Leasehold vs Fee Simple

Please note: Rules and Regulations change, this article is only written to offer a general overview. It is imperative that you do your due diligence on this subject.

For many real estate buyers from outside of the State of Hawaii the difference between Leasehold and Fee Simple property is a confusing and somewhat foreign concept. The fact is that Leasehold property exists throughout the world but in many areas it is limited to commercial and industrial real estate. Different forms of ownership such as Leasehold and Fee Simple are referred to as different types of Tenure.

Leasehold ownership is in fact not ownership of land but rather ownership of a lease on that land. The lease has a fixed term, contains renegotiation provisions under which the owner of the lease may extend the lease and carries with it all the rights to use the land within the zoning restrictions of that particular area. These rights include planting trees and crops and constructing buildings. Farm land leases may contain additional terms based on USDA standards.

Fee Simple ownership is familiar to many people by other names including freehold and real property. It is ownership of land and all immovable property that normally goes with the land including buildings, crops and underground resources.   

Major Differences Between Leasehold (LH) and Fee Simple (FS) Ownership
Length of Ownership
(FS) Indefinite
(LH) The term of the lease. 

Ability to Finance
(FS) Yes
(LH) Sometimes, but generally a No

Price
(FS) Market
(LH) Below market depending on terms and remaining time on the lease.

Monthly Payments for Farm Land and Single Family Homes*
(FS) Taxes
(LH) Taxes and monthly payments to the landowner.

Monthly Payments for Condominiums
(FS) Taxes and maintenance or condominium fee.
(LH) Taxes, monthly payments to the landowner and maintenance/condo fee.  

*Single family style homes may be part of a community association, condominium or resort area that charges additional monthly fees.

Where Do You Find Leasehold Property on the Big Island?

Leasehold property is concentrated in two areas on the Big Island. Leases in these two areas are very different from each other and each offers certain advantages and drawbacks.

1. South Kona Coffee Farms 

The first type of leasehold property that is common on the Big Island are small farms, many located in the South Kona district that were originally leased to immigrant farmers to grow coffee and macadamia nuts. The largest landowner in the area, the Bishop Estate estimates that they own 70% of the producing farmland in the South Kona District.

Drawbacks

-Financing is more difficult to secure. Cash is generally the only option.

-If you can get financing, there can be a lengthy process before the landowner to approve transfer of lease.

- Some leases requires a certain percentage of the land is cultivated and the terms can require increased rental payments if additions or buildings are added and a share of the farming profits. 

Advantages 

-Initial cost of LH is much less than a comparable FS property.

-The purchase price as well as lease rent payments to the landowner count as qualified business expenses or depreciable assets of the business.

2. North Kona Condominiums

The second type of leasehold property common on the Big Island are condominiums, many located in Kailua-Kona town and concentrated along Alii Drive. These are typically older condominiums built in the 1960s and 1970s. Landowners include the Bishop Estate and several private family trusts.

Drawbacks

-Some leases have only a few years remaining at the current lease rate. Renewal clauses will adjust the lease rent to current market rates.
Advantages

-Prices are lower for LH condominiums than for comparable FS properties.