One question I often get from clients is about leasehold properties. There are different types of ownership and it is important to understand these differences and what you actually own.
For a freehold type of ownership, the owner has full use and control of the land and the buildings on it, subject to any rights of the Crown, local land-use bylaws, and any other restrictions in place at the time of purchase. It’s the highest level of ownership for the common citizen.
In a leasehold, the land that the building is on is actually rented to the developer for a set period of time and the developer sells or rents out portions of the buildings. In addition, leaseholds may be pre-paid by the developer or not. The land can be rented from the city, federal government, First Nations Bands, universities or even private individuals.
So why would you accept this lower level of ownership? Here’s a good old fashioned pro/con list.
1) Significant savings: You can typically buy leaseholds for much less than comparable freehold properties.
2) Leaseholds are often found in prized neighborhoods: False Creek, UBC, Champlain Heights and the West End are some of the most sought after areas to live in Metro Vancouver. Leasehold homes allow you to buy into the lifestyle of these neighbourhoods at a discount.
1) Rising land values may work against you: If lease payment haven’t been prepaid by the developer then the individual owners will need to make annual lease payments to the land owner. Many lease agreements allow the land owner to occasionally increase the payments to reflect current land values. This can sometimes lead to dramatic hikes for the leasehold owner.
2) All leases eventually expire: No one knows with certainty what will happen when a lease is near the expiry date. There is no guarantee that the land owner will renew. Banks in particular do not like uncertainty and generally request 25-30% down payments to mitigate the risks
3) Leaseholds take longer to sell: The uncertainty around leaseholds typically makes them harder to sell. Higher down payments and questions about whether the lease will be renewed are contributing factors
For more information about leasehold properties, please read this great article published by REW.ca. Leasehold: Own a Home (But Not the Land It’s On) or contact us!