Hawaii Leasehold Real Estate
For most Americans and Canadians, there is one type of property ownership: Fee Simple, which is also commonly referred to as Freehold in some States. When discussing Hawaii real estate, It is critical to keep in mind that properties may have another type of 'Land Tenure' besides being Fee Simple, the other form being Leasehold. The difference between these two types of ownership is wide, so it's important to know the difference and how it can impact viability in reach your Hawaii real estate goals.
So to start, let's define them:
FEE SIMPLE (a.k.a. Freehold or Fee Simple Absolute): Commonly referred to as the most absolute and complete form of ownership, Fee Simple ownership entitles the owner with title (ownership) in perpetuity, including the land and all improvements thereon. An owner of a Fee Simple property can feel more secure in ownership rights, he or she can make use of the land, occupy it, and/or dispose in whatever matter is deem appropriate.
LEASEHOLD: When the Fee Simple owner (as Lessor) of land leases the land via a ground lease with an individual or entity (Lessee), a leasehold interest is created. As per terms on the lease, the Lessee can enjoy the land and improvements in the same manner as a Fee Simple owner, BUT there are some stark differences to keep in mind. First, the Lessee and any Buyer who purchases a property subject to a lease does NOT own the land, but instead have the right to enjoy it as per terms on the lease. Second, when a leasehold property is sold to a new owner, he/she then is subject to the same terms/conditions in the lease, including remaining time of lease. At the end of the lease period, in a process named 'Reversion', the land reverts back to the land owner and depening on the surrender clause in the lease (if any), the improvements on the land may revert back to the land owner at no cost or as per negotiated terms on lease. Third, in exchange for use and enjoyment of the land, generally there is a lease payment due to the Lessor from the Lessee and likely there are provisions for periodic adjustments.
Leasehold properties on Maui were up to a large extent developed in the 1970’s and 1980’s. Commonly these are clustered in West Maui (particularly Lahaina to Napili area) and South Maui (Kihei and Maalaea areas). For properties offered for sale throughout the State of Hawaii, prices will include whether the property is Leasehold or Fee Simple, as it plays a significant role in pricing and on-going costs of ownership. It is worth noting that the lease payment is in addition to the monthly maintenance fees (HOA / Strata), property taxes, and any other costs associated with ownership - such as utilities, insurance policy, property management, etc. The main point to take away is that ownership of the land is separate from ownership of buildings and improvements constructed on the subject land.
When assessing a Leasehold property, take note of the following:
* Lease Term - This is the period of time for which the lease is in full effect. Most original leases were over 50 years, but as the lease term nears the expiration, that has an effect on valuation.
* Lease Rent – This is the amount to be paid by the Lessee to the Lessor, including the frequency of payment - some are paid quarterly, whereas most are paid monthly.
* Renegotiation Date – The original lease will detail specific timeframes when the lease payment is to be renegotiated, generally by a specific formula detailed. The purpose of this renegotiation is to ensure that lease payments are en par with fair market value and market conditions.
* Expiration Date – This is an important date to note, as unless an extension or new lease are negotiated, then the original lease will have been completed and Reversion (more on that below) will come into effect. It's worth noting that for lenders, the expiration date is important as most will only finance mortgages that are 5 years less than the time remaining on the lease - as an example, if 20 years left on the lease, then lender will approve a mortgage for 15 years or less.
* Fee Interest – Keep in mind that when a Lessor leases his land, he/she retains an interest in the land, subject to the rights of the Lessee. Some leases will detail the amount of compensation for which the Lessor will accept to the sale of the Fee to the Lessee.
* Conversion - The process of converting a Leasehold property to Fee Simple by the Lessor / Land Owner selling the 'Fee' interest to the Lessee. In some properties, only part of the complex has gone through conversion, with the remaining units continuing to be Leasehold.
* Reversion – The lease will detail provision for reversion, which is the process of giving the land (and improvements thereon, if agreed) back from the Lessee to the Lessor.
For any prospective Buyer interested in a leasehold property, note that during escrow, the Seller will furnish a fully copy of the lease and any applicable amendments. Things to be clear on include the amount of the lease rent, when lease rent is due and to whom is it payable, all future renegotiation dates, how the new lease rent will be calculated (typically there is a formula outlined), and what is to happen at the expiration of the lease as detailed on the surrender clause. Review the Hawaii Guide to Residential Leasehold as put out by a State of Hawaii agency and become more familiar with this type of ownership.
For some people, Leasehold is an attractive option that allows them to buy 'more' for a lower sales price. As an example, Kamaole Nalu is sandwiched between Royal Mauian and Hale Pau Hana, yet sales prices at Kamaole Nalu can be less than half per square foot than at the comparable Fee Simple neighbors. In addition, some leasehold properties such as Napili Point have remarkably low lease rent (at the time of this writing, in the $7 per month range). Lastly, when searching, take into account that some properties like Papakea Resort include both Fee Simple and Leasehold, which is then reflected in the price.
Now that armed with all this information, how to use our site to search (or exclude) leasehold properties?
We have taken great care to provide our site visitors with the most comprehensive yet easy-to-use user experience available. For Maui and Oahu we offer the ability to search by Land Tenure. On the Maui MLS search page, click on 'More Options' then scroll down to the Land Tenure drop down menu.
When looking at search results, we add the Land Tenure prominently for each listing. Between the price and the Listing Brokerage, please find the land tenure for quick indexing.
In an effort to provide all pertinent information quickly and easy to find, we are one of the very few sites that displays relevant details regarding leasehold properties, to include the amount of the lease and lease expiration. On a leasehold details page, scroll down to view details.
Our team is well acquainted with the unique nuances of Hawaii Leasehold real estate throughout the entire State. For more information about a specific property, contact our team of Realtors today.
Interested in Leasehold properties? Take a look below at some pertinent new listings, added to the market within the past month. For a more comprehensive search, view our Hawaii MLS Search page.
Hawaii Leasehold Properties For Sale
Fine Island Properties, LLC
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Listing information last updated on August 1st, 2021 at 3:55pm HST.
Listings provided courtesy of the REALTORS® Association of Maui.
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