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Wainapanapa on Maui

Purchasing Fee Simple Property Versus Leasehold Property

Purchasing Hawaii property can be very similar to purchasing property where you live, or it can be very different - it depends on whether the property is a fee simple property or a leasehold property.

Fee simple property is most likely very similar to the way you currently hold title to real estate you currently own. You own the physical structures on the land and the land beneath it, or if it is a condo, you own the interior space between the walls of the condo and a proportionate interest in the land beneath the buildings in the complex. (In some instances the state or other individuals may retain the mineral rights of the land, but this is not the focus of this article).

Fee simple is probably rated the most desirable way to hold title to the property, because the property is yours and will always be yours until you sell or give it away (or the lender reposesses).

Leasehold property is when you own the structure on the land (or interior space between the condo walls), but you do not own the land or a proportionate interest of the land beneath the structures. Instead, another individual, corporation, etc., owns the land and charges you a monthly lease rent payment for the use of the land. There is also a lease with terms and conditions, often with renegotiation dates when the lease rent will be renegotiated and will probably increase, and a lease expiration date. The expiration date is a critical date for you to know when considering a purchase of leasehold property. Since there is some risk involved with purchasing leasehold property the expiration date of the lease is very important.

If an expiration date is 50 years from now, you have limited amounts of cash upfront for a down payment, you do not have any heirs you wish to leave your home/condo to, and the lease rent combined with mortgage, utility, and tax payments, is a reasonable amount that fits within your budget, this may be a way for you to purchase real estate in Hawaii at a lower initial cost. Leasehold properties are usually less expensive than fee simple properties because you are only buying the structure (or interior space between walls if a condo) and not the land.

What happens when you reach the lease expiration date? The owner of the land is in control, and what happens is totally dependent on that land owner. The owner of the land can extend the lease, renegotiate the lease with a new lease rent amount and expiration date, offer the fee simple interest for purchase, or decide to take back the land.

Let's discuss the last two options:
1. Offer the fee simple interest for purchase - This means that the landowner is providing the opportunity to buy his interest in the land for a market value price. Usually an appraisal will be conducted and a fair market value is set for the price of the fee simple interest. You may purchase that fee simple interest and your property will go through a fee simple conversion process. Once it is completed, you will own the structure and the land beneath the structure (or if a condo, the interior space between your condo walls and a proportionate interest in the ground beneath the complex buildings).
2. Take back the land - This means the owner has decided he no longer wishes to "lease" the land and has other plans for his land. You may tear down your structures or move them to another location, but the structures can no longer remain on his land. Any structures remaining on the land after the lease expiration date become the property of the land owner.

Another reason the lease expiration date may be important is if you are financing your purchase. A lender will agree to provide a loan for only the number of years left on the lease or less. For example, if your lease term expires in 27 years, a lender will most likely provide a loan for a term of only 15 or 20 years. This will make your monthly mortgage payment higher than if you purchased a similar fee simple property and are able to finance the property for a term of 30 years.

Currently some landowners have offered the fee simple interest for purchase at some condominium complexes, and the condominium homeowner's association purchased all the fee simple interests for the complex. This may present some opportunities for those who do not have large down payments. You can buy the property initially as a leasehold property, and then make a separate purchase of the fee simple interest from the homeowner's association at a later date.

I hope this information clarifies some of the questions regarding leasehold and fee simple properties, but please contact me if you have further questions.

Add Your Comments


Anonymous fee simple said...

Not many people know the difference betweeen fee simple property and leasehold property. In my opinion, everyone interested in real estate should be better informed.

May 6, 2009 5:29 AM