Every day, the lure of Paradise calls many to begin a search for how they can own their own special getaway place on Kauai. You may be someone who visits the garden island regularly and has been thinking about securing a place to retire to at today’s prices. You may be someone who hopes to find a great investment opportunity in owning your own tropical or beachside vacation rental. A Kauai condominium is where such a search often begins since they tend to be the most affordable option of residential ownership on Kauai.
What is Fee Simple?
However, ownership in Kauai doesn’t always come with the traditional rights of possession, known as Fee Simple ownership. With Fee Simple ownership, sometimes abbreviated as FS in the Tenure section of a listing, means you hold title to both the land parcel and any developed structure related to that address and unit. It is a traditional form of land and home ownership that we are most familiar with.
What is Leasehold?
What many are not familiar with is another form of ownership tenure called Leasehold. You may also see this abbreviated in listings to simply LH. With a Leasehold property, you hold title to the unit above the land, but not the land it has been developed on. As the owner of the unit, you will be required to pay a monthly lease fee to the landowner letting you have a development on it for a specified period of time.
These leases have expiration dates. At the time a land lease expires, a new lease is renegotiated with the current leaseholder. It is important to be aware that it would be legal for the landowner to decide not to renew the lease and the unit development would have to be surrendered to the landowner.
The lease term length can be any period that was agreed upon in the original lease agreement but is typically between 50 to 75 years. During the land lease periods, there is a scheduled renegotiation date. This allows for both the owner of the land and the leaseholder to renegotiate the monthly lease fee if there have been significant shifts in the market up or down. This does not give the landowner the ability to raise the monthly lease to an arbitrary amount. It must be within reason of current market values and the method of calculation is often specified in the leasehold agreement.
It is important to be aware that unlike the typical appreciation of value in a Fee Simple tenure, a Leasehold value tends to go down as it comes closer to its renewal and expiration dates.
Why would someone be interested in a Leasehold?
Most often it is investors who are attracted to Leasehold condominiums. Those experienced with rental management and number crunching may be able to create a profitable, cash flow positive rental property from them because of the low entry price of a Leasehold property. Experienced investors can make purchasing leasehold properties a worthy acquisition with proper timing of the purchases and knowing what numbers to crunch to evaluate income potential.
Leaseholds may also attract those who want the security of owning for a period of time and want to keep their cash purchase or monthly mortgage as low as possible.
Mortgage companies typically require at least a 30% down payment on Leasehold properties, or may not finance at all if the expiration date is within 10 years time. Knowing they may not see a profitable return on their investment at the time they sell is another concern to affordable security. Many mainland lenders are not familiar with leasehold properties and may not give loans for this type of tenure, so I advise you to work with lender local to Hawaii if you considering a Leasehold property to be financed.
Now that you have a basic understanding of the difference between Fee Simple and Leasehold land tenure in Kauai, you can continue your search for which type of tenure better suits your plans and dreams. There are always great deals to be made with either type of Kauai property and the island has a diverse selection of both Fee Simple and Leasehold properties for sale.
If you would like to know the renegotiation and expiration dates of a Leasehold property or would like to discuss your interest in purchasing a Kauai condominium with a licensed, local REALTOR, please contact me here. or text or call at 808-464-7471
Cindy A. Shannon
Oceanfront Sotheby's International Realty