Real Estate FAQs

Free Simple vs Leasehold

Fee Simple (aka Free Hold) is the most complete form of ownership and most common throughout the United States and the Hawaiian Islands. Fee Simple ownership includes the land and the buildings. A Fee Simple condominium includes the actual condominium unit, and the proportionate interest in the land underneath plus the proportionate interest in the common and limited common elements of the project. Common elements could include the lobby, elevator, walkways, swimming pool, etc.
Fee Simple owners are responsible for their property taxes and sometimes association dues and or maintenance fees in case of a condominium. The vast majority of all Honolulu properties are Fee Simple; however, Leasehold properties remain.

Leasehold ownership only includes the buildings, but not ownership of the land! A Leasehold condominium includes the actual condominium unit and the proportionate interest in the common and limited common elements of the project but not the ownership of the land. Someone else (the fee owner) owns the land and the Leasehold owner only leases (rents) the land at terms defined in the lease document. Leasehold properties, at first sight, may appear very affordable, but remember, the value of the land is not included.

There is a considerable risk of not owning the land underneath: Leasehold owners pay a monthly lease rent to the landowner. Per the terms of the lease, the lease rent could increase over time and is payable above and beyond the property taxes and any possible association dues or maintenance fees. Per the terms of the Lease, there may be restrictions on property usage, alterations, and maintenance.

Financing for Leasehold properties could be more difficult depending on how short the remaining lease term is. The terms and details of the Lease can vary for different properties and the risks of ‘Step-Up Lease Rent’, ‘Lease Renegotiation’, and ‘Lease Expiration’ need to be carefully considered. On occasion, the landowner may offer the land for sale (Leased Fee Interest), but often at a high ‘take it or leave it’ price. On occasion, a Lease may get extended but sometimes at less favorable modified terms.

Leasehold ownership could be more of a lifestyle choice. The investment aspect is speculative at best with many unpredictable variables. Make sure you understand the terms of the lease before signing on the dotted line. Depending on the surrender provision in the Lease, at the time of lease expiration, the landowner may take back the improvements and buildings on the land (reversion). Leasehold owners need to be prepared for this worst-case scenario of surrendering their interest in the building or condominium. In short, ‘move out and give it all up!’ Remember, Leasehold after all means you are just renting the land.

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