In September 1985, John Kreese, broke and destitute after the loss of his students due to his assault on Johnny Lawrence (in The Karate Kid Part II), visits his Vietnam War comrade, Terry Silver, a wealthy businessman who founded Cobra Kai and is the owner of a toxic-waste disposal business. Silver vows to personally help him get revenge on Daniel and Mr. Miyagi and re-establish Cobra Kai, sending Kreese on vacation to Tahiti to rest and recuperate.
Upon returning to Los Angeles from Okinawa, Daniel and Miyagi discover that the South Seas apartment complex is being renovated, leaving Miyagi unemployed and Daniel homeless. They also learn that Daniel’s mother, Lucille, is currently in New Jersey taking care of Daniel’s ill Uncle Louie. Miyagi invites Daniel to stay at his house, and Daniel uses his college funds to help finance Miyagi’s dream of opening a bonsai shop. Miyagi makes him a partner at the business. Visiting a pottery store across the street, Daniel meets Jessica Andrews; although he has a brief crush on her, she tells him about her boyfriend and they agree to remain friends. Silver hires Mike Barnes, a vicious karate prospect nicknamed “Karate’s Badboy”, to challenge Daniel at the upcoming All-Valley Karate Tournament. Silver sneaks into Miyagi’s house to gather information and overhears Daniel telling Miyagi that he will not defend his title at the tournament. Barnes and his henchmen Snake and Dennis harass Daniel in an attempt to force him to enter the tournament, but Daniel still refuses, and Barnes departs in a rage.