While the majority of the properties in the United States are Fee Simple ownership, Hawaii has two types of property ownerships, Leasehold and Fee Simple.
Fee Simple Ownership:
In simple terms, a fee simple property ownership is one in which you own the home, as well as the land it sits on. Fee Simple ownership is the highest type of ownership interest you can have in real estate. When you purchase a Fee Simple condominium, you are purchasing your condominium unit and your percentage interest the land sits on. In Hawaii, you will often see a fee simple property be abbreviated as FS.
In simple terms, a Leasehold property ownership is one in which you own the home, but not the land it sits on. When you own a Leasehold property, you pay lease rent to the land owner. When you purchase a Leasehold condominium, you own the condominium unit, but instead of owning your percentage interest in the land, you are leasing your percentage interest in the land. In Hawaii, you will often see a leasehold property be abbreviated as LH.
What is the History of Hawaii Leasehold Properties?
In the early 1800’s all Hawaii land was owned by the king of Hawaii, Kamehameha III. It wasn’t until 1848 when the king divided his land. Most of the land was sold to Western missionaries, such as Bishop Estates. In an effort to keep their land as well as earn income, the Bishop Estates leased the land to developers who built homes and condominiums on the land. People who purchased the homes or condominiums from the developers were subject to a ground lease. Other landowners, who wanted to keep their land followed suit and began leasing their land to developers to build homes and condominiums on them in a similar fashion.
An Example of Leasehold:
An example of a ground lease (Leasehold) structure would be one where the land would be leased for 50 years. During this lease, payments are fixed for the first 30 years in 10-year increments, after which payment would be renegotiated to market rent for the next 20 years in 10-year increments. Typically, when the ground lease expires the property would then revert back to the landowner. Every ground lease was setup differently and may contain differing clauses, so if you are considering buying a leasehold property you should read the ground lease thoroughly. For more information on what to look for, see blog on 5 potential risks when purchasing land in Hawaii.