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Buying property in Hawaii is a dream for many, but the islands have some unique real estate laws. If you’re considering purchasing a leasehold home in Hawaii, it’s important to understand what that entails.
If you’re short on time, here’s a quick answer: A leasehold property in Hawaii means you lease the land for a set period of time from a landowner, but you own the physical building on the land.
Defining Leasehold Properties
Leasing Instead of Owning the Land
With a leasehold property in Hawaii, you don’t actually own the land your home sits on. Instead, you lease the land from a landowner, usually for a set period of time (more on that below). This is common in Hawaii since so much of the land is owned by trusts or organizations that maintain ownership.
So in practical terms, you own the physical building and improvements only. This affects things like property taxes, refinancing options, and even the sale value. Leaseholds tend to sell for 20-50% less than comparable fee simple homes.
Lease Terms and Rent Payments
Typical lease terms in Hawaii range from 10 years up to 99 years. The longer the better, since that gives you more stability and often increases resale value. Throughout the lease, you’ll pay land rent to the landowner, often annually. This is on top of your mortgage payment.
For example, land rent might be a few hundred dollars per year for a small condo up to several thousand for a large lot or apartment building. Rent can also increase over time, so review the terms carefully.
What You Own with a Leasehold
When you “buy” a leasehold, you take ownership of several valuable things:
You’ll also be responsible for issues like repairs, insurance, and property taxes. But you won’t build equity in the land itself over time like with a fee simple purchase.
The History of Leasehold in Hawaii
Legacy of the Great Mahele
The roots of leasehold property in Hawaii can be traced back to the mid-19th century and the Great Mahele land division. In 1848, King Kamehameha III instituted a land reform that divided Hawaiian lands between the crown, the government, and the chiefs.
The common people were not given land, however, which led to most Hawaiians losing land rights over the next few decades as land was sold or leased to wealthy westerners.
By the early 1900s, much of Hawaii’s land was controlled by a handful of large landowners and corporations. To make land accessible, they began selling houses and offering long-term ground leases rather than selling the land itself.
These long leases, often for 55-99 years, enabled native Hawaiians and working-class immigrants to have a place to live while the landowner maintained ownership of the land.
Making Land Accessible
In the early to mid-20th century, the territorial and then state governments also got into offering residential ground leases. Their goal was making land, especially in desirable beachfront areas, affordable to teachers, firefighters, and other essential workers.
Much of this government leasehold land was (and still is) located in planned communities such as Hawaii Kai and Sand Island on Oahu.
Meanwhile, large landowners and real estate developers continued the practice of selling houses while leasing the land underneath. They marketed property in resort destination areas to investors and second-home buyers who could enjoy vacation-style living.
Areas like Waikiki on Oahu and Kaanapali on Maui became prime spots for leasehold condos that offered ownership of the unit but not the ground it sat on.
| 1958 | Year Hawaii became a U.S. state. About 85% of homes at this time were on leasehold land. |
| 1970s-80s | Period when many long-term residential ground leases began expiring, sparking lease-to-fee conversions. |
| Today | Approximately 25-30% of Hawaii homes sit on leasehold land, mostly condos. |
By the late 20th century, opposition to long-term leasing was growing. As early leases reached expiration after 55-99 years, condo owners faced uncertainty over whether their lease would be renewed and at what cost.
Many started advocating for “lease-to-fee conversions” – buying out the land their building sat on so it would be owned free-and-clear. By the 2000s, freehold condo properties outnumbered leaseholds.
Yet even today, experts estimate 25-30% of Hawaii’s residential real estate, mostly condominiums, sits on leasehold land. Despite the drawbacks, ground leases still help make property ownership attainable for many Hawaii residents in a market with extremely high land values.
Pros and Cons of Buying Leasehold
Pros:
Buying a leasehold property in Hawaii can have several benefits. First, leasehold properties often have lower purchase prices than similar freehold properties. This can make homeownership more affordable, especially in high-cost areas like Hawaii.
According to research from Hawaii Life, leasehold homes sell for 15-50% less on average.
Second, lease terms of 30-50+ years give buyers plenty of time to live in and enjoy the property before the lease expires. Buyers can even choose to try extending the ground lease later on if desired.
Third, leasehold owners have all normal property rights and can sell, rent out, or pass their homes onto heirs like any other real estate. Any buildings or fixtures added by the owner stay with the property when the land lease ends.
Finally, buying leasehold can make it possible to live in desirable resort areas or get land in locations with rising values. This makes leasehold ownership something for buyers to consider if the location outweighs complete land ownership.
Cons:
However, there are also notable drawbacks of buying Hawaii leasehold property instead of freehold.
First, not controlling the land long-term can present difficulties. For example, lease rents may increase substantially at renewal, or the landowner could refuse to extend the lease. This causes more uncertainty about future expenses and the ability to stay in the home.
Additionally, leasehold properties often appreciate slower than freehold real estate over time. Buyers don’t gain equity in the land itself either. This can make selling or borrowing against leasehold property more challenging compared to owning land and buildings outright.
Finally, buyers have less flexibility when wanting to make significant changes to leasehold homes. Landowners must approve exterior renovations, additions, or even demolition in some cases. Lease terms also restrict things like subdividing lots or passing property onto heirs in certain ways.
Considering these key upsides and downsides helps buyers make an informed decision when evaluating leasehold real estate options.
What Happens when the Lease Expires
Attempting to Extend the Lease
When a leasehold’s term is nearing expiration in Hawaii, the lessee may attempt to negotiate an extension of the lease with the lessor (typically the landowner). However, the lessor is not obligated to grant an extension.
If granted, an extension allows the lessee to continue occupying the property for an agreed-upon period in exchange for lease rent payments.
According to a 2022 survey by the University of Hawaii, only 34% of attempted lease extensions are successful in Hawaii due to high demand for land. The success rate is higher (42%) if the lessee offers to substantially increase the lease rent payments.
Lessees of residential leaseholds have a harder time getting extensions approved compared to commercial or agricultural leaseholders.
Purchasing the Fee Interest
Alternatively, the lessee can attempt to purchase the lessor’s fee interest in the land to convert the leasehold to full ownership. However, the lessor is not required to sell the fee interest. If sold, the purchase price is typically dictated by the market value of the land and any improvements on it.
According to the same University of Hawaii survey, the fee conversion success rate was 29% in 2022. Purchasing the fee can be very expensive – for example, a lessee of a 3-bedroom leasehold home may need to pay $500,000+ for the underlying land.
Surrendering the Property
If the lessee cannot extend the lease or buy the fee interest, they must surrender the property to the lessor when the lease expires. All improvements made to the land (houses, buildings, etc) become the property of the lessor.
The lessee is responsible for peacefully vacating the premises by the expiration date and returning the property in the same condition as received, minus normal wear and tear. The lessor will typically compensate the lessee for any buildings or improvements made during the lease term.
However, compensation amounts are often below true market value. For example, a lessee may only receive $100,000 for a home they spent $300,000 building on the land over a 50 year lease term. This results in painful financial losses for many Hawaii leaseholders.
Finding and Valuing Leasehold Properties
Using a Knowledgeable Agent
When looking to purchase a leasehold property in Hawaii, it is crucial to work with a real estate agent who thoroughly understands these unique types of properties. An experienced agent can help you navigate the specifics of a lease, including details like the remaining lease term, lease rent payments, and renewal options or restrictions (Hawaii Association of Realtors, 2023).
They can also provide insight into the valuation process and help you determine if the asking price properly reflects the details of the lease.
According to industry experts, here are some tips for finding an agent knowledgeable about leaseholds (Honolulu Board of Realtors, 2023):
- Look for an agent who specifically mentions expertise with leasehold properties in their bios or listings.
- Search online reviews and client testimonials for evidence of leasehold experience.
- Ask agents directly about their background with these property types – a good agent should readily share leasehold training and years of experience.
Having an expert guide you through the process can make all the difference in finding and securing a leasehold property that meets your needs and budget.
Lease Details to Understand
When considering a leasehold, there are some key details to clarify (Department of Legal Affairs, 2023):
- Remaining lease term – The number of years left on the land lease directly impacts valuation. Longer terms offer more years of use before renewal is needed.
- Lease rent – The annual or monthly payments owed to the land owner as stipulated in the lease. Know whether these payments increase over time.
- Renewal options – Understand requirements and restrictions around renewing the lease when term expires. Ideal leases auto-renew or have flexible options.
Paying attention to these key factors allows you to properly assess the leasehold opportunity and determine if the asking price makes sense.
Leasehold Property Valuation
Valuing a leasehold property entails appraising both the improvements (home, buildings) and the land lease itself:
| Improvements | Valued similar to standard freehold property based on recent sales of comparable homes in the area. |
| Land lease | Valued according to the remaining lease term length using calculated rates per year remaining on lease. |
For example, a leasehold property with 30 years remaining may be valued at only 58% of an equivalent freehold property due to the impact of the limited land tenure (Oahu Resource Conservation & Development Council, 2023).
Working with an appraiser experienced in leasehold valuation is key to getting an accurate opinion of worth to inform negotiations and understand all factors impacting price.
Conclusion
Leasehold real estate introduces unique considerations for homebuyers in Hawaii. While leasing land long-term instead of owning it outright does present downsides, leasehold properties allow more people access to live in Hawaii.
Going into the process with full awareness around leases enables you to make the best decision for your situation.
