Leasehold Condos Explained

20 Jun

When you begin your search for a Kona condominium you want to be sure you find one that is Fee Simple.  Following is all the information you need to give you a beginner’s idea of the difference between a Fee Simple and a Leasehold condominium.

MLS DATA

MLS # Tp St DOM Taxkey Tnr Price Location Lnd area Details
       270216 CND A 484 3-7-8-10-58-23 LH $199,500 Mauna Loa Village #23 1,326 #23 2/2.01

 

This information has been supplied by third parties and has not been independently verified by Hawaii Information Service and is, therefore, not guaranteed.

 

This condo is Leasehold.  Note in the listing under the heading “Tnr“, which stands for Land Tenure, the letters LH.  LH stands for leasehold.  Land tenure is the relationship, legally defined, among people, as individuals or groups, with respect to land.  Rules of tenure define how property rights to land are to be allocated. They define how access is granted, who has rights to use, control, and transfer the land, as well as associated responsibilities and restraints. In simple terms, land tenure systems determine who can use what resources for how long, and under what conditions.

The two forms of Land Tenure are Fee Simple and Leasehold.  Most people are not familiar with the concept of leasehold when it comes to condos.  They think it’s the same as renting and it’s not.  These are long term leases; up to 99 years.  When you rent a condo it’s a short term lease; usually no more than one year.  I will include a short explanation of the long term lease concept here.

Fee Simple tenure is an estate in land, a form of freehold ownership.  It is the way that real estate is owned in common law countries, and is the highest ownership interest possible that can be had in real property.  Fee simple ownership represents an ownership interest in real property, though it is limited by certain governmental powers such as taxation, eminent domain, etc.

Sea Village

Sea Village

Leasehold tenure means that you just have a lease from the Fee Simple owner (sometimes called the landlord or lessor) to use the home for a number of years. The leases are usually long term; 35 or more years.  The person leasing the property is called the tenant or lessee.  A lessee has a contract with the lessor which sets down the legal rights and responsibilities of both sides.  Think of it like leasing a store front in a strip mall on the mainland, except that instead of 5 years, the original lease could have been 35 or 55 years.  The lessee has all the leasehold interest in the property as defined in his lease.

When you are buying a leasehold condominium, the person selling the condo is the lessee; the person leasing from the person who owns the Fee Simple interest (lessor).  The seller is only selling the buyer the right to take over his existing lease with the lessor.  The lessor (Fee Simple owner) doesn’t receive any of the proceeds from the sale; he continues to receive the lease rent stipulated in the lease for the remaining number of years left on the lease.  The seller (lessee) keeps all the money and transfers the lease to the new buyer; but only with the lessor’s permission.  So the lessor must approve of the new buyer before the lease can be transferred to him.

Take Alii Villas for example.  One person still owns about 12 of the units in Fee Simple.  This person, the lessor, owns the Fee Simple interest in the property.  He used to own the entire complex, but about 12 years ago he allowed as many people as wanted to buy out the Fee Simple interest (for about $40K each).  About a dozen people didn’t.  The Fee owner has let it be known that he has no desire to offer the Fee again.  The lease rent for his one bedroom units is $331/month.  The condo Association Fee of $423.00/month is separate.  So the total monthly layout is $754/month.  The lease expires in 2029.  That’s when the Fee owner will take back the condo.  So you are only buying the condo for fourteen years and end up with nothing when the lease expires.

The Islander Inn is a little better, the lease doesn’t expire until 2079.  The lease rent is currently only $72/month, but it re-negotiates (goes up) in 2019.  There is no way to know what it will go up to.  The condo maintenance fees at the Islander are $634/month.  One company owns the entire complex and has no desire to sell the Fee Simple interest.

Two other condo complexes that are entirely leasehold are Mauna Loa Village and Kona Makai.   At Mauna Loa Village The lease rent is $187/month and renegotiates (will go up) in 2024.  The lease expires in 2050.  In addition to the lease rent, the monthly condo maintenance fee is $966.44.  Aside from the Leasehold units, more than half of Mauna Loa Village is time share.  The time share company leases all the units from the Fee owner.  At Kona Makai the lease expires in 2039 and the lease rent renegotiates in 2019.  Lease rent for the one bedrooms is $203/month and the Condo Association maintenance fee is $542.20/month.  For the two bedroom units the lease rent is $284/month and the maintenance fee is $755/month.  The Kona Makai lease states that tenants have three choices at the end of their lease: 1. Move the building to another location at their own expense.  2. Tear down the buildings and remove the rubble at their own expense. 3. Peacefully vacate the premises.  Tough choices!

My advice; just stay away from leasehold condos.