HAWAII Leasehold Property:
In Hawaii, most property is held either Fee Simple or Leasehold. What is the difference?
Fee Simple ownership is the most familiar form of ownership of property in the US. A fee simple buyer acquires ownership of the entire property, including improvements, buildings and land. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes. The owner may sell it, give it away, trade it. It can be mortgaged, leased to others or passed to others upon the owner's death. Fee simple ownership is called that because it is the most complete form of ownership including all the interests in or rights to the property. It is sometimes called Fee Simple Absolute.
Leasehold ownership is created when a fee simple land-owner enters into a long term agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the buyers interest or ownership rights differ from the fee simple interest in several important respects. First, the buyer of leasehold property does not own the land or even a portion of it. The lessee must pay a lease rent to the land owner and sometimes owes a part of the earnings made from the use of the property. The length of the lease vary depending on the property and lessor. All leasehold properties have what is called a surrender clause. While leases are often renewed where the lessee is caring for the property according to the restrictions of the lease, the land owner is not obligated to renew the lease. The lease usually addresses what will happen to improvements upon surrender. The use, maintenance and alteration of the leased premises are subject to restrictions contained in the lease. Many leases provide the land owner with inspection rights.
Important questions to ask when purchasing a leasehold property are:
1. How long is the lease term?
2. How much is the lease rent?
3. How will the new lease rent be determined?
4. What are the terms of the surrender clause?
5. What does the lease allow me to do with the property?
6. What does the lease prohibit?
A large portion of our Kona Coffee Belt and many of the coffee farms are on leasehold land owned by a trust called the Bishop Estate. This is probably a gross simplification, but the monies they collect from the leases go to support Kamehameha Schools which educates children of Hawaiian decent. Bishop Estates is one of the largest land holders in the US. It is overseen by a group of trustees. With most Bishop Estate leases the lessee also pays a portion of the income derived from the farm crops. The leases usually set requirements for the number of acres that must be in production, the number and use of outbuildings and the amount of land surrounding residences that may be used for yards. There are usually additional rents for outbuildings.
Leases that did not have strict requirements for farm production were formerly referred to as "Gentleman's Leases". A person would lease a small tract, build a beautiful home and cover the land with some coffee or fruit trees, flower gardens, pools, tennis courts or other recreational facilities creating a private. Bishop Estates appears to be phasing out this type of lease. Other types of property that are often leasehold are commercial properties and condominiums.
Financing leasehold property is possible but can be tricky because different lenders have different rules. To make matters worse, periodically the rules change.
Joyce Murphy, RB
Broker@JoyceMurphyRealtor.com
If you'd like to discuss the topic of purchasing leasehold property, call me at 808-443-4302.