Hawaii is one of the few states which allow leasehold properties. Most properties in Hawaii are sold as Fee Simple, meaning you own both the physical property and the land itself. Fee simple is the most valued form of ownership. Leasehold on the other hand, can loosely be explained as owning the house/unit but NOT the land. Knowing that, why would anyone want to enter into a leasehold agreement?
The upside to leaseholds are that leasehold properties are generally less expensive than fee simple properties. This can initially look very attractive to buyers. If you are familiar with Hawaii’s real estate market, you know that land here is ridiculously expensive, so leaseholds can seem like a great alternative. However, the money you may think you are saving will eventually pay out to the “lease rent”. Essentially, because you do not own the land, you pay lease rent to the owner of the land for the number of years agreed upon (1-99 years) through the Lease Agreement.
Does that mean you will be paying the same lease rent you are now, 5-10 years in the future? Unfortunately, no. If you were lucky enough to get a great value on your lease rent, that does not mean it will not go up. During the course of the lease agreement the lease rent can be “renegotiated”. This usually happens every 10 years (depending on how the lease is written). This renegotiation is equivalent to your monthly rent going up periodically due to inflation, maintenance costs, etc.
Now, I know I mentioned that a leasehold would mean you would not be the owner of the land, but, there is a way for a leasehold to eventually become a fee simple. At the end of the lease term there are several things which could happen. One of which being that the fee owner (owner of the land) offers you the option to buy it off of them. You could now purchase the property in its’ entirety and own it fee simple. Congratulations!
Don’t get me wrong. Leaseholds can be very valuable to the right buyer. Older couples looking for a quiet home to retire to or investors who are well versed in real estate verbiage would find great opportunity with leaseholds. If you are considering entering a Lease Agreement, I strongly advise you to speak with a knowledgable realtor before making any decisions. Lease Agreements can get very complicated. There are many different types of Lease Agreements for different purposes. Be extremely cautious with hidden language embedded into the agreements. You do not want to get yourself stuck in a financially sticky situation for 10+ years. Contact us if you have any questions regarding Fee Simple vs. Leasehold properties!