O‘ahu Real Estate 101: Own, Lease, Rent or Try a Sandwich

Understanding more options in the Honolulu market.


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Rent, Own, Sandwich?

 

A visitor recently asked if it was true that you can’t own land in Hawai‘i. Huh? Apparently, she had walked into a condo for sale in Waikīkī, been told it was leasehold and thought that was a local market quirk.

 

While there are places that make it hard to own land—say, Mexico—Hawai‘i isn’t one of them. We do have some unique ownership options, and one in particular can take a few minutes to wrap your brain around but can offer alternatives.

 

Fee simple is the most common and the simplest: You buy a home, you own the land as well, end of story. You buy a condominium, you own a proportionate right to the land the condo complex rests on.

 

Leasehold gets a bit trickier: You buy a home, you own the structure and may do with it as you please. However, you’ve only leased the land. While every lease contract is different, in most cases, when your lease is up, you’re out—the home stays and becomes property of the landowner.

 

SEE ALSO: Love Historic Homes? Check Out This 1920s Kaimukī Plantation Cottage For Sale

 

Leasehold is a result of our state’s unique history as a monarchy. Until the Great Mahele in 1848, all land was owned by the king and other ali‘i. With the Great Mahele, Kamehameha III introduced the beginnings of the concept of private land ownership. Large trusts maintained large tracts of land and were unwilling to sell them, so they began leasing the lands under long-term leases to make money from the properties without giving them up. Well-known leasehold buildings in Honolulu include the Admiral Thomas, Diamond Head Beach Hotel, Sans Souci, Discovery Bay and the Kāhala Beach Apartments.

 

So why would anyone ever buy leasehold? One reason: price. Leasehold properties are significantly cheaper than fee-simple properties. If the lease is long enough—say, longer than your expected lifetime—and the rent is affordable, it might make sense to get more home for your money by buying a leasehold property. When considering this type of purchase, it’s important to look not only at the length of the lease, but also how often and when the lease rent can be renegotiated. Some leases will have terms defined that limit a rent increase, but others don’t.

 

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But wait, there’s another option: the sandwich lease. These are rare, but an interesting mix of leasehold and fee simple and often a value for the buyer willing to take a hard look at the lease terms. Almost always a condo, a residence with a sandwich lease is a fee-simple property. An owner purchased it, put a lease on it, then resold it with a sandwich lease. The property owner owns both the condo and the land under it (the bread). When the lease (the cheese) expires, the property is owned free and clear by the owner of the residence, fee simple. Properties with sandwich leases are often less expensive than fee-simple homes, and the sandwich lease terms are usually small amounts and very clear. They’re worth considering for the buyer who intends to hold onto the property long-term. Buildings with sandwich leases include Villa on Eaton Square, Waikīkī Banyan and Kukui Plaza in Downtown.

 

READ MORE STORIES BY RACHEL ROSS BRADLEY

 

 

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