5 Things to Know Before You Buy a Leasehold Property in Hawaii

How Leasehold Works

Leasehold property is a type of ownership that was established in the early 1960s in Hawaii with the thought of making real estate more affordable. Fee simple ownership, on the other hand, implies that an owner of a condo also has an undivided interest in the common elements of the development, including the land the condo sits on. In the case of leasehold property in Hawaii, the land belongs to a third party, “the lessor,” and is leased (under precise terms) to the condo owners.

Kahana Outrigger, oceanfront development

Here are 5 Things to Know Before You Buy a Leasehold Property

1. What is the Duration of the Lease?

For example, the Kahana Outrigger lease expires in 2071, which allows for 30-year financing. Property values tend to go down as we approach the termination of the lease. The lessor and the lessees have the option of extending a lease or reaching an agreement to convert the property to fee simple.

2. What Happens at the Termination of the Lease?

If the lessor and the lessees have not agreed on a lease extension or a fee conversion, the lessor (landowner) has the right to repossess the land and all the improvements on it.

Kahana Outrigger 3 bed/3 bath, listed at $899,000 leasehold

3. What is Monthly Rent and the Schedule of Future Increases?

Most leases have precise dates when lease rents are renegotiated and have a cap on future increases, based on land values at the time of renegotiation.

4. Are There Any Ongoing Negotiations to Convert to Fee Simple?

Such a conversion occurs when the landowner (lessor) sells the land to the condo owners. Depending on the size of the land and the number of units in a development, the fee conversion for a 1bd unit can vary from $30,000 to $100,000. One can finance the cost of such conversion.

5. Does it Make Financial Sense for You?

Leasehold properties are more affordable than fee simple ones. When buying a leasehold property, you may be able to afford a larger unit or a better location. It may also allow you to reduce the initial investment, but you have to be financially prepared for the lease rent payments and future increases.