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Fee Simple and Leasehold Ownership Defined
If you have been looking for property on Maui or in the State of Hawaii you have probably noticed that some properties are classified as Leasehold and some are classified as Fee Simple. To the uninitiated this could be confusing, especially considering that Hawaii is one of only three states including New York and Florida that recognize Leasehold properties. Let’s look at some of the differences between the two and help you discover which one would be the best option.
Fee Simple Ownership
Fee simple is the most common type of ownership and may be the only one you have heard of up until this point. In short, Fee Simple is the complete or absolute ownership of a property and the land it sits upon. In a Fee Simple transaction, the owner is given the title of the property, which allows them to use, sell, trade and pass on that property upon death. There are cases where title can be taken from an owner, such as if the property is behind on taxes, or is being used for illegal activity.
Fee Simple is referred to as the highest form of ownership because it allows for full and unrestricted use of the land. The only thing limiting an owner’s options for construction and alterations are state zoning laws and any subdivision rules that may be in place. Another important item to note about Fee Simple real estate is that the duration of ownership is indefinite, which is how you can leave the property to your children and keep it in the family for generations.
Leasehold Ownership
A Leasehold interest is a term that refers to the creation of an arrangement between two important parties, the Lessor and the Lessee. The Lessor refers to the original, Fee Simple owner of the land. The Lessee refers to a person that enters into a contract with the Lessor for what’s called a ground lease. After this agreement is in place, the Lessee pays a monthly fee and is entitled to the land specified in the contract and may do with it as they see fit, unless it violates any terms or rules set up in the lease agreement. The important difference to note with a Leasehold is that the Lessee is not buying the land, they are simply buying the right to use the land in the form of a ground lease.
Important things to keep in mind about a Leasehold are that the amount of time the Lessee can use the land is specified in the original lease, usually 99 years or less. This is worth noting because if someone else should buy the Leasehold, they are essentially buying the remaining years from the original lease. Unless a new lease is drafted or protections are set up in the original lease for the Lessee, at the end of the specified time period, the land and anything built on it will then revert back to the Lessor in what is called a reversion.
The biggest benefit in buying a Leasehold property is that it costs much less than a similar property that is Fee Simple. Depending on your needs, and how long you intend to keep a property Leasehold could be a great option. But if you are someone who wants to be able to control your property and pass it down to future generations, we would recommend continuing to search for the right Fee Simple property to suit your needs.
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