“Akamai Money” seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put “Akamai Money” in the subject line.

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QUESTION: Land is expensive in Hawaii, which makes homeownership tough for many residents. Does owning a home but not the land underneath it, a so-called leasehold arrangement, make sense?

ANSWER: Leases are different and people are different, too. Leasehold properties can make a lot of sense for certain buyers. Investors are on the lookout for the highest return on their investment. The less money they have to spend each month in order to collect market-rate rent increases the return. As leasehold properties are less expensive, it provides a good opportunity for positive cash flow. A retired person living on a fixed income may find the lower expense of a leasehold property advantageous. Also, the security of owning your place and not being forced to move with only 45 days’ notice, when on a month-to-month lease, can be quite comforting.

Q: Generally, how does the leasehold arrangement work?

A: A lease is drafted at the request of the lessee (the owner of the improvements) and the lessor (the landowner) that spells out the terms of the lease as far as the duration, the lease rent, the responsibilities of the lessee during the tenancy and at the end of the lease. During the term, renegotiation dates are set to adjust the rent. Either party may suggest changes down the road, but both parties must approve these changes. A lease extension would be handled in this way.

Q: What is the single most important detail in a leasehold property that a buyer should examine when considering such a purchase?

A: The length of the lease. A 100-year lease will last a whole lifetime, whereas a lease with only 10 years remaining presents some challenges with financing and the uncertainty of what will happen at the end of the 10 years.

Q: What other factors are important?

A: The lease rent, including when and how often it will be renegotiated, and how it is determined. A low lease rent is great, but what happens when it jumps up significantly at the renegotiation date? That can be an unwelcome surprise unless this is spelled out in advance. Another factor to consider is the likelihood of the landowner eventually offering to sell the fee interest (land) to the property owner. In recent years the Liliuokalani Trust sold the land under some major condominium projects in Waikiki after many years of declaring that they wouldn’t ever do that. The trust decided that it was time to divest some of their real estate holdings in favor of a more diverse portfolio. This was a big bonus to those condominium owners, and most jumped at the opportunity to own their units in fee simple.

Q: Up until the 1980s much of Hawaii’s housing market was made up of leasehold property. What share of the local housing market would you estimate remains in leasehold today?

A: This is not an easy thing to ascertain; however, we can look at what property is on the market currently for a quick idea. Of the 1,511 single-family home listings in our MLS system, 1,472 are fee simple, which leaves only 39 homes as leasehold, or 2.6 percent. The condominium market is a different story. Leasehold condos represent about 13 percent of the total (on the market). You must remember that in 1967 the Hawaii Legislature passed the Hawaii Land Reform Act. This was challenged all the way up to the Supreme Court of the United States. The ruling in 1984 came down in favor of a homeowner being able to force the sale of the land. Condominiums and townhomes, however, were exempted from this statute, and that is why there is a higher percentage of the leasehold condominiums compared to single-family homes.

Q: Can you give a couple examples of what kind of leasehold homes are on the market today, from the low end to the high end?

A: At the low end, there is a one-bedroom unit for sale at Kaioo Terrace with 20 years remaining on the lease for a mere $62,500 and many more condo options in the $100,000-$150,000 range. At the higher end, I (have a unit in the Diamond Head Beach Hotel listed) for $529,000 on the Gold Coast or a beautiful oceanfront home in Punaluu at $425,000.

Q: Are any developers building new leasehold homes?

A: A developer wants to be able to sell the finished product for the highest possible price, and to get that, you want to have the broadest appeal to buyers. As leasehold properties are more complicated, you will rule out a number of buyers from the start. I don’t know of any new leasehold developments coming down the pipeline.

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Interviewed by Andrew Gomes