Leasehold Vs Fee Simple
When taking a look at here on the island of Hawaii many buyers come to ask the typical concern “What is the distinction between Leasehold vs. Fee Simple.
These are The two types of land ownership that exist in Hawaii and also exist all over else. It’s simply that on the mainland primarily only business area is leased. The two forms (jointly called Land Tenure, abbreviated “Tnr” in the listings) are Fee Simple (FS) and Leasehold (LH). “Tnr” is Land Tenure, the way the owner holds title to the residential or commercial property. You either have title to the Fee interest or the Leasehold interest.
This explanation is primarily for leasehold farms. Leasehold condos are different in lots of respects, although they do have regular monthly lease rent, renegotiation durations and expiration dates.
Fee Simple is the method you typically hold title on the mainland, only you just didn’t understand the name. When you bought a home, you also bought the land and you owned your home and land up until you sold it. With leasehold, you purchase the home (or, for condominiums, the space within the walls) and the right to take control of the staying time on an existing land lease. Hawaii simply has more leasehold residential or commercial property than any other state. In fact, 55% of all Hawaiian land is owned by something like 17 major land owners, the biggest of which is Bishop Estate. On the Big Island, Bishop Estate owns thousands of acres. This land is broken up into different sized farm lots averaging 5 or 6 acres each. All the leases were rented out in the 50’s and 60’s for farm purposes at a yearly expense of around $300 to $400. There was no up front cash. For many years the lessees built structures and planted crops (mostly coffee and macadamia nuts) which included value to the land that did not come from the lessor. Hence, a trade in leases began in the 70’s. By the 80’s you might offer your lease with 30 to 35 years left on it for around $100,000. The leases have regular renegotiation periods where the lease rent goes up using the Honolulu Price Index as a bench mark. Right now the typical lease rent is about $800 to $1500 annually. A common leasehold residential or commercial property of 6 acres with a three bed room house and 28 years left on the lease might cost $250K to $600K. A comparable cost easy piece would be around $800K to over a million. When the lease expires you can get a brand-new thirty 5 year lease at a renegotiated rate.
The most significant downside to a (farm) lease is the lease transfer cost (apartments, Gentleman Farm leases, and residential leases do not have the transfer fee). If you have all the productive land defined in your lease planted in a crop then the transfer cost is %10 of the gross list prices. If you have overlooked your crops severely (let them end up being thick with weeds and vines, and so on) or failed to plant a crop in the efficient location, then the transfer fee is%20. Therefore, it is important that you farm your land carefully and save a part of your profit every year to balance out the transfer cost when you offer. Leasehold is still a bargain, due to the fact that if you were going to farm for a living, paying the debt service (interest) on a million dollar loan for fee basic residential or commercial property would consume up all your revenues. Similar leasehold residential or commercial property would typically be under $500,000. Leasehold might be the only method to choose expert farmers or those who wish to own a hobby farm, want acreage, and can just manage the leasehold costs. And lease rent can be a deductible company cost!
If a person did not desire to farm at all, however could only pay for leasehold, there are
professional farmers who will participate in a contract to farm your land, keep it in compliance with the Lessors requirements, in exchange for the crops. Terms are flexible. I have actually heard of people who just wished to wash their hand of the entire farming experience who got absolutely nothing in exchange for the crops but an absolutely buffed out piece of land. Others receive as much as 10% of the gross sales and their lease rent paid. Basically, what ever you can exercise with the farmer.
Leasehold condos are another story. There are a number of different personal and corporate entities that own condominium tasks and lease the condominiums. So you don’t really buy the apartment, you purchase the lease to the condo from the present lessee. There is no lease transfer cost. When it concerns the property listings you commonly see, the quantity of the month-to-month lease rent and the date the lease ends appears in the bottom line of the listing under the “remarks” box. You can also tell if a listing is Leasehold or Fee Simple by looking under the heading entitled “Tnr” with is the abbreviation for Land Tenure. FS will be for Fee Simple and LH will be for Leasehold. The cost interest in some residential (not farming) and condo leases can be purchased.
COMMONLY ASKED QUESTIONS ABOUT LEASEHOLD:
(Q) What is the extra regular monthly payment I make in addition to my mortgage payment? (A) The extra monthly (or annual) payment you make to the Lessor is the lease rent. Only condominiums have monthly lease rent. Lease lease on leasehold farms is paid yearly. Your mortgage payment is absolutely different and is in between you and your lending institution. It has nothing to do with the Lessor. If you pay cash you will not have a mortgage payment, however you will still need to pay lease rent. When you purchase leasehold residential or commercial property from the individual residing on it (the lessee) you buy the enhancements (for a farm, the contents for a condo) and the right to have the lease transferred into your name. The lease is with the Lessor (land owner), not the individual you bought the lease from (previous lessee). At the time you acquire the residential or commercial property (called “at closing”), the Lessor transfers the lease to you, and all it’s terms then become binding on you for the rest of the lease term or until you offer it to another person. Every lease has lease rent renegotiation durations and an expiration date, to name a few stipulations and requirements. When you make an offer on leasehold, but before you are needed to go through with the purchase, you are provided a copy of the lease and a leasehold disclosure to study. You have time to reveal it to an attorney if you prefer. If there are terms or conditions in the lease that you do not like, you can cancel escrow and get your deposit back.
(Q) What happens if you purchase a lease that is about to end? (A) It depends on the Lessor. For condominiums and residential leases, it depends on what is specified in the specific lease. For Bishop Estate leasehold farms, you can await the lease to expire and renegotiate a new 35 year lease, or you can renegotiate the a new 35 year lease while in escrow.
(Q) What happens at the end of the lease hold time? Say it ends in 2035, does it go back to the state? (A) There are very few leases readily available from the State of Hawaii. The agricultural residential or commercial properties you see on the other side of the highway when you leave the airport heading toward Kailua are State owned ag leases. But the Bulk of the leases available on the Big Island are owned by Bishop Estate. The Greenwells own some ag rents up behind the Kealakekua Ranch Center in Captain Cook. A few other households have some ag leases and numerous own condo tasks. Bishop and/or it’s for earnings arm, Kamehameha Investment Corp, likewise own the land under numerous condo tasks in Kona. Most leases define the technique of renegotiating a new lease when the present one expires. Today lessee almost constantly has “first best of refusal”. If you can’t get to terms you can cope with you don’t have to restore, however you generally have very first choice. Remember, when you make a deal on a leasehold residential or commercial property, you will be supplied with a copy of the present lease to evaluate before you make your decision to buy or not. At that time you must see what the renewal terms are along with lease rent renegotiation terms.
(Q) can the monthly payment increase? (A) Rent renegotiation periods usually come every 10 years after the very first 15 years of the lease. Right now Bishop Estate is providing very favorable lease rent at renegotiation time for full-time farmers of leasehold farms, $165 per acre. For some, this is even less than they have been paying. If you added up all the lease rent you pay over the life of the lease it’s still way less than the extra interest you would have to pay on the extra cash you would need to borrow to buy a similar piece of land in fee simple. Leasehold condominiums are more unsure. There are various individual Lessors and each lease stipulates a different technique of renegotiation. If you fall for a leasehold apartment you need to study the lease thoroughly before you buy it.
(Q) What happens when the lease expires? (A) Most Bishop Estate leases have a surrender stipulation. But in practice Bishop typically gives the lessee the choice to work out terms on a new 35 year lease. To date, nobody has ever been asked to leave the premises when their lease expired.
The person who asked this next concern had read all of the above, so I am including it here to ideally clarify this scenario: (Q) At the end of the lease, what takes place if they request for, state, another $50,000 to get a new lease? Do we have any recourse? (A) When the lease ends, and you wish to renegotiate a new lease so you can continue to live on the residential or commercial property, only the lease rent quantity will alter. They will not precise a charge, like the $50,000 you discussed. The lessor will not be “offering” you a brand-new lease. They might charge a greater lease rent for the brand-new lease because of inflation. The amount is usually identified as a portion of the assessed value of the underlying Fee Interest. It’s a complicated form of appraisal, and can just be done by an expert. If you disagree with the lessor’s appraisal, you can hire your own appraiser. Sometimes the two appraisers appoint a third, and they average all three. If you still disagree, and you want to leave, you can take your home with you.
When you purchase leasehold residential or commercial property you are purchasing the improvements and the right to take over the lease from the present lessee (the individual who is presently leasing the residential or commercial property). You are not purchasing anything from the lessor (the entity that owns the underlying Fee Interest in the residential or commercial property). The lessor does not get any of the cash the Buyer pays to the Seller. The lessor may specific a transfer charge from the Seller however, normally 10%. But on property leases, it is usually only the administrative expenses that are credited the Seller. At closing, the lease is moved into your name from the Seller’s and you begin making the lease payments to the lessor where the Seller ended. The lessor does not take part in the sale other than to consent to move the lease from one person to another.