Fee Simple or Leasehold
Fee Simple and Leasehold Property Explained
There are two types of property in Hawaii Fee Simple and Leasehold.
Fee Simple is what we are all familiar with. Fee Simple is where the property owner owns both the house and the land the house sits on.
Leasehold is where you own the house but rent, or lease the land. Land leases are typically 30-year periods. This determines the cost of the property. If there is 30 years left on the lease the property will be consistent with Market Values. As the lease years decrease, the property value also decreases. This is why you may see a Great Deal on a Leasehold property. But is it?
When the term of the lease is over, three things could happen:
The landowner could convert the land to fee simple and sell you the lot so that you would own both the land and the house.
The landowner could renegotiate the lease so that you can continue living and paying your leasehold rent. However, the lease is based on the market value of the land. Most likely the land value has gone up in the last 30 years, therefore the lease amount would also increase.
You would have to vacate the land. Depending on what is written in the lease you would either have to vacate your home, leaving your home on the land. Or remove the home. This actually happened to a hotel on Ali’i drive. They were not able to renegotiate the land lease, so the hotel had to be removed.
Getting a loan on Leasehold Property:
When getting a loan on a leasehold property the lease has to be 5 years beyond the loan.
For example, if the lease is 30 years the loan can be for no more than 25 years, etc. So, for example the property that has 12 years left on the lease would theatrically be able to get a 7-year loan, but, not really, because there are rules within the general loan guidelines. Even if they would lend, it would not be very practical because the monthly payment would be too high or if you did a 7 year with a balloon you would be paying interest for 7 years then have the whole loan amount due at the end of the 7 years, so it makes since why as the leasehold years get lower it becomes a Cash only property.
There are two types of leasehold landowners:
If it’s a Bishop Estate leasehold, the lender would work with the Federal Land Bank because there is a farming aspect that is required. (That is why most of those properties have a lot of fruit trees on the property, you are in the farming business of growing and selling the fruit)
If it is a General leasehold (not with Bishop) then you do not have to worry about the farm aspect so it opens up the different loan programs your lender can work with.