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For Buyers: Leasehold vs. Fee Simple
A Guide to Hawaii's Residential Leasehold
Authorized by the Hawaii State Legislature and the State's Housing
Finance and Development Corporation
- Introduction
- Basic Terminology
- Purchasing a Leasehold Property
- Types of Apartment Unit Leases
- Obtaining Financing for Leasehold Property
- Renegotiating Lease Rent Payments
- Expiration of the Lease Term and Surrender
- Purchasing the Leased Fee
- Conclusion
This article will help you understand some of the issues involved in buying and owning
residential leasehold condominium and cooperative apartments, as well as dwelling units
within Planned Developments (PUD). This article uses the term apartment unit to refer to
all three forms of ownership. Anyone buying a leasehold residential apartment should be
aware of all of the consequences of leasehold ownership.
Why is it so important for me to understand leasehold issues?
AFFECTS YOUR DECISION TO BUY
If you are contemplating the purchase of a
residential leasehold apartment unit, there are additional considerations than their are
in the event that you were contemplating the purchase of a comparable fee simple apartment
unit. For example, you will be concerned with the length of the remaining lease term, what
happens to your unit at the end of the lease term, and how increases in the rent payments
are determined. Answers to these questions will enforce your decision to buy.
AFFECTS YOUR ABILITY TO OBTAIN A LOAN
As an owner of a leasehold apartment
unit, you some day may want to refinance your leasehold apartment unit. A short time
remaining on the fixed period or term of the lease could create obstacles to obtain the
needed financing. This could be a problem if you wear seeking to refinance either an
agreement of sale or a mortgage that is soon to become due and payable in full.
AFFECTS YOUR ABILITY TO RESELL
If you want to sell your leasehold apartment
unit, you could find the apartment unit becomes more difficult to sell as the lease term
approaches its rent renegotiation and explicit expiration dates. Naturally, a buyer would
be more attracted if the lease had a longer period until rent renegotiation or expiration.
Also, lease provisions regarding such matters as the increase of rent and the
expiration date of the lease term may seriously affects the willingness of some lenders to
finance the proposed purchase of the apartment unit. If, due to the length of the lease
term, buyers have difficulty obtained financing, a seller may need to make concessions in
order to sell the apartment unit. The value of a unit could decrease as the lease term
nears the expiration date.
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