What is a Leasehold Farm and Why Would Anyone Want It?

Leasehold farm for $265,000

If you’ve been searching for a farm property on this site you have probably come across the word Leasehold. Compared with similar Big Island real estate, you are also very excited to find 9 acres, a house and an ocean view for around $250,000. Well, its cheap because its leasehold. Leasehold is very common here on the Big Island especially in the Kona Coffee farming area. The majority of farms are leased by Kamehameha Schools/The Bishop Estate. These lands were once Royal Lands and were left in Trust for Hawaiian children. This is a private trust, one of the largest in the US, which uses the income from it’s leases to operate a wonderful, free private school system for children of Hawaiian descent. As you can imagine much of this land, being Royal and all, is in prime location.

Basically, with leasehold you have the right to use the land and the structures until the end of the lease term. However, it’s not true that you automatically have to leave the property once the lease is over, quite often the Kamehameha Schools doesn’t want to repossess the land and will extend another lease for 35 years especially with Agricultural Leases. These leases require the owners to farm, pay a low yearly rent, and share a percentage of any proceeds. They may periodically inspect the property to make sure it is being farmed, and all structural additions must be approved by them as well as the local government.

Why would anyone want to buy a leasehold farm? (1) It can be a very inexpensive way to acquire farmland. Leasehold land often sells for 50% less than the equivalent fee simple property. (2) There are tax advantages and leases can be depreciated. (3) Much of the best farmland is leasehold.

Several local banks do finance leasehold. In addition to the regular qualifications for obtaining a loan, the banks require that the term of the lease be at least 5 years longer than the term of the mortgage. Therefore to obtain a 30 year mortgage the banks require a lease of at least 35 years in length. The purchase process can be lengthy as the Trust takes a long time to process the paperwork and accept a new lessee. They have right of refusal on any offer made on a leasehold property of theirs. Extra time therefore must be allowed in the Purchase Contract.

Leasehold can be an inexpensive way to acquire a lifestyle/farm property here in South Kona. You should of course check with your lawyer and CPA about the legal and tax consequences. I love these places. They are “Old Hawaii” and in fact, I have my eye on a few myself. Contact me today for your own private tour.