When looking at here on the island of Hawaii lots of purchasers come to ask the common question "What is the difference in between Leasehold vs. Fee Simple.

These are The two kinds of land ownership that exist in Hawaii and also exist everywhere else. It's simply that on the mainland primarily just company space is rented. The two types (jointly called Land Tenure, abbreviated "Tnr" in the listings) are Fee Simple (FS) and Leasehold (LH). "Tnr" is Land Tenure, the way the owner holds title to the residential or commercial property. You either have title to the Fee interest or the Leasehold interest.

This explanation is mainly for leasehold farms. Leasehold condos are various in many aspects, although they do have month-to-month lease rent, renegotiation periods and expiration dates.

Fee Simple is the way you typically hold title on the mainland, only you simply didn't know the name. When you purchased a house, you also purchased the land and you owned your home and land up until you offered it. With leasehold, you purchase your home (or, for apartments, the space within the walls) and the right to take over the remaining time on a current land lease. Hawaii simply 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 thousands of acres. This land is separated into different sized farm lots averaging 5 or 6 acres each. All the leases were rented 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 money. Throughout the years the lessees built structures and planted crops (mostly coffee and macadamia nuts) which included worth to the land that did not come from the lessor. Hence, a trade in leases started 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 goes up using the Honolulu Price Index as a bench mark. Today the average lease rent is about $800 to $1500 per year. A common leasehold residential or commercial property of 6 acres with a 3 bedroom home and 28 years left on the lease might cost $250K to $600K. A similar charge basic piece would be around $800K to over a million. When the lease ends you can get a new thirty 5 year lease at a renegotiated rate.

The biggest drawback to a (farm) lease is the lease transfer fee (condominiums, Gentleman Farm rents, and domestic leases do not have the transfer cost). If you have all the productive land specified in your lease planted in a crop then the transfer cost is %10 of the gross prices. If you have neglected your crops badly (let them become overgrown with weeds and vines, and so on) or failed to plant a crop in the efficient location, then the transfer charge is%20. Therefore, it is very important that you farm your land wisely and conserve a portion of your earnings every year to balance out the transfer cost when you offer. Leasehold is still a bargain, since if you were going to farm for a living, paying the financial obligation service (interest) on a million dollar loan for charge basic residential or commercial property would eat up all your profits. Similar leasehold residential or commercial property would typically be under $500,000. Leasehold might be the only way to go for professional farmers or those who wish to own a hobby farm, want acreage, and can just afford the leasehold costs. And lease rent can be a deductible service cost!

If a person did not desire to farm at all, but might just afford leasehold, there are

expert farmers who will enter into an agreement to farm your land, keep it in compliance with the Lessors requirements, in exchange for the crops. Terms are negotiable. I have actually become aware of individuals who simply desired to wash their hand of the entire farming experience who got nothing in exchange for the crops however a totally buffed 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 number of different personal and business entities that own condominium projects and lease the condominiums. So you do not really purchase the apartment, you buy the lease to the apartment from today lessee. There is no lease transfer fee. When it comes to the genuine estate listings you commonly see, the quantity of the monthly lease rent and the date the lease ends appears in the bottom line of the listing under the "remarks" box. You can likewise inform if a listing is Leasehold or Fee Simple by looking under the heading titled "Tnr" with is the abbreviation for Land Tenure. FS will be for Fee Simple and LH will be for Leasehold. The fee interest in some domestic (not farming) and condo leases can be purchased.

COMMONLY ASKED QUESTIONS ABOUT LEASEHOLD:

(Q) What is the additional monthly payment I make in addition to my mortgage payment? (A) The extra regular monthly (or annual) payment you make to the Lessor is the lease rent. Only condos have month-to-month lease rent. Lease rent on leasehold farms is paid annually. Your mortgage payment is absolutely separate and is in between you and your lending institution. It has absolutely nothing to do with the Lessor. If you pay cash you will not have a mortgage payment, but you will still have to pay lease rent. When you buy leasehold residential or commercial property from the person surviving on it (the lessee) you buy the improvements (for a farm, the contents for a condo) and the right to have the lease moved into your name. The lease is with the Lessor (land owner), not the person you bought the lease from (previous lessee). At the time you take possession 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 offer it to somebody else. Every lease has lease rent renegotiation periods and an expiration date, to name a few terms and requirements. When you make a deal on leasehold, however before you are required to go through with the purchase, you are given a copy of the lease and a leasehold disclosure to study. You have time to show it to an attorney if you prefer. 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 occurs if you buy a lease that will end? (A) It depends upon the Lessor. For apartments and domestic leases, it depends upon what is stated in the private lease. For Bishop Estate leasehold farms, you can await the lease to expire and renegotiate a brand-new 35 year lease, or you can renegotiate the a new 35 year lease while in escrow.

(Q) What takes place at the end of the lease hold time? Say it ends in 2035, does it go back to the state? (A) There are very couple of leases available from the State of Hawaii. The farming 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 offered on the Big Island are owned by Bishop Estate. The Greenwells own some ag leases up behind the Kealakekua Ranch Center in Captain Cook. A couple of other families have some ag leases and a number of own condo tasks. Bishop and/or it's for earnings arm, Kamehameha Investment Corp, likewise own the land under a number of apartment jobs in Kona. Most leases specify the technique of renegotiating a brand-new lease when today one ends. The present lessee often has "initially best of refusal". If you can't reach terms you can live with you do not have to renew, however you normally have very first option. Remember, when you make a deal on a leasehold residential or commercial property, you will be provided with a copy of today lease to examine before you make your decision to purchase or not. At that time you need to see what the renewal terms are along with lease rent renegotiation terms.

(Q) can the month-to-month payment increase? (A) Rent renegotiation durations normally come every 10 years after the first 15 years of the lease. Right now Bishop Estate is providing extremely 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 built 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 purchase a similar piece of land in charge simple. Leasehold apartments are more uncertain. There are various specific Lessors and each lease specifies a various technique of renegotiation. If you fall in love with a leasehold apartment you must study the lease carefully before you purchase it.

(Q) What happens when the lease expires? (A) Most Bishop Estate leases have a surrender provision. But in practice Bishop typically gives the lessee the alternative to negotiate terms on a new 35 year lease. To date, no one has ever been asked to vacate the facilities when their lease ended.

The person who asked this next concern had read all of the above, so I am including it here to hopefully clarify this scenario: (Q) At the end of the lease, what happens if they request for, say, another $50,000 to get a brand-new lease? Do we have any option? (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 change. They will not precise a fee, like the $50,000 you discussed. The lessor will not be "selling" you a new lease. They might charge a higher lease rent for the brand-new lease due to the fact that of inflation. The quantity is normally figured out as a portion of the evaluated value of the underlying Fee Interest. It's a complex kind of appraisal, and can only be done by a professional. If you disagree with the lessor's appraisal, you can hire your own appraiser. Sometimes the two appraisers select a 3rd, and they balance all three. If you still disagree, and you wish to leave, you can take the house with you.

When you purchase leasehold residential or commercial property you are buying the improvements and the right to take control of the lease from the present lessee (the person who is presently leasing 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 cash the Buyer pays to the Seller. The lessor might precise a transfer fee from the Seller however, normally 10%. But on domestic leases, it is usually just the administrative costs that are credited the Seller. At closing, the lease is transferred 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 other than to consent to move the lease from one person to another.