Useful leasehold buying strategies

 

Part 1 of 2 series

 

HONOLULU ADVERTISER , October 23 2005

BY LISA SCONTRAS

Custom Publishing Group

 

If you’re considering a leasehold property purchase, it’s best to know the ins and outs of this unique form of land tenure.

 

Most buyers know when you purchase a leasehold property you are buying the structure but only a leasehold interest in the land and you will pay the landowner lease rent — usually fixed for a period of years and then renegotiated. But there are several other key issues that a prospective buyer should understand, according to Michael Pang, president and principal broker of Monarch Properties.

 

“The leasehold buyer is most often willing to pay the fee simple price if the fee is available,” says Pang, whose company represents 85 percent of Hawaii condo associations in matters relating to fee conversion or lease renegotiation. “Some fee owners offer the fee on an on-going basis. So ask if the fee is available. Those are the good ones. They have the least risk, because you know what’s going on and can purchase the leasehold interest with the leased fee interest.”

 

 

 

If not, Pang suggests you find out more about the lease terms and the land owner.

 

“Get as much information as possible,” Pang adds. “In addition to knowing how long the lease term is, find out what the attitude of the fee owner is. It’s possible that a fee offering is coming.”

 

There are also financing considerations that buyers should understand.

 

“Sometimes you may not be able to get a 30-year loan,” notes Pang.

 

“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 the 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.

 

To owners of leasehold property, Pang generally doesn’t recommend waiting to purchase the fee because there are no guarantees you’ll get another chance.

 

“When the fee offer comes,” he says, “take it.”

 

 

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