Buyers

Leasehold vs. Fee Simple

One of the more unique dilemmas associated with buying a home in Hawaii is the issue of land tenure.  While the "fee simple vs. leasehold" issue often comes as a surprise to non-Hawaii residents looking to move or invest here, it can also be confusing to even longtime Hawaii residents.

What is Fee Simple?

Fee simple is the easiest to understand.  It is the most complete form of ownership and is probably the most familiar form of property ownership to homebuyers, especially on the Mainland.  When you buy fee simple, you acquire ownership of the entire property, including both the land and buildings.  You do not pay ground rent, but do pay maintenance fees and real property taxes.  The fee simple owner has the right to possess, use the land (within the legal zoning, legal, and health codes) and dispose of the land as you wish - sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

Often, when you see a fee simple property advertised for sale, you might see the price followed by "FS."  However, new Hawaii laws do not require that sellers indicate this land tenure since it is so common.

What is Leasehold?

Leasehold property differs from the fee simple property in several important respects.  The buyer owns the home or structure but only a "leasehold interest" in the land beneath it.  A leasehold interest is created when a fee simple landowner enters into an agreement or contract called a ground lease with the lessee, or the buyer.

Basically, and most importantly, the buyer of residential leasehold property does no own the land and must pay ground rent.  The rent is usually fixed for anywhere from 10-30 years; from there, the rent has to be renegotiated based on terms of the lease and may increase.  (The ground rent is in addition to the monthly mortgage payments for the home.)

At the end of the term, the landowner may opt to take the property back.  Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor.

In addition, the use, maintenance, and alteration of the leased premises may be restricted by terms contained in the lease.

Conversion of leasehold property to fee simple ownership involves purchasing the landowner's remaining interest, called the leased fee interest.  The lessors of many leasehold properties in Hawaii are currently offering to sell their leased fee interests to their lessees or prospective buyers of a leasehold property.

So why buy Leasehold?

Often, leasehold properties are more affordable, which means that you would have a smaller down payment and lower monthly mortgage payment than if you bought a comparable fee simple property.  For instance, if you do a search for condos in Diamond Head with 2 bedrooms, 2 baths, and 2250 square feet, a leasehold property of this nature may cost about 20-40 percent less than a fee simple one.

"For people looking to buy their first home but cannot afford any fee simple ones on the market, there are many leasehold properties available that are lower in price and make excellent starter homes," says Andrew Stuber of Pacific Access Mortgage.  "Most leasehold properties are located in Waikiki, near the University, and around East Honolulu.  Leasehold ownership is really very common."

"Many of the best-quality buildings in Honolulu began sales as leasehold and later converted to fee simple for those buyers who preferred it, " adds Christine T. O'Brien (R) who sells many luxury leasehold units.  "Think of Nauru Tower, One Waterfront, Yacht Harbor Towers, Craigside and Harbor Court, to name a few.  These buildings appealed to financially sound buyers who valued the luxury of location and appointments and were confident that the long modern leases would serve their needs.  Were the fee simple offered, they could choose to purchase or not, as their portfolio circumstances dictated.  Indeed, in the recent resale market of these buildings where both leasehold and fee simple units are listed for sale, fully as many apartments have sold in leasehold as have sold in fee simple.  

The extension of mandatory leasehold conversion to condominiums has given even more confidence to leasehold buyers of all financial circumstances, giving comparatively higher quality for the purchase price than fee simple, with long leases and long fixed rents (often stepped up periodically) and the ability to purchase the fee simple, or not, at intervals in the future."

Click Here for "A Guide to Hawaii's Residential Leasehold", Authorized by the Hawaii State Legislature and the State's Housing Finance and Development Corporation.