What do leasehold and fee simple mean in Hawaii real estate?

What does leasehold mean in Hawaii?

A leasehold estate is a property where an owner, or lessor, leases real estate to a buyer, or lessee, for a specific period of time. The lessee can live in the property for the lease period and pay the specified rent on the lease. The lessee also pays the property taxes and utilizes it. Leaseholds in Hawaii typically have long lease periods – sometimes even longer than a typical 30-year mortgage, like 50 years.

Hawaii leasehold properties are usually less expensive, and the prices for leasehold estates generally decrease as the lease term nears its expiration. Sometimes there are opportunities for leasehold owners to purchase the remaining fee interest in the land for a significant price, which will change the land status to fee simple absolute.

The landowner, or lessor, is usually a large royal trust, a family, or an individual who has chosen to keep ownership of the land and generate income from it instead of selling it. Leasehold Hawaii property owners have certain rights:

• They can sell the fee or landownership to the homeowners, which would then make the land fee simple.
• They can extend their lease offering indefinitely, often renegotiating leases that extend for 30 to 40 more years.
• They can take away the property and any other structures on the property after the lease.

What does fee simple mean?

Fee simple means a type of ownership where a buyer purchases a real estate property outright and has the right to use the property indefinitely. There is no time limit to the use of the property with fee simple ownership, unlike leasehold estates. In a Hawaii fee simply property, the owner would pay the mortgage, property taxes, association or maintenance fees, and any other expenses associated with the property. An owner of fee simple property can sell, lease, will, or trade the property.

Fee simple real estate in Hawaii is usually more expensive; however, it is typically simpler to receive financing compared to leasehold transactions.

Why does Hawaii have leasehold estates? How many leasehold Hawaii properties exist on Oahu now?

Leasehold Hawaii properties date back to the early 1800s when all the land in Hawaii belonged to one owner – King Kamehameha III. The Great Māhele of 1848 divided all the King’s land into ownership under three main groups: the Konohiki (headmen of the ahupua‘a, or land divisions), the King, and the Royal Government.

The Great Māhele made possession of land possible instead of the traditional Hawaiian ahupua‘a system. However, owners of the land would have to present claims to the Land Commission to secure title ownership to property – an often-difficult process that took many years. Therefore, much of the Konohiki land was sold and managed by trusts like the Queen Emma Foundation, Liliuokalani Trust, and Bishop Estates. These trusts would then lease the lands; thus Hawaii had many leasehold properties historically.

Today, the majority of single-family homes have converted to fee simple properties, with only 2 percent of homes on the Oahu market being leasehold. According to the Honolulu Board of Realtors, an average of about 10 percent of condos on the Oahu market are leasehold properties, many of which are found in Waikiki, Downtown, Makiki, and the University area with a few in Pearl City, Kahala, and Windward Oahu.

Should I buy a leasehold Hawaii property?

For most home buyers, a fee simple property is more desirable and cost-effective, allowing the owner to generate equity. However, leasehold estates might make sense for the following types of buyers.

An investor might consider leasing a leasehold Hawaii property. Leasehold real estate often has low price points, and an investor might decide to rent out the property and generate monthly cash flow. Some leasehold properties are zoned for short-term rentals, like AirBnbs. Also, if an investor has multiple leasehold properties in one building, operational costs are streamlined, and the owner can have a stronger voice in the building’s policies. Some investors have used leasehold properties to rent to college students as well.

Seniors who want to downsize might consider a leasehold estate. They are on a fixed income and leaseholds are less than the payment for a fee simple estate. Condos in Kahala or the Gold Coast offer beautiful views and easy access to health care. However, possible leasehold property lessees need to consider the length of the lease, as you would not want to outlive the lease and be stuck in housing limbo.

Lifestyle buyers might also consider a leasehold estate for their ease and luxury life access. First-time homebuyers in Hawaii might be attracted to leaseholds because of their price, but most real estate agents will advise them to buy a fee simple property to build up equity.

However, for buyers who already have appreciating assets and are simply looking to enjoy the Hawaii paradise lifestyle, a leasehold condo or home in Hawaii might make sense. For them, purchasing a leasehold unit in a luxury building along the Gold Coast of Waikiki or Diamond Head would give them the luxury lifestyle at a fraction of the price. They would be paying less than a monthly rental fee and less than a mortgage payment. Sometimes a group of buyers may come together to purchase a leasehold property and split the time that they enjoy Hawaii paradise throughout the year; purchasing a leasehold listing in Hawaii is often less than rates on a hotel, vacation rental, or even a timeshare, depending on how much time the lessees want to be in Hawaii.

While the number of leasehold properties in Hawaii is dwindling, you may find an amazing deal that's right for you. Check the land tenure status to see if the property is a leasehold or fee simple estate, and then decide which tenure status is right for your real estate needs.