Hawaii Leasehold Properties: What the Exam Actually Tests

Leasehold is the single most distinctive feature of Hawaii real estate. While leasehold exists in some other markets, nowhere is it as common or as complex as Hawaii. Roughly 25% of Hawaii residential transactions involve leasehold properties.

The exam tests leasehold 6-10 times across the 50 state questions. Master it.

What is leasehold ownership?

Leasehold ownership splits property ownership into two parts:

Lessor (landowner): Owns the underlying land in fee simple. Receives lease rent payments from the lessee.

Lessee (leasehold owner): Owns the right to use the property for the lease term. Pays lease rent to the lessor. Owns the improvements (buildings) on the property during the lease term.

When a leasehold property is sold, the buyer becomes the new lessee. They take over the lease obligation and own the improvements until the lease expires.

Major Hawaii lessors

Several large landowners hold significant leasehold interests:

• Bishop Estate / Kamehameha Schools: Manages a substantial portfolio of leased lands
• Damon Estate: Historic Hawaiian estate
• Mary Lucas Trust: Substantial Oahu holdings
• Various Hawaiian Trust: Multiple trusts hold ancestral lands

Lease terms

Leases typically run 50-99 years. Within the lease term:

• Initial period: Lease rent is typically fixed for the first 10-30 years
• Renegotiation period: Lease rent renegotiates at scheduled intervals (often every 10-30 years)
• Final period: As the lease approaches end, value declines because remaining lease term shortens

Sale of leasehold properties

When buying a leasehold property, the buyer purchases:

• The remaining lease term
• The improvements (buildings) for that term
• The right to occupy and use the property

The buyer does NOT purchase:

• The underlying land
• Any rights after the lease expires (unless converted to fee simple)

Conversion to fee simple

Some leasehold properties have been converted to fee simple over the years through:

• Negotiated purchase of the land from the lessor
• Statutory conversion under specific Hawaii laws
• Cooperative purchase by multiple lessees together

Converted properties are valued at fee simple prices. Unconverted leasehold properties trade at discounts.

Mortgage considerations

Lenders are reluctant to mortgage leasehold properties with short remaining lease terms. Most lenders require:

• At least 30-40 years remaining on the lease
• Specific lender approval of the lease terms
• Higher down payments
• Sometimes higher interest rates

Disclosure obligations

A licensee representing a buyer of leasehold property must disclose:

• That the property is leasehold (not fee simple)
• The remaining lease term
• The current lease rent
• The renegotiation schedule
• Whether the property has been converted or has conversion options

Sample exam questions

Q: A buyer is purchasing a leasehold condominium with 35 years remaining on the lease. The current lease rent is $400/month. Which disclosure obligation applies to the licensee?

A: The licensee must disclose the leasehold structure, remaining lease term, current lease rent, and renegotiation schedule.

Q: A leasehold property's lease expires in 5 years. What happens to the buyer's improvements at lease end?

A: Improvements typically revert to the lessor at lease end (subject to specific lease terms).

Why this matters for your career

If you practice real estate in Hawaii, leasehold transactions will be a substantial part of your practice. Coastal markets in Honolulu, Maui, and the Big Island have heavy leasehold concentrations. Buyers often don't understand the distinction between leasehold and fee simple. The licensee's role in clear disclosure is critical.

The exam questions on leasehold aren't academic. They test whether you'll handle Hawaii's most distinctive ownership structure correctly the day you start representing clients.