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For Buyers: Leasehold vs. Fee Simple

A Guide to Hawaii's Residential Leasehold
Authorized by the Hawaii State Legislature and the State's Housing Finance and Development Corporation

  1. Introduction
  2. Basic Terminology
  3. Purchasing a Leasehold Property
  4. Types of Apartment Unit Leases
  5. Obtaining Financing for Leasehold Property
  6. Renegotiating Lease Rent Payments
  7. Expiration of the Lease Term and Surrender
  8. Purchasing the Leased Fee
  9. Conclusion


Unless you have the cash to pay the full price to buy your apartment unit, you will need to obtain a loan to finance the difference between the cash down payment and the sales price. The terms of the lease can affect your ability to obtain a loan, especially if the lease is due to expire in less than 30 years, or if there are only a few years remaining on the fixed rent period.

How do the lease terms affects my ability to obtain financing?

Most banks and other lending institutions have policies for approving loans on leasehold property that can affect a buyer's ability to finance, or refinance, and an owner's subsequent ability to resell. Certain lenders require that their be at least 10 years remaining on the fixed rental portion of the lease, or that the term of the lender's loan be no longer than the remaining number of years on the lease, less two years.

In addition, the Veterans Administration will not guarantee a mortgage beyond the actual time remaining on the fixed rent period of the lease, and the Federal Housing Administration insurers mortgages only up to 5 years beyond the fixed rent period of the lease.

These policies may make it more difficult for an apartment unit owner to sell the unit as the fixed rent period or the entire lease term shortens. Lenders are cautious about lending money against leases with short fixed rent period because they are concerned that the borrower may not be able to make the monthly mortgage payment if the renegotiated lease rent increases substantially.

What are the lessee's options when the lease term is less than the loan term?

If you are considering purchasing a leasehold apartment unit and only a few years remain on the fixed rent period of the lease, it may be helpful to contacts an appraiser to estimate approximately what the lease rent would be if renegotiated at this time.

The buyer could apply to a conventional lender for a loan with a shorter term.

The lessee-seller may be willing to finance the purchase through an agreement of sale or mortgage, with the seller in essence acting as the lender.

The lessee can inquire whether the lessor is willing to extend the lease term.

Finally, the lessee can inquire whether it is possible to purchase the leased fee interest from the lessor. The lessor may decide to make a voluntary sale of the leased fee interest to some or all of the apartment unit owners in the project, but the lessor is under no obligation to do so.

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