When taking a look at genuine estate here on the island of buyers come to ask the common concern "What is the distinction in between Leasehold vs. Fee Simple.
These are The two kinds of land ownership that exist in Hawaii and likewise exist everywhere else. It's simply that on the mainland mostly just company area is leased. The 2 forms (jointly called Land Tenure, abbreviated "Tnr" in the listings) are Fee Simple (FS) and Leasehold (LH). "Tnr" is Land Tenure, the method the owner holds title to the residential or commercial property. You either have title to the Fee interest or the Leasehold interest.
This description is mainly for leasehold farms. Leasehold condominiums are various in many aspects, although they do have regular monthly lease rent, renegotiation durations and expiration dates.
Fee Simple is the way you generally hold title on the mainland, just you just didn't understand the name. When you purchased a home, you also bought the land and you owned your home and land till you sold it. With leasehold, you purchase your house (or, for condos, the space within the walls) and the right to take control of the remaining time on an existing land lease. Hawaii just has more leasehold residential or commercial property than any other state. In reality, 55% of all Hawaiian land is owned by something like 17 major land owners, the largest of which is Bishop Estate. On the Big Island, Bishop Estate owns countless acres. This land is separated into numerous sized farm lots balancing 5 or 6 acres each. All the leases were leased out in the 50's and 60's for farm functions at an annual expense of around $300 to $400. There was no up front cash. Throughout the years the lessees built structures and planted crops (mostly coffee and macadamia nuts) which included value to the land that did not belong to the lessor. Hence, a sell leases began in the 70's. By the 80's you could 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 increases using the Honolulu Price Index as a bench mark. Right now the average lease rent is about $800 to $1500 annually. A typical leasehold residential or commercial property of 6 acres with a three bedroom house and 28 years left on the lease might offer for $250K to $600K. A comparable cost simple piece would be around $800K to over a million. When the lease ends you can get a new thirty five year lease at a renegotiated rate.
The biggest drawback to a (farm) lease is the lease transfer fee (condos, Gentleman Farm leases, and property leases do not have the transfer fee). If you have all the productive land specified in your lease planted in a crop then the transfer fee is %10 of the gross sales cost. If you have actually neglected your crops significantly (let them end up being thick with weeds and vines, etc) or stopped working to plant a crop in the efficient location, then the transfer cost is%20. Therefore, it is very important that you farm your land wisely and conserve a part of your profit every year to offset the transfer cost when you sell. Leasehold is still a great deal, since if you were going to farm for a living, paying the debt service (interest) on a million dollar loan for charge easy residential or commercial property would consume all your earnings. Similar leasehold residential or commercial property would typically be under $500,000. Leasehold might be the only way to opt for expert farmers or those who want to own a pastime farm, want acreage, and can just pay for the leasehold prices. And lease rent can be a deductible company expense!
If an individual did not wish to farm at all, however could only manage leasehold, there are
professional farmers who will get in into a contract to farm your land, keep it in compliance with the Lessors requirements, in exchange for the crops. Terms are flexible. I have heard of individuals who simply wished to wash their hand of the entire farming experience who got nothing in exchange for the crops but a totally rubbed out piece of land. Others receive as much as 10% of the gross sales and their lease rent paid. Basically, what ever you can work out with the farmer.
Leasehold condos are another story. There are a variety of various personal and corporate entities that own condo jobs and lease the condominiums. So you do not actually purchase the condominium, you buy the lease to the condo from the present lessee. There is no lease transfer charge. When it concerns the real estate listings you commonly see, the quantity of the month-to-month lease rent and the date the lease expires appears in the bottom line of the listing under the "remarks" box. You can likewise 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 charge interest in some domestic (not agricultural) and condo leases can be bought.
COMMONLY ASKED QUESTIONS ABOUT LEASEHOLD:
(Q) What is the additional monthly payment I make in addition to my mortgage payment? (A) The additional month-to-month (or yearly) payment you make to the Lessor is the lease rent. Only condos have regular monthly lease rent. Lease rent on leasehold farms is paid annually. Your mortgage payment is totally separate and is in between you and your lender. It has nothing to do with the Lessor. If you pay money you will not have a mortgage payment, but you will still need to pay lease rent. When you acquire 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 (former lessee). At the time you take ownership of 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 till you sell it to somebody else. 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 required to go through with the purchase, you are provided a copy of the lease and a leasehold disclosure to study. You have time to show it to an attorney if you want. 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 takes place if you purchase a lease that will expire? (A) It depends upon the Lessor. For condos and domestic leases, it depends upon what is stated in the private lease. For Bishop Estate leasehold farms, you can wait for the lease to end 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 return to the state? (A) There are extremely 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 families have some ag leases and several own condominium projects. Bishop and/or it's for revenue arm, Kamehameha Investment Corp, also own the land under several apartment tasks in Kona. Most leases specify the method of renegotiating a new lease when today one ends. Today lessee practically constantly has "first best of refusal". If you can't get to terms you can live with you do not need to renew, but you usually have first choice. Remember, when you make an offer on a leasehold residential or commercial property, you will be provided with a copy of the present lease to review before you make your decision to buy or not. At that time you should see what the renewal terms are in addition to lease rent renegotiation terms.
(Q) can the regular monthly payment go up? (A) Rent renegotiation periods generally come every 10 years after the first 15 years of the lease. Today Bishop Estate is providing very beneficial lease rent at renegotiation time for complete time farmers of leasehold farms, $165 per acre. For some, this is even less than they have actually been paying. If you included 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 additional cash you would have to obtain to buy a similar piece of land in fee simple. Leasehold apartments are more unpredictable. There are several individual Lessors and each lease states a various technique of renegotiation. If you fall for a leasehold apartment you need to study the lease thoroughly before you purchase it.
(Q) What happens when the lease ends? (A) Most Bishop Estate leases have a surrender clause. But in practice Bishop generally provides the lessee the choice to work out terms on a new 35 year lease. To date, no one has actually ever been asked to abandon the facilities when their lease ended.
The individual who asked this next question had read all of the above, so I am including it here to hopefully clarify this situation: (Q) At the end of the lease, what occurs if they request, say, 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 reside on the residential or commercial property, only the lease rent quantity will alter. They will not precise a cost, like the $50,000 you pointed out. The lessor will not be "offering" you a new lease. They might charge a greater lease rent for the brand-new lease since of inflation. The quantity is typically identified as a percentage of the appraised worth of the underlying Fee Interest. It's a complex 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 designate a third, and they average all 3. If you still disagree, and you desire to leave, you can take your home with you.
When you buy leasehold residential or commercial property you are purchasing the improvements and the right to take over the lease from today lessee (the person who is currently renting 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 money the Buyer pays to the Seller. The lessor might specific a transfer fee from the Seller nevertheless, normally 10%. But on property leases, it is generally only the administrative costs that are credited the Seller. At closing, the lease is moved into your name from the Seller's and you start making the lease payments to the lessor where the Seller ended. The lessor does not take part in the sale except to concur to transfer the lease from a single person to another.
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Leasehold Vs Fee Simple
Ervin Demarco edited this page 2025-10-27 13:43:38 +00:00