Have you ever come across leasehold properties just outside of Olympic Village, near Granville Island and around False Creek that look a lot cheaper than expected? Sometimes you’re thinking to yourself, this looks too good to be true! Well those units are likely sitting on leased land where owners own the physical building but rent the land.
Leasehold vs Freehold
Leasehold land is a plot of land that has been rented out to Developers for certain period of time (often 100 years). The Developers build on the land then “rent out” portions of the building by selling the right to exclusively lease, i.e. By selling a leasehold property!
The city of Vancouver owns leasehold land in and around Granville Island and in South East Vancouver along the Fraser River too. There is also leasehold land in the West End which is owned by Corporations, UBC has leasehold land owned by the University and First Nations bands own land on the Westside and in North Vancouver. All leasehold land comes with a Lease Agreement that details the terms of the lease and what happens at the end of the lease (which is very important to owners). Simply put, you are buying a “right of exclusive possession” of your unit until the end of the lease period, or until you sell that right to another person.
Types of Leases
The lease term is typically 100 years that started in the 1980’s (so in that Neighbourhood many leases end in the 2080’s). A pre-paid lease means the Developer paid the lease payments ahead of time so owners wouldn’t have to worry about the extra monthly cost, though likely included this feature in the value of the properties. Leases that are not pre-paid (often on First Nations Land) means homeowners have a monthly lease payment in addition to strata fees, taxes, etc. Depending on what the lease agreement says, the owner on non pre-paid leasehold land can raise lease payments at different intervals.
What happens at the end of a lease on Leasehold land?
Leasehold land is cheaper than freehold land (when comparing similar neighbourhoods and properties), and for good reason. Owners of leasehold land don’t own the land, and thus won’t get a share of any increase in land value (which is what makes Vancouver Real Estate so expensive).
If the lease on your building is nearing its end of term, you won’t be able to say with any certainty whether it will be renewed, and if so, at what cost once rising land values have been factored in.
And if the lease is not renewed, most lease agreements give the landowner the right to buy out the buildings at fair market value, then do with the land what they wisheven if that means tearing down existing buildings, rezoning, or selling for redevelopment. You might have to move and the value of the building pales in comparison to the value of the land, so owners won’t be able to buy a similar unit on freehold land with their payout. Think of the land near Granville Island.. That’s fantastic, waterfront land near the burgeoning Olympic Village. If the City takes the land back they could either build new, taller developments or sell the land off for a hue profit to bring in millions for the City’s budget (to use towards something like the Broadway subway line). Though homeowners can fight the decision, it would be well within the City’s right to take the land back and sell it (this is why they leased the land in the first place!). Homeowners in False Creek were successful in decreasing a significant increase in lease payments in False Creek a few years ago (the City increased lease payments to match the value of the land in Olympic Village, which leasehold owners argued wasn’t fair).
Financial Issues of Leasehold Land
The advantage is that leasehold units are cheaper than freehold units, but there are disadvantages.
It’s uncertainties like the end of the lease that make some leasehold properties less than ideal investments. They generally take longer to sell since there are fewer Buyers interested in this type of property, and as the lease moves towards its end of lease years, the property value can decrease.
Not every lender will lend on a Leasehold property, but the major banks as well as a number of private lenders will still offer a mortgage. Buyers typically need to have a good financial record, though a bigger down payment than normal isn’t necessary. Having said that, it’s a a unique situation for every Buyer so speak with your Mortgage Broker for more information.
Buying a Leasehold Property
If lifestyle factors like being close to work or living in a beautiful area are most important, it could be the right choice for you. You’ll want to buy into leasehold properties that have a long lease remaining – my suggestions would be 50 years or longer. Make sure you’re working with an agent who understands leasehold properties (that’s us!), the lease and the buying process so that you know the in’s and out’s of the purchase.
If you want to know more about leasehold properties or any other types of properties, give me a call!
Michelle Cote – 7788345868