Leasehold

[peat]

This is a pretty simple question but I dont know if I fully understand the concept of leasehold and was wondering exactly what it means
Eg if u buy a leashold property with 10 yrs on the lease, what happens at the end of it. Do you own anything? Do you have the right to stay longer if you continue to pay the ground rent? Or is it completely 'see ya later' ?

[Halebop]

There are various permutations of leases. Most are very long term (hundreds of years) or shorter term (say 5 or 10 or 21 years) but renewable in perpetuity, allowing the leaseholder to rollover the lease for another x years at the negotiated market rate for as long as they can pay.

Imrovements are a bit trickier because you own them but they are probably firmly attached to the ground and even other leaseholders' improvements. Not my field but if my memory serves me right improvements can be surrendered to the land owner if you opt not to renew the ground lease. I have a vague thought though that some less standard lease agreements can force the leaseholder to remove their improvements at the end of the lease period if not renewed. Not 100% certain on that one but just have some vague recollections in reading of deals gone bad.

Although a leasehold interest provides many of the benefits of freehold ownership in practical terms I would view it as owning the finite cash flows or occupancy benefits net of costs including ground rent. For this reason leasehold property is superficially much cheaper than freehold but removes the upside benefit of land ownership, which ultimately is the only part of the deal that appreciates.

So for long term ownership leasing provides few benefits except a lower initial capital spend. A well timed lease investment can be very profitable at the end of a depressed property market though - providing potentially significant cash flow "arbitrage" opportunities. Now is an unlikely time to find such deals but I guess they always exist.

[peat]

thanks for your reply Halebop , and yes I suppose each lease itself must be investigated individually to understand its ramifications. My experience (mainly gathered from my parents) was of 999 year leases and renewable in perpetuity, and so I am bewildered by some of the seemingly cheap provincial properties on sale on trade me with 10 or less years remaining on the lease. Why would anyone buy those? (even tho cheap cf freehold)
Being a bear on property I wonder about selling up and living in one of these to release cash and whether that is a viable option but wouldnt want to have nothing remaining at the end of the lease of course.
eg
this would be a nice (and cheap ) place to live after selling an Auckland property but wouldnt wanna be homeless in 10 years!!

http://www.trademe.co.nz/Trade-Me-Property/Houses-for-sale/auction-74415474.htm?key=313797

[Bling_Bling]

A few friends i know who bought into leasehold properties in a very good areas found it very hard to sell.

[blockhead]

quote:Originally posted by Bling_Bling

A few friends i know who bought into leasehold properties in a very good areas found it very hard to sell.


Blocky understands lease's pretty well, there are many variables in a lease. Generally (in the case of leasehold motels) the leasee (fellow paying the rent) buys a business off another person for "x" dollars and the lease continues under the original agreement as set up by the lessor (fellow collecting the rent) There will be a rent review periodicaly, often every two years when the lessor gets the chance to increase the rent if justified. During the period of the lease the leasee normaly pays all costs except structural type repairs. Ins, rates, the whole lot paid by lessor. Leases can be any length of time, last motel we had was 15 years, present one is two years. When I was in Coasters territory the lease was 35 years. The length of the lease affects the value of the business, obviously if you are buying a business which could net you $200k pa but only has a two year lease you would not pay a gazillion for it because at the end of two years you have nothing, you simply walk away.

So there you go, brief insight to leasing.

[stephen]

One thing about leasehold property is that the conditions can and do vary wildly. For example, there are many properties owned by the Cornwall Park Trust in my area. At least one of their leases I looked at required the leaseholder to redecorate every three years! Wow, that changes the investment nature just a tad.

The term of the lease can make a big difference too. Eg, over 21 years, an initially chunky rent can be reduced by inflation to a pittance. Or not. Equally, leaseholders can get a nasty shock when the lease comes up for renewal. Again, some of my neighbours were caught short when they realised the Trust Board was keen to catch up on 21 years of inflation and increase in local property values - the tenants had come to think of the place as their own and forgotten that the day of reckoning would arrive.

By contrast, I have a friend in Hamilton with a house on a section with a 99 year lease, and decades left to run. The leasehold has considerable value and it let him get into the property market when the nearest freehold was out of reach.

In sum: in leasehold property as in all things, there are special situations that make a particular opportunity a good deal or a bad one, and your planning will compound the goodness or badness. Do your sums, think about your plans for the future, look hard at the lease terms, think about resale value if any.