest that you create an easily maintained farm. Some of the most important considerations are planting distances, drainage, soil type, slope, and maintenance style. (are you going to mow or poison?) The Soil and Water Conservation Service and the University of Hawaii Agricultural Extension Office offer free services to farmers.
It is also very important to determine if the property has utilities available. Do not assume anything ! You should call Hawaii Electric to find out if power is available or what the cost would be to hook up. Just because a power line goes by the property, does not mean that you can hook up to it. The same applies to phone service. Many phones are party lined. This puts a cramp on using your fax machine. Also high speed internet may not be available.
Water is either supplied by the County, in a limited area, or catchment must be relied upon. Catchment systems are limiting. Annual rainfall in most coffee growing areas is between 20 to 80 inches per annum. This is minimally acceptable for most household use but is insufficient for agricultural applications such as irrigation. Fortunately, irrigation of mature coffee in mauka areas is rare. Make sure that all building materials used in your home are lead free. The acid rain in Kona derived from thesulfer dioxide fumes emitted from the volcano, leach heavy metals into the water supply.
If you are going to build a new home, you should call the State Department of Heath and ask if a septic system or a cesspool will be required. Septic systems cost about $5,000 more than cesspools.
NOW THAT I HAVE HARVESTED ALL OF THIS COFFEE, WHAT DO I DO WITH IT?
Many farmers sell their crop to one of the many processors. Others who are more entrepreneurial or adventuresome, process their own coffee and sell it themselves. The rapidly growing cottage industry of marketing ESTATE COFFEES is increasing steadily in Kona. Before you invest in a million lables for your own brands of Estate Coffee, it is important to do some homework. You may need to have a Certified Kitchen to pack the coffee. Call the State Department of Health to get the facts. You should also secure a market for your coffee and decide if you have the time to pick, pack and sell.
For more information please go to our RESOURCE LIST, for contact phone numbers for many agencies listed in this article.
About the Author. Arnold Rabin is the Principle Broker of A Real Estate Concern of -Hawaii Inc . He is a member of the Kona, Hawaii, Honolulu and National Association Of Realtors. He has owned an organic farm in Kona for 37 years where he grows the best coffee in the known universe. He has specialized in selling coffee farms since 1980 when he opened his own office, A Real Estate Concern of Hawai Inc. When he is not selling or writing, he is a part time professional magician, active community member, and father of three coffee pickers.