What Is A Lease Hold and How Does It Affect Buying Property on the Big Island?

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Moving to the Big Island of Hawaii can have its challenges when you are looking at real estate on the MLS and you find condos and beach properties that appear to be below the market values than other homes in the area. Look in the comments to see if the property is leasehold. This also holds true for farmland, which in many cases is owned by the Bishop Estate, a trust that owns a sizable portion of the agricultural land on the Big island.

There are generally two types of property you can purchase in Hawaii: Fee simple and leasehold. We recently wrote a post about fee simple, which means you actually own the structure AND the land.

When you purchase a leasehold property you are buying the structure only.

Here is how it works:

When you buy a leasehold property, you are in fact paying the landowner rent for a fixed amount for a specific fixed term. When you purchase a leasehold property in Kailua Kona you own the improvements on the land, but not the land itself. The leasehold interest is created when a fee simple land-owner enters into an agreement or contract called a ground lease with a lessee.

What happens when the term expires? The leasehold term is limited to the remaining years covered by the lease. The land lease is then renegotiated and, of course, the land owner will most likely increase the amount for another specific term.

If purchasing the land outright does not occur, then upon end of term, the land returns to the lessor. 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. (Which makes building your dream home on leased land, not a good idea for the long term.) Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.

The ground leases are usually negotiated for a 55 -year lease and depending upon how much time is left on that lease when the property is for sale, will have a great impact on the price of the property when you will have to renegotiate with the property owners. The length of the remaining time on a lease hold can influence the ability to procure financing, as well. Usually, the long term loan on a leasehold will be five years beyond the lease term.

Here are some other key points to know when buying into a lease hold:

Terms of Lease:

  • Terms of Lease
  • When can you renegotiate the lease?
  • Financing considerations

Leasehold buyers may sometimes have opportunities to buy the land as part and during the payoff of the building or structure. Sometimes improvements to the property can also be made as a portion of obtaining the land from the owner. Does this happen often? Not often enough, but it’s always good to ask if you find yourself in this situation.

Leaseholds can be quite complicated. If you or someone you know is in the market to buy real estate in Hawaii and you need more information on leasehold properties, feel free to contact us at 808.769.5111 or email us at info@luvarealestate.com.