If you're buying property in Hawaii, you'll encounter a concept that's rare on the mainland: leasehold ownership. Understanding the difference between leasehold and fee simple is one of the most important aspects of Hawaii real estate education.
Fee Simple Ownership
Fee simple is what most people think of when they think of "owning" property. When you buy a fee simple property, you own both the land and any structures on it, outright and indefinitely. You can sell it, pass it to heirs, or modify it (within zoning laws) as you see fit.
Fee simple properties in Hawaii are generally more expensive than comparable leasehold properties, but they offer the security and flexibility of complete ownership.
Leasehold Ownership
Leasehold means you own the building or improvements on the land, but you lease the land itself from a landowner for a specified period. In Hawaii, leasehold terms typically range from 30 to 99 years.
When the lease expires, ownership of the improvements reverts to the landowner unless the lease is renegotiated or the lessee purchases the fee interest (converts to fee simple).
Key Differences
Cost: Leasehold properties are typically 20-40% less expensive than comparable fee simple properties. However, you'll pay monthly or annual lease rent to the landowner.
Lease Rent: This is an ongoing cost that can increase over time, sometimes significantly. Lease rent renegotiations can result in dramatic increases, which is a major risk factor.
Financing: Both fee simple and leasehold properties can be financed, but leasehold properties may have additional requirements. Lenders typically require the lease to extend at least 5-10 years beyond the loan term. As leases get shorter, financing becomes more difficult and expensive.
Resale: Leasehold properties can be harder to sell, especially as the lease term shortens. Buyers may be reluctant to purchase a property with a short remaining lease, and lenders may not finance it.
Historical Context
Hawaii's leasehold system has its roots in the state's history of large landholdings by a few estates and trusts. The 1967 Hawaii Land Reform Act allowed lessees to purchase the fee interest in their residential leasehold properties, and subsequent legislation has continued to address leasehold conversion issues.
Making the Decision
Leasehold can be a good option if the remaining lease term is long (50+ years), the lease rent is reasonable and predictable, the price discount compared to fee simple is significant, and you understand and accept the long-term implications.
Fee simple is generally preferred when you want maximum control and security, you plan to hold the property long-term, you want the simplest financing and resale options, and you can afford the higher purchase price.
Consult the Experts
Before purchasing any Hawaii property, especially leasehold, consult with a real estate attorney who specializes in Hawaii property law, a local real estate agent experienced with leasehold transactions, and a mortgage lender who understands leasehold financing requirements.