When searching for property in Maui, the primary type of ownership you will encounter is known as fee simple. That is the type of ownership familiar to most mainland buyers, although some may refer to it as freehold, depending on where they live. That said, there are some condominiums on the island and a very limited number of homes that are leasehold properties.
For potential condo and homebuyers, it is worth understanding the intricacies of leasehold property to determine if it is a type of ownership that suits your needs.
KeyTakeaways:
- Leasehold Ownership Basics: Buyers acquire usage rights for a set time while the land remains with the lessor.
- Key Terms to Know: Leasehold properties involve ground rent, lease duration, and renegotiation terms, which impact both costs and long-term value.
- Renegotiation Process: Ground rent is renegotiated periodically, typically every 10-15 years, which affects future expenses.
- Financial Pros and Cons: Leasehold properties offer lower upfront prices but come with ongoing ground rent and a potential decline in property value as the lease nears its end.
- Market Opportunities: These properties offer access to desirable areas at a lower price, but careful financial planning is required due to the higher ongoing cost of ownership.
The Fundamentals of Leasehold Property in Hawaii
Leasehold property represents a distinctive ownership structure where you purchase the right to use a property for a specified period while another party maintains ownership of the land.
In Maui, leasehold properties come with lower purchase prices compared to similar fee-simple properties, making them attractive to certain buyers. Leasehold properties can sell for anywhere from 30 percent to over 50 percent less than a comparable fee simple property. This is a fairly broad range, influenced in part by lease payments, the lease duration, and other factors.
Understanding the Key Components of Leasehold Ownership
The foundation of leasehold ownership rests on several critical elements that distinguish it from traditional fee simple ownership. When you purchase a leasehold property, you’re essentially buying the right to use the building or unit for a predetermined period, typically ranging from 30 to 99 years.
The landowner, known as the lessor, grants these rights through a lease agreement that outlines specific terms and conditions. This agreement includes crucial details such as:
Ground Rent: Regular payments to the landowner for the use of the land, which may be fixed or subject to periodic adjustments.
Lease Term: The duration of your right to use the property, including any extension options.
Maintenance Obligations: Responsibilities for property upkeep, including both regular maintenance and major repairs.
Renegotiation Points: When and how lease terms can be adjusted, including rent renegotiation intervals
These components have a significant impact on the long-term value. For instance, a property with 50 years remaining on its lease typically holds more value than one with only 15 years left.
The lease document itself often spans dozens of pages and contains critical information about your rights and responsibilities as a lessee.
Lease Rent Renegotiation Process
One of the most significant aspects of leasehold ownership involves renegotiating lease rent. Typically occurring every 10 to 15 years, this process determines your future ground rent payments. The renegotiation follows specific procedures outlined in your lease document.
- Appraisal Process: Independent appraisers assess the fair market value of the land, which is then used to determine a fair market ground rent. Typically, the AOAO hires an appraiser, and the lessor hires an appraiser.
- Negotiation Window: The condo association and the lessor will negotiate a new lease based on the respective appraisals.
- Arbitration Options: If an agreement can’t be reached, predetermined arbitration procedures take effect
Benefits and Considerations of Leasehold Property
Advantages of a Leasehold Purchase
The biggest advantage of leasehold properties in Maui is the lower upfront acquisition cost. The initial purchase price often falls significantly below comparable fee simple properties, creating opportunities for buyers to enter desirable neighborhoods or secure properties at lower upfront costs.
Real-world examples demonstrate these benefits. For instance, a leasehold listing in Papakea sold for $525,000, while a fee simple listing in the same building with the same floor plan sold just a few months later for $999,000.
This price difference allowed buyers to enter a premium market while maintaining financial flexibility. If you have a high income but limited capital available for a down payment or outright purchase, a leasehold property may be an appealing option.
If a leasehold makes sense for you financially, there are some fantastic properties that are exclusively available as leasehold. Alaeloa is a one-of-a-kind condominium complex in the Napili area, featuring 42 cottages or duplexes situated on 13 oceanfront acres. It is the lowest-density condo development on the island and has unmatched beach cottage charm. Kamaole Nalu is one of just a handful of beachfront vacation rental condos in South Kihei.
Check out our listing in Alaeloa »
4 Important Financial Considerations
When buying a leasehold property, the lower purchase price is attractive, but you need to understand all the ongoing costs involved:
- Ground Rent: Ground rent is a regular payment you make to the landowner for using the land. These payments typically increase every 10-15 years based on market values at the time of renegotiation.
- Standard Property Costs: Just like any property, you’re responsible for annual property taxes and maintenance fees. These costs continue throughout your lease term, regardless of any changes to your ground rent.
- Property Value Changes: The value of a leasehold property can decrease as you approach the expiration of a lease. This decline can be more dramatic in the last 10-20 years of a lease, affecting both resale potential and financing options.
The length of the remaining lease influences property value and financing options. Most banks require that the lease term exceed the mortgage term by a minimum of five years. In other words, to qualify for a thirty-year mortgage, a bank will typically require a minimum of thirty-five years on the lease. To qualify for a fifteen-year mortgage, they will need a minimum of twenty years remaining on the lease.
This requirement protects their investment and ensures the property maintains sufficient value throughout the loan term.
Impact on Property Value Over Time
Understanding how leasehold status affects property value helps buyers make informed purchase decisions. The remaining lease term plays a fundamental role. Properties can see values depreciate if the lease term is less than twenty years. That is particularly the case if the lessor has shown an unwillingness to extend the lease.
Market conditions affect both leasehold and fee-simple properties, although leasehold properties can be more sensitive to market fluctuations. This sensitivity stems from their unique ownership structure and the additional variables involved in their valuation.
Properties with favorable lease terms and clear extension options, tend to maintain stronger values over time.
Location remains a crucial factor in property value, even with leasehold properties. Prime areas often retain their desirability despite being leasehold.
Fee Available
Occasionally, leasehold properties can be converted to fee simple. This happens more frequently in condo developments that already have a mix of fee simple and leasehold properties. If they are for sale, these properties are advertised as leasehold fee available (LHFA).
People may or may not choose to exercise their option to purchase the fee based on its cost. Typically, that cost is substantial. In some cases, it may exceed the equity gained by converting to fee simple. I looked at the MLS and there are currently two leasehold fee available condos on the market. In both cases, it looked like the purchase price for the fee exceeded the equity gained.
Every so often, you will see an entire leasehold condo complex convert to fee simple. In those circumstances, the AOAO negotiates to purchase the land from the lessor. In the mid-2000s, the Hawaii state legislature was concerned about the number of leasehold properties with shorter leases and what might happen if those leases were to expire. They passed a bill that incentivized lessors to sell their underlying land via tax incentives. Hale Ono Loa, a condo in Honokowai, was the one condo in Maui that converted after that bill passed.
In general, most lessors are content to keep the property as leasehold because they receive substantial passive income from the property. They will choose to extend the lease terms and maintain that income rather than take the tax hit.
Making Smart Leasehold Purchase Decisions
The length of time you plan to own a property is something to consider when determining whether a leasehold property makes sense for your needs. A shorter-term purchase may make the lower entry costs particularly appealing. Longer-term holds require careful consideration of lease terms and future renegotiation points.
Financial readiness extends beyond the initial purchase price. Successful leasehold ownership requires preparation for ground rent payments, potential increases during renegotiation periods, and the standard costs of property ownership.
Risk tolerance becomes particularly important with leasehold purchases. You’ll need to feel comfortable with the unique aspects of not owning the land beneath your property and the possibility of lease rent increases.
Future resale potential deserves careful consideration in your decision-making process. Think about how many years will remain on the lease when you plan to sell, as this could impact your property’s marketability.
Leasehold Property Due Diligence
When submitting an offer on a leasehold property, the offer includes a leasehold property addendum. That document defines some of the important terms you encounter when purchasing a leasehold property and establishes a timeline for the seller to provide a leasehold disclosure for the buyer to review.
The leasehold disclosure is required to include the following:
- A complete and accurate copy of any leases and any amendments.
- A standardized summary of the length of the lease, lease rent terms, lease rent renegotiation dates, how renegotiated lease rents will be calculated, and surrender clause provisions.
- A standardized glossary of commonly used lease terms.
- For condos, a statement that there are currently no statutory provisions for the mandatory conversion of leasehold condominiums, and that there are no assurances that such measures will be enacted in the future.
The leasehold disclosure is one of the contingencies in the purchase contract. If the buyer reviews these documents and finds them objectionable, they may cancel the purchase contract, provided that the cancellation is made within the specified contingency period.
Types of Leasehold Properties in Maui
As mentioned at the top of this post. The bulk of the leasehold properties on this island are condominiums. About 8% of the current active Maui condo listings are leasehold. There are leasehold condominiums in Ma’alaea, Kihei, Ka’anapali, and the Napili, Kahana, and Honokowai area. There were also a couple of condo developments in Lahaina Town that were leasehold properties destroyed in the Lahaina fire.
There is a limited number of single-family homes on the island that are leasehold. The vast majority are properties located in Hawaiian Homelands. Hawaiian Homelands properties are exclusively available for purchase to individuals with at least 50% Hawaiian ancestry, as determined by their Hawaiian Blood Quantum. There is also leasehold land for the Hawaiian Homelands, but it rarely, if ever, comes to market. There are long waiting lists of qualified Hawaiians for these lots.
Every now and then, you will find a leasehold home that is not located in the Hawaiian Homelands. The most common example is when one of the Pires Place Residential Condominiums becomes available on the market in Kula. This is a small community of 11 homes.
While we don’t frequently represent commercial property buyers or sellers, it is worth noting that you can encounter leasehold properties on Maui when purchasing commercial real estate. Commercial leasehold constitutes a very small fraction of the overall commercial inventory.
FAQs About Leasehold Property
How do I know if a property is leasehold or fee simple?
If you are searching on our site, the property’s leasehold or fee simple status will be displayed next to the property address. Our local Realtor Association also requires Realtors to indicate if a property is leasehold in the listing remarks.
What happens when a leasehold property’s lease expires?
When a lease expires, the property typically reverts to the landowner. The lease includes a surrender clause that outlines the responsibilities of both the lessor and the lessee upon expiration.
However, many leases offer options for extension or renegotiation before expiration. There have been no recent examples of leases expiring and the property reverting to the landowner on Maui. Most of the lessors are getting substantial income from these properties giving them less incentive to let the lease expire.
Can I modify or renovate a leasehold property?
Most leasehold agreements permit modifications with the landowner’s approval. However, significant renovations may require specific permissions and should be carefully considered, given the temporary nature of leasehold ownership.
How does financing work for leasehold properties?
While financing options exist for leasehold properties, lenders often require longer remaining lease terms and may offer different terms compared to fee-simple properties. Most will want at least five more years on the lease than the length of the loan.
Some local lenders specialize in leasehold property financing and are well-versed in Hawaii’s unique market. Interest rates may be slightly higher, and down payment requirements may differ from those for fee simple properties.
Your Next Steps in Maui’s Leasehold Property Market
Understanding leasehold property ownership opens up new possibilities in Maui’s real estate market. While these properties require careful consideration, they can offer viable pathways to property ownership.
The key lies in working with experienced professionals who understand the nuances of leasehold ownership and can guide you through the decision-making process.
For personalized guidance on leasehold properties in Maui, contact the Maui Real Estate Team today! Our deep understanding of Hawaii’s unique real estate landscape enables us to help you navigate leasehold opportunities and find the perfect property match for your needs.
