Leaseholds: What Are They?
What You Need to Know About Leaseholds
In Hawaii, there are two ways to own property – fee simple and leasehold. Most people are familiar with the fee simple form of ownership, which gives title to the property to the owner and includes the land. With fee simple condominium ownership, the person receives a share of the “land” on a pro-rata basis.
With a leasehold, you own the home, but not the land. Lease rent is paid to the landowner. Many condos are leaseholds, and in this instance, the condo owner owns their unit, but leases a pro-rata percentage of the land rather than owning it. Homes listed for sale as leaseholds usually include “LH” in the listing.
The majority of Hawaiian leaseholds include a surrender clause, meaning the lands reverts to the owner at the end of the lease. There are many cases of landowners taking back the property when the lease is up. However, most leaseholds are renegotiated with the landowner at the expiration date. Some landowners may offer the land to the leaseholder in a fee arrangement.
Leaseholds are seldom found in other states, and grew out of the large trusts created during the Kingdom of Hawaii, according to Hawaii Business magazine. These trusts once owned most of Hawaii’s the privately held land. As real estate values soared after World War II, and lawsuits proliferated forcing properties to convert from leasehold to fee simple, most of single-family homes became fee simple by the 21st century.
Because leaseholds expire, they are often great deals for the right buyer. That’s especially true for older people who want to retire in Hawaii and appreciate the good value provided by a leasehold. Such leaseholds are less expensive than mortgages. Such buyers must have a plan in place in case they outlive their lease.
Parents with children going to college in Hawaii might want to rent a leasehold rather than spend a similar amount on campus housing. Once the kids graduate, the parents can continue renting the unit and generating income until the lease is up – and then just walk away.
Leasehold properties are more likely to decline in value than fee simple properties, especially when the lease hits about 25 years pre-expiration. You cannot purchase a leasehold property and obtain a 30-year mortgage if the lease will expire before that time. That means the buyer must obtain a 15-year mortgage requiring a higher monthly payment. Overall, it’s harder to get financing for a leasehold than a fee simple property.
If the lease expires and the lease is renegotiated with the landowner, expect the lease rent to increase substantially. After all, prices rise significantly over 30 or more years.
Each Leasehold is Unique
Fee simple contracts are generally straightforward, but each leasehold is unique. That’s why it’s essential to have a real estate attorney look over any leasehold you consider purchasing. It’s also important that you understand the terms of the lease and what you can and cannot do.
If you’re looking to buy or sell a home or find a rental property, you need a knowledgeable, experienced realtor familiar with all aspects of the Hawaiian real estate market. Contact Island Realty Group LLC at 808-689-7407 or IslandRealtyGroup@irghi.com.