Hawaii is one of the few states with leasehold property. Most properties in Hawaii are sold as “fee simple” meaning you own both the physical property and the land. Fee simple ownership is the most comprehensive type of ownership. “Leasehold” property means that you do not own the land. The leasehold owner enters into a lease agreement with a fee simple owner with the right to use the unit, per the lease agreement. The leasehold owner pays a monthly “lease rent” to the fee simple owner.
Leasehold property is generally less expensive than fee simple property and can look very attractive to buyers. There are extra costs associated with leasehold property and that is “lease rent”. Leasehold property means you have the right to use the land only for a certain amount of time years (1-99 years). During that time you pay lease rent to the owner of the land.
You can think of this similar to a 6 month or 1 year rental extended for x amount of years. It can be viewed as a secured rental unit for however long your lease is. During the course of the lease the lease rent will be “renegotiated”. This usually happens every 10 years (depending on how the lease is written). This renegotiation can be thought of in the same way as your monthly rent going up periodically due to inflation, costs, etc. The way the lease rent is renegotiated is written into the leasehold documents. Lease rent is calculated off of the value of the land at the time of the renegotiation. Land in Hawaii generally appreciates over time so the lease rent tends to always go up.
Leasehold property is not recommended for most buyers as the lease rent could go up substantially (double or triple) several times over the course of ownership. If buyers do not plan for these increases in advance they may have more monthly expenses than they planned for.
At the end of the lease term there are several things that could happen depending on what the fee owner wants to do. The best situation would be if the fee owner offers the fee to the leasehold owner. The leasehold owner can now purchase the fee and own a fee simple property. They could re-negotiate and extend the lease with the leasehold owner for x number of years. The last option is the fee owner could take back the entire property and you would be left with nothing. The last is the worst-case scenario. This happens sometimes when one owner owns the fee for the land and decides to turn the entire building into something else such as turning an apartment building into a hotel.
Leasehold property may be right for the right buyer. Retired buyers that are looking for less cost than a fee simple property and are okay with the length of the lease might be a perfect fit. Investors that can get a good return on the property, taking into account the lease rent, renegotiation, and length of the lease might be another great fit.
If you have any specific questions about leasehold property please feel free to contact me at (808) 351-8394 or JoeC@BetterHawaii.com
Hawaii Starts Here | Joe Castaneda (R)
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Joe is realtor-associate with Better Homes and Gardens Real Estate Advantage Realty. He majored in finance and has experience as a former mortgage loan originator. He has helped buyers both with new project loans and going through the process of applying and obtaining units in new projects. He uses his finance, mortgage, and real estate knowledge to help home buyers find the right properties to fit their needs. Contact Joe by phone or email at (808) 351-8394 or JoeC@BetterHawaii.com
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As an expert in real estate and property ownership, particularly in the unique context of Hawaii, I can provide valuable insights into the concepts mentioned in the article.
Leasehold Property in Hawaii: Unveiling the Intricacies
In Hawaii, the distinction between "fee simple" and "leasehold" property is crucial for prospective buyers. Fee simple ownership, as widely recognized, grants you full ownership of both the physical property and the land it sits on. This is considered the most comprehensive type of ownership, providing a sense of security and control over the entire property.
On the other hand, Hawaii stands out as one of the few states where leasehold property is prevalent. In a leasehold arrangement, the property owner does not own the land but rather enters into a lease agreement with the fee simple owner to use the unit. This leasehold owner pays a recurring "lease rent" to the fee simple owner.
Key Concepts to Understand:
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Leasehold Structure:
- Leasehold property is generally more affordable than fee simple property, making it an attractive option for some buyers.
- The leasehold owner has the right to use the land for a specified number of years, typically ranging from 1 to 99 years.
- Lease rent is a recurring payment made by the leasehold owner to the fee simple owner for the use of the land.
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Lease Rent Dynamics:
- Similar to a rental agreement, lease rent undergoes periodic renegotiations, usually every 10 years, as specified in the leasehold documents.
- The renegotiation process involves recalculating lease rent based on the current value of the land. Given that land in Hawaii tends to appreciate, lease rent often experiences increases over time.
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Considerations for Buyers:
- Leasehold property may seem appealing due to lower upfront costs, but buyers must be prepared for potential significant increases in lease rent over the ownership period.
- Planning for these rent hikes is crucial to avoid unexpected financial strains.
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End-of-Lease Scenarios:
- At the end of the lease term, various outcomes are possible based on the fee owner's decisions.
- Ideally, the fee owner may offer the fee to the leasehold owner, allowing them to convert to fee simple ownership.
- Alternatively, the lease could be renegotiated and extended for a specified number of years.
- In the worst-case scenario, the fee owner might reclaim the entire property, leaving the leasehold owner with nothing.
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Suitability for Specific Buyers:
- Retired buyers seeking cost-effective alternatives and investors capable of factoring in lease rent, renegotiation terms, and lease duration might find leasehold property a suitable option.
Expert Insight:
Given the potential complexities and risks associated with leasehold property, it is crucial for buyers to conduct thorough due diligence. While leasehold arrangements may be suitable for certain individuals, careful consideration of long-term implications, financial planning, and an understanding of the specific terms outlined in the leasehold documents are essential.
For personalized guidance and further inquiries about leasehold property in Hawaii, I am available at (808) 351-8394 or via email at JoeC@BetterHawaii.com. As a realtor-associate with Better Homes and Gardens Real Estate Advantage Realty, I bring a wealth of experience, having majored in finance and worked as a former mortgage loan originator. My expertise extends to assisting buyers in navigating the intricacies of new project loans and property acquisitions.
Explore the diverse real estate opportunities across Hawaii's regions, and let me be your guide in making informed and strategic property decisions. Connect with me on Instagram @HawaiiStartsHere for regular updates and insights into Hawaii's dynamic real estate market.
