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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


Hawaii does not have a law requiring the lessor to sell to the lessee the leased fee interest under a condominium, cooperative or PUD leasehold project. Still, some lessors decide voluntarily to offer for sale the leased fee interest to apartment owners (referred to as a fee conversion).

How is the offering price determined?

The price at which the fee may be offered is not subject to any legal restrictions. This price may be determined by mutual agreement between the parties or set by an impartial panel of one or more appraisers. In some cases, the lessor may want a certain price, leaving little room for negotiation.

Appraisers typically use the income approach to value the leased fee interest in the land under a leased apartment unit. In addition to lease rent payable over the period of the lease, the owner also will receive the return of the land at the end of the lease (reversion).

The appraiser calculates the amount of lease rent due over the fixed period of the lease and estimates the projected rent over the renegotiated lease period. This amount is then reduced (discounted) using present value tables. This reflects the fact that lease rent dollars received in the future are worth less than dollars received today. In essence, the appraiser asks how much would a person need to invest today (as in an immunity) to receive a stream of income equal to the amount of rent projected for the entire lease term.

Next, the appraiser evaluate the worth of the revision of the land, by calculating the projected value of the land at the end of the lease but then discounting that amount to present value. An example follows:

Determining the value of leased fee

Projected ground rent over remaining lease term (discounted to present worth):

Present value of fixed rent $600,000

Present value of renegotiated rent $900,000


Present value of reversionary interest in land (market value of raw land discounted to present worth): $500,000


$2, 000,000


Lessee's percentage of common interest X 1%

Value of leased fee interest $20,000

As you can see, it is not easy to determine what price you may have to pay for the leased fee interest, assuming the lessor is willing to sell, and you are willing to buy. If the lessor does offer to sell the leased fee interest, you may want to consult an expert to advice you about the pros and cons of the offer. If the lessor has not committed to sell the leased fee interest, you should carefully consider the possible impact of this on present and futures value.

Sometimes preliminary negotiations for the voluntary sale of the leased fee are underway when the sellers list their apartment unit for sale. One of the questions you as a buyer want to ask your seller is whether their is an ongoing or planned leased/fee conversion. If so, the sales contract (DROA) should address such issues as seller cooperation and transfer of any deposit money.

What is the right of first refusal for condominium associations and cooperative corporations?

In 1988, the Hawaii State Legislature enacted a law to give condominium owners associations a right of first refusal to buy the leased fee interest if the lessor decides to sell to anyone other than the existing individual apartment owners. At least 75% of the unit lessees must approve of the purchase, or the lessor can complete his sale of the fee to another party. The intent of this law is to encourage negotiation for a leased fee sale between lessors and condominium or cooperative owners or their associations or corporations.

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