Anyone who’s searched for Hawai`i real estate online has probably run across the terms “fee simple” and “leasehold.” If you currently live in a state that doesn’t have these different types of property ownership, you may be looking for some clarification! Here’s a list of frequently asked questions on the subject.
1. What Are the Basics of Fee Simple Ownership?
As the owner of a fee simple property, you have purchased complete ownership, meaning that the land itself belongs to you, along with all of the dwellings, buildings, and other structures on the land. If the property in question is a condo rather than a house, a fee simple buyer has purchased an interest in the land and the community’s common elements, along with the unit itself.
Once a fee simple property is yours, you still have to abide by zoning laws and community covenants/restrictions. Otherwise, though, you have the right to full enjoyment of the property; you can choose to make improvements to it (for example, by building an additional structure), and it’s yours to sell, trade, or pass along to others in a will. Fee simple ownership also has no time limit.
2. How Is Leasehold Different From Fee Simple?
In a leasehold purchase, the buyer agrees to 1) temporary ownership of the structure(s) on the land, and 2) leasing of the land beneath it, for a length of time specified in the lease. As a result, the leasehold owner has restrictions on how – and how long – s/he may occupy or otherwise use the property. When the lease term ends, a “reversion” takes place, meaning that the property reverts back to the landowner from whom it was leased.
3. What Else Should a Buyer Know About Leasehold?
Most leasehold agreements include a timeline for when a lease will be renegotiated (for example, every 10 to 15 years). Most also include caps on how much a monthly lease rent may increase. However, it’s still possible that a lease rent might go up as the market value of the property goes up.
If conditions are favorable for both parties, a leasehold owner may be willing to renew or extend a lease. If the landowner decides to sell, the leasehold owner typically has the first opportunity to purchase. In this case, the property is made “fee available” — and if the leaseholder buys the landowner’s interest, the property converts to fee simple and belongs to the leaseholder outright. If there is a third party buyer, the original lease agreement just continues to count down.
4. Why Might a Buyer Choose Leasehold?
Simply put, leasehold properties are more affordable! For a buyer whose priority is minimizing cost, leasehold may be an attractive choice. By including leasehold properties in their search, buyers may have the option of a larger home/condo or a more desirable location with a smaller initial investment.
Other buyers who may opt for leasehold? Those seeking a reasonably priced second home or vacation rental property, those who think they may want to own for only a brief period, and those who aren’t concerned about passing a property on to others.
5. Why Might a Buyer Want To Stick With Fee Simple?
A leasehold property loses value over time as the lease term becomes shorter. It, therefore, becomes more difficult to sell or obtain financing on the property as time passes on the lease. And for any lease term of less than 10 years, financing is not an option at all (making a cash buyer the only option).
It’s also important to note that there are leasehold-related restrictions when it comes to real estate transactions like 1031 exchanges. Specifically, a leasehold property may not be involved in a 1031 unless 30 or more years remain on the lease.
Want to Know More?
If you have additional questions about fee simple vs. leasehold — or any other questions about Maui real estate, please don’t hesitate to contact me!
Nancy Beebe, REALTOR(S), SRES
VV
July 11, 2023
Do you know if a fee simple condo can converted back to a leasehold? In other words, I want to sell my condo as a leasehold, but I want to retain the fee.