My name is Mike Gallagher and I am Broker in Charge at RE/MAX Honolulu.
You can visit my website at http://www.hawaiirealestatestatistics.com
or email me at Mikeg@hawaii.rr.com.
Here is is an explanation on Lease Hold vs. Fee Simple properties in Hawaii that are offered for sale. My example is based upon buying a Condo in Waikiki.
This example is applicable for all properties in Hawaii:
Lease Hold (L.H.) vs. Fee Simple (F.S.)
A few words need to be said about Waikiki Condos and the 'Tenure' a buyer or seller can own them in. What I am referring to is how the property is legally owned.
There are two types of tenure in Hawaii which is unlike anywhere else as far as I know in the United States. You can own a Condo in "Lease Hold" which is the predominent tenure in Waikiki.
A little bit of Hawaiian history shows us that years and years ago when the Missionaries of the World came to Hawaii to convert the natives they wanted to build churches. To do this the various religious organizations had to secure land from the King and Queen of Hawaii. This worked out pretty good for the Missionaries and they saw a good thing here in obtaining land and actually ended up one of the biggest land holders in Hawaii even today.
Although the largest land holder in Hawaii is the State of Hawaii the land in Waikiki of course over time became more and more valuable passing from generation to generation and a new system was developed whereby the ownership of the land was not the way we are accustomed to today. The ownership of the land was held in Lease Hold. This means you can purchase a Condo in Waikiki but if the tenure, which is noted on the MLS For Sale Sheet is "L.H." then the property is Lease Hold. You can own the Condo, a proportionate interest in it's Common Areas, parking spaces, storage space...but not the ground the Condo is built upon.
Lease Hold property in Hawaii simply means you are renting the land on which the Condo is built. Lengths of the leases vary but are usually given out as 100 year leases from the land owners to you in the form of a lease.
Example: You want to purchase a Condo in Waikiki that is Lease Hold. It is $329,000 "L.H." but if you look carefully at the MLS For Sale Sheet you will see a Monthly Lease Rent. This Lease Rent usually is nominal and around $50-$100 / month. However you must also pay attention to the terms of the lease as almost certainly there is a "Re-Negotiation Date." This means that every few years the Monthly Lease Rent can be adjusted. There often are no set rules on how much the Lease Rent can go up on many of the Condos. If it's $50/month it can go to $500/month. You may not be able to know the terms of the Lease Rent Increase until you are in Escrow. Of course while in Escrow if you do not like the terms you can cancel the contract within the contracts specified time frames.
The better way, but sometimes unavailable, is find out the terms of the Lease Rent increases before making an offer.
Lease Hold property also presents challenges for the borrower. A Mortgagor will not lend on a Lease Hold property for any term longer than 5 years short of the Lease Expiration Date (also on the MLS For Sale Sheet) or the Re-Negotiation Date. This means that in most cases a buyer will not obtain a 30 year mortgage. Dependent upon how much cash a buyer goes in with this scenario will often lead to high monthly mortgage payments since the term of the mortgage is less than 30 years.
This presents challenges for the Seller as well as Monthly Lease Rents can go up, Monthly Maintenance can go up, Taxes can go up (yes you pay monthly taxes on a leased property too) and as the owner approaches the Lease Expiration Date and wants to sell they will often find themselves "between a Rock and a Hard Place" as no one will lend on a Lease Hold property with just a few years short of the Lease Expiration Date.
There are ways around this...
When shopping for a Condo to buy in Waikiki, or anywhere else you can choose to purchase the property in "Fee Simple" tenure. This will be noted on the MLS For Sale Sheet as "F.S."
You can also continue to shop for Lease Hold property where the "Fee" is being offered. This means you can enter into Escrow with a contract specifiying you are buying a Lease Hold property but you also are purchasing the Fee from the owner (if it is being offered, which is rare in Waikiki) at the same time and when you close on the property and receive your Deed you will own the Lease Hold property in Fee Simple.
You want to buy a Lease Hold property and the Fee is availble. The purchase price of the property in Lease Hold is $329,000. The Fee Purchase Price is $80,000. Although you will have purchased the property for $329,000 your final closing statement will show amoung other closing costs that you purchased the Fee for