What is Leasehold?
You own a home or interest in a condominium on land owned by someone else (the fee holder). Typical leases run for 55 years and monthly rent is paid to the fee holder. This rent is usually fixed for 30 years and adjusted at fixed intervals over the remaining length of the lease.
The Good
- Originally allowed developers to build and sell homes at a lower cost. Leasehold property is more affordable since you’re not paying for the land.
- The fee holder may offer the opportunity to purchase the fee interest (the land) at some point. This is usually advisable if you can afford it and eliminates the risks listed below.
The Bad
- Obtaining financing to buy leasehold property is more complicated. Lenders will finance the purchase for a period five years less than the remaining term on the lease. Example: if there’s only 25 years left on the lease term, the lender will provide financing for only 20 years. Your monthly mortgage payments will be significantly higher.
- The closer a lease is to expiration, the more difficult it is to sell the leasehold interest because it may not be known if the fee holder intends to renew the lease. If the leasehold interest can be sold, it may be at a deep discount.
The Ugly
- When purchasing leasehold property, there is risk concerning the length of time remaining on the lease. The landowner may choose not to renew the lease at expiration at which point the “reversionary clause” takes effect.
- The fee holder is not obligated to renew the lease. If the lease is not renewed, the leaseholder must leave the property and is entitled to nothing. Ownership of the structure on the land transfers to the landowner.
Contact Michael Zimmerman if you have leasehold or other home purchase or sale questions.
