FEE LAND AND LEASE LAND

What is Fee and Lease Land?

Some homes and condominiums in Palm Springs and in other cities of the Coachella Valley are on lease land. The leases are either Indian leases or private developer leases. You can see the lease land map here.

Typically homes on lease land cost less. The cost savings of home ownership maybe reduced by up to 20 to 30%.

Once a structure is built, the land beneath it can be of no other use to the landowner. This is applies to homeowner too. Therefore, by owning a structure on leased land, the homeowner enjoys the use of the land without the capital outlay associated with the land. The result can often be that the prospective homeowner can afford “more home” for less money.

IS FINANCING AVAILABLE ON LEASE LAND?

If purchasing on lease land, it is important to consider the term of the lease if you are financing and resale in the future. A 15-year mortgage needs a minimum lease term of 20-years. A 30-year mortgage needs a minimum lease term of 35-years.

Whether fee land or lease land, its recommend that you use a local lender. Buyers need an expert who knows the local market and works with local appraisers to ensure the success of underwriting your home loan. Also, most national banks and lenders will not finance the sale of a home on lease land. Kevin can refer you to mortgage professionals who are experienced in financing lease land in the desert.

WON’T THE VALUE OF REAL ESTATE CLIMB FASTER WITH OWNED LAND?

Many aspects and events determine resale values. All available figures indicate that resales of homes on lease land have climbed in the exact proportion as other homes in the area. How a property is maintained is more important for resale value than whether it’s on lease land.

WHAT ABOUT HEIRS, CAN A LEASEHOLD ESTATE PASS ON TO THEM?

Yes, a home on lease land is as easily transferrable to heirs as homes on fee land. However, if there are concerns about heirs 65 years from now, there are practical questions for the owner to consider:

Will the heirs want a 65-year-old home? The average life of most homes is less than fifty years.
Most residents change ownership about every five years . There could be more that 10 turns of ownership during the life of the lease. Is the home likely to stay in the family for 65 years?
The dollar difference invested between lease land and fee land in an investment account for 10 years, could potentially yield attractive earnings:

	Lease Land	Fee Land
Purchase Price	$960,000	$1,200,000
Savings to Invest	$240,000	$0
Monthly Lease Payment	$400	$0
Annual Lease Payment	$4,800	$0
Holding Period Years	10	10
Total Term Lease Payments	$48,000	$0
Investment Return at 7%*	$0	$427,780

*Based on assumptions calculated at Bankrate. All buyers should review their investments options with their own investment professionals.

Investing an initial amount of $240,000 could potentially be worth $427,780 after 10 years. This appears to be a more attractive investment.

WHAT HAPPENS AT THE END OF THE LEASE?

If there is no legal restriction prohibiting the lessor from selling its land, the lessee (or heirs) may have the option to purchase the land. However the current lessee would be offered a new lease based on conditions existing at that time; and there would be no financial advantage of the lessor taking back the land.

REVIEWING THE LEASE

Be sure to review the lease for rent increases and other terms. Increases may be bi-annual based on CPI (consumer price index) or every 5-years such as a 10% increase.

When purchasing a home on lease land, you should review the lease carefully for transaction fees that you may incur when you sell the home in the future. Some leases either charge a percentage of the sale price or a flat fee in addition to the typical escrow transaction fees. The fee can be several thousand dollars.