LEASED FEE SERVICES
Historic Overview of Residential Leasehold
Residential leasehold began in the 1950’s as a means to create more housing for post-war Hawaii, which was experiencing a shortage. While many landowners did not want to sell, developers were able to convince them to lease their land in return for income, improving their property and getting it back at the end of the lease.
This well-intentioned system did create more housing, but it was doomed to fail because the model it was conceived from was misapplied from commercial leasehold concepts. The reversionary or surrender clauses in the leases (returns the land to the fee owner) inevitably displace lessee-residents from their homes and uncapped lease rent increases (tied to land value fluctuation) can create difficult-to-afford lease rents. These realities eventually placed social conscience (saving peoples’ homes) in conflict with the terms of the lease contract.
As early as 1967, government responded to the social plight by mandating sales of leased fees, first for single-family homes (Land Reform Act, Chapter 516, Hawaii Revised Statutes) and then for condos, co-ops and PUDs (Chapter 38, Revised Ordinances of Honolulu; passed in 1991 and repealed in 2005). Despite the adverse social effects of residential leasehold and government intervention into the lease contracts, landowners and developers proliferated residential leasehold to unprecedented levels in the 60’s, 70’s and 80’s. It is estimated that at one time there were about 60,000 leasehold apartments statewide. Today, there is about one third left leasehold, the rest have converted to fee.
About Leased-Fee Interests
Hawaii has, proportionately, the most residential leasehold land in the world. Single-family and multi-family zoned lands were leased, not sold, for development and those land leases created dual ownership: leasehold and leased-fee interests.
The pie chart on the left illustrates how land was owned before a land lease was created. It was fee simple land owned completely by the fee owner. The pie chart on the right illustrates what happens during the term of your leases. From the time the apartment leases began until they expire, there are two ownership interests in the land – leasehold, which is what you as the lessee owns and basically means that you have use of the land (or in a condominium your apartment) in return for payment of the lease rent and leased-fee, which is what the lessor retained and gives them the right to collect income (the lease rent) and obtain reversion (surrender of the land) at the end of the lease.
In a typical lease-to-fee conversion, the lessee purchases the lessor’s leased-fee interest and upon merging it with the leasehold interest they already own, the apartment converts to fee simple ownership.
Most land leases are for a term of about 55 years and contain fixed rent periods and lease rent renegotiation periods after which the leases expire and reversion occurs (return of full ownership in land to the fee owner).
The closed market context of fee conversions (one seller and one most practical buyer) means negotiations are very different from most other types of real estate negotiations that usually occur in an open market (competition). While neither side controls the other in a closed market, there are things that can be done to influence decisions to sell. Negotiations can, and do, occur.
For leased fee services, see also: