Buying Leasehold
When you purchase a leasehold property you are buying the structure only.
In a nutshell, you will pay the landowner lease rent — a fixed amount for a fixed term. When the term expires, the land lease is renegotiated, likely for an increased amount over another set term.
In some cases, the leasehold buyer may have the opportunity to buy the land as part of the purchase of the building, or improvements, if the fee is available.
Some fee owners offer the fee on an ongoing basis. But it never hurts to ask if the fee is available to purchase.
If the fee is not available, it is imperative you find out everything regarding the lease terms and the landowner. Here is where the professional help of an agent from Prudential Locations can be worth its weight in gold.
By getting as much information as possible about the land lease, your Prudential agent can advise you on how long the lease term is, when it might renegotiate or if it recently has, and can explore your other options regarding the property. It’s possible that a fee offering is coming or perhaps the owner might be persuaded to sell the fee to you.
But should the fee not be available, there are some financing considerations that buyers should understand.
You may not be able to get a 30-year loan. Most lenders will only go five years beyond the lease term.
And, unless there are 30 years or more remaining on the lease, the IRS does not consider it as real estate — so you won’t be able to exchange it or tax defer the gain.
Since Hawaii’s mandatory conversion law went into effect, approximately 20,000 leasehold properties have been converted to fee simple with roughly 22,000 co-ops and condominiums to go.
If you already own a leasehold property, pay attention to any fee offerings. It is generally recommended to buy the fee when it is offered. It isn’t recommend to wait because there are no guarantees you’ll get another chance.