What is a leasehold agreement?
A leasehold is a long-term rental agreement with a minimum term of 40 years but that can last several decades longer, sometimes up to 120 years. Leaseholds differ from rental agreements in that leaseholders (the equivalent of a tenant in a short lease agreement) have a very different relationship to their freeholders (the equivalent of a landlord as they are the holder of the properties title and continue to hold this title throughout the leasehold agreement). There are also key differences to the agreement, the finances and the circumstances around the contractual relationship.
Let’s explore the intricacies of leaseholds and how they apply to the real estate business in the State of Florida
The Pros and Cons of Leaseholds
Improvements – One of the advantages of Leaseholds for the leaseholder is that there is much more leeway to make property improvements than there would be in a short term lease agreement. Freeholders are less concerned than short term lease landlords about how upgrades to the property are made once the leaseholder has occupied it. This can, however, be limited by association rules and regulations.
Transferability – A second benefit of a leasehold is that it is valuable and can be sold by the leaseholder to a new leaseholder. The longer the time left on the leasehold the more valuable it is. What’s more, the freeholder usually cannot restrict or be required to grant permission for the resale. The leaseholder is completely within their right to sell the property at any time.
Cost – Leaseholds have lower monthly rents than short term leases of properties of similar size and location. Leaseholds are also significantly less expensive than buying the property outright, plus they require lower down payments. In most cases, a leasehold property allows investors to rent out the property at a premium to short-term lessors while paying a discounted monthly rate to the freeholder. Also, leaseholds can keep monthly rentals at the same rate for decades. That is advantageous for leaseholders who would otherwise face a rental increase every year or two with a short term rental.
“…there is much more leeway [in leaseholds] to make property improvements than there would be in a short term lease agreement.”
No equity – When you lease a property, it is important to note that you do not own any part of it. Leaseholds, in most cases, extend for a time period longer than the lives of the people living in and using them. Therefore they can feel a lot like a purchased residential or commercial property. However, leaseholders do not own the property and cannot take out a mortgage or take equity out of the property in the form of cash. On a balance sheet, a leasehold property appears as a liability generating a monthly expense in the form of rent. It is worth noting too that unlike most purchased properties, the resale value of a leasehold contract always decreases with time. It may be very difficult to next to impossible to resell the leasehold for a profit later when the contract is closer to the end of the term.
Increased HOA fees – In Florida in particular, residential leasehold properties are found in communities that charge a high homeowners association management fee. Many of these properties are in communities where the homes are quite close together and are less likely to have amenities common to other properties of their size (say, for example, pools). These are typical leasehold issues for residential properties and do not apply to leasehold commercial properties.
Complexity – There are several reasons why a leasehold agreement can be considered far more complicated than a purchase agreement (where the title of the property is transferred) or a short term lease. First of all, the leaseholder needs to take into consideration the time remaining on the leasehold, the value of the property during the leasehold period and any “exit” that they plan to make whether that is a sale or simply holding the property until it is required to be returned to the freeholder. Secondly, surrender clauses for leasehold agreements can mean that any improvements made to the property may have to be turned over “as is” and without compensation to the freeholder when the lease is up. Thirdly, although the monthly rent can be locked in for decades, HOA or commercial management fees may not be. As mentioned above, these fees can be much more expensive (sometimes more than three times the price) of fees in a community where the properties are owned outright.
The Importance of an Attorney
In order to navigate the pros and cons of leasehold properties, leaseholders and freeholders considering a transaction of this type could consult a Florida-based real estate attorney with long-term lease experience. Getting legal advice at each step in the process benefits both sides of the transaction by answering important questions as they arise. One of these important questions could be, “does this transaction increase my financial security and that of my business or family?”. An experienced Florida real estate legal counsel can help you by answering this and other vital questions that help determine if a leasehold transaction is the right move to make.
South Florida Law PLLC
At South Florida Law, we are committed to helping our clients close real estate transactions of all types within the state of Florida. We help businesses and individuals buy and sell residential and or commercial properties ranging from single-family homes to warehouses, freehold or leasehold. In cases where it is necessary to navigate through obstacles in order to close on a transaction, we have the big firm resources to dedicate the time and effort where it is needed. At the same time, we provide personalized service and attention to detail in your case at a price point that can only be achieved with a boutique firm of our size. Are you planning to buy or sell freehold or leasehold in Miami, the Keys, Broward or Palm Beach County? Are you looking for an experienced Florida real estate attorney you can rely on? Call South Florida Law today on (954) 900-8885 or reach out to us via our contact form.