50 Year Lease Anyone?

I can't recall if this has been discussed before, but I'll put it out there anyway....

With all the recent talk about home ownership affordability (in which I dispute a problem exists, but that's a different topic) a thought crossed my mind today while daydreaming.

Would I be able to buy a HOUSE AND LAND in fee simple, then sell the HOUSE ONLY as a leasehold for say 50years?

Just pulling figures out of the air here...

Say I buy a house/land for $500,000, and the "house" is worth $200,000....

I could sell that house as leasehold for $300,000 (or any other figure really) on a lease for 50 years (or 99 years) and retain ownership of the land, and generate a rental income on the land from the house owner.

Surely this would assist in the elimination of any "housing affordability crisis" that is currently being spoken about.

Now, what advantages would I as the investor gain?

I retain ownership of the land, thus an appreciating asset
The cost of the land is "subsidised" by virtue of the Lessee buying the house
I generate a rental income on the land
If the lessee doesn't pay what he needs to pay then I can resume the house (pursuant to the lease agreement of course)

The disadvantages?

I have to pay stamp duty on the purchase which is unrecoverable



Now, I haven't investigated this, but I don't see why this wouldn't be do-able.


Would love to have a discussion about the pro's and con's, tax implications, and any feedback from accountants and lawyers would be most welcome.
 
You'd have to rent it to relatively young people wouldn't you? I'd be nervous giving anyone over 30 a 50 year lease! :D

Interested to see what the professionals have to say about it, interesting concept :)
 
Now, I haven't investigated this, but I don't see why this wouldn't be do-able.

Because the tenant would laugh in your face and say he could rent a better property for less than the interest payments on the cost of a 300K house. Furthermore he would not have aquired a depreciating asset and 50 years worth of maintenance bills. He would also not be tied to one property for 50 years or be saddled with an "asset" that would be very difficult to sell.

Even if you found someone to do it, what finance would they use to buy the house? Without any land component would they need a commercial / personal loan?
 
You'd have to rent it to relatively young people wouldn't you? I'd be nervous giving anyone over 30 a 50 year lease! :D

Interested to see what the professionals have to say about it, interesting concept :)

a lease would be considered transferrable tenure, so I assume it could be willed or whatever upon death...

i don't know, just throwing thoughts out there.
 
Because the tenant would laugh in your face and say he could rent a better property for less than the interest payments on the cost of a 300K house.

I was just throwing figures around for the sake of discussion...nothing hard and fast

Furthermore he would not have aquired a depreciating asset and 50 years worth of maintenance bills.

The house part in the house and land is the depreciating part of the purchase, and since he purchased a lease over the house surely that would be depreciable, or perhaps his tenure over the house would be depreciable somehow??? don't know...

Also, surely as the supply/demand cycle does it's thing, the lease would surely go up in value as they do in Circular Quay and Walsh Bay in Sydney CBD, which is all leasehold property.

He would also not be tied to one property for 50 years or be saddled with an "asset" that would be very difficult to sell.

it certainly wouldn't be difficult to sell if it became common practice, and simply another alternative form of home ownership.

Even if you found someone to do it, what finance would they use to buy the house? Without any land component would they need a commercial / personal loan?

i admit that our current banking system wouldn't necessary be up to it at the moment, but it's certainly not impossible to do. As I understand it, this is common practice overseas, particularly in major CBD hubs in USA.
 
The house part in the house and land is the depreciating part of the purchase, and since he purchased a lease over the house surely that would be depreciable, or perhaps his tenure over the house would be depreciable somehow??? don't know...

For tax purposes you can't depreciate your own PPOR. Only investments / work expenses.
 
I could sell that house as leasehold for $300,000 (or any other figure really) on a lease for 50 years (or 99 years) and retain ownership of the land, and generate a rental income on the land from the house owner.

Hi Joanna

Interesting idea but I don't understand what you mean with creating a rental income? You sell the house on leasehold for 300k which leaves you with a debt of 200k on your 500k purchase. There would be no rental income as you sold the house (at least for the next 50 years) and the interest on the 200k would not be tax deductable because the investment doesn't produce an income. Or am I not getting something here?

kaf
 
This is known in some countries as a Glasgow lease. This type of lease normally is for a term or 999 years with 21 year rights of renewal. Rent reviews were commonly at the 21 year renewals, but since inflation became a big factor of economic life many now have 7 year rent reviews.

The owner of the leasehold interest can sell, and mortgage without problems in the areas I am familiar with.

The owner of the freehold interest can likewise sell of mortgage their interest without affecting the lease which endures independent of the changes to the parties.

In some countries churches hold endowment lands this way. The leaseholders have been able to develop and build but the freehold of the land and the rental forever can belong to the church.

Some very clever developers have built apartments in New Zealand, creating leasehold titles to sell with the apartments, and the developers family trust holding the underlying freehold title.

Normally you would expect a rental yield of 5 to 7% of the unimproved value of the land as a rent.

Some ground rent leases have highly developed requirements of the lessee such as having to paint the exterior of the houses every 5 or 7 years.
I guess this is because the lessor owns a large area they wish to maintain the quality of the suburb.

In Auckland, New Zealand I am aware or ground rents of over $40,000 per year.
Now at first glace that seems WOW, but compare this to a land value of say $800,000
in a top area.
The mortgage on the 800k would be much more than the rent, of lease to start with.

In one case I am aware of such a house sold at action for under 50k, with such a rent.
The house on freehold land would have been ?? 700k to 1 million??
That property could have been redeveloped also into 4 units.

So in summary do an internet search on Glasgow lease and ground rent and see what else you come up with.

This is a great concept.

Much easier to sell in an area where people are familiar with the leasehold concept already. Might be an uphill battle as you can see from the early replies to your post.
 
Hi Joanna

Interesting idea but I don't understand what you mean with creating a rental income? You sell the house on leasehold for 300k which leaves you with a debt of 200k on your 500k purchase. There would be no rental income as you sold the house (at least for the next 50 years) and the interest on the 200k would not be tax deductable because the investment doesn't produce an income. Or am I not getting something here?

kaf

I think Joanna means that the tenant/purchaser would have to pay rental on the land component, thus her loan of $200k remains deductable.

Could be an interesting scenario.
 
To give a less extreme example.

Two similar houses in one street.

One is freehold Value 300K made up of 150k land and 150K improvements (house, garage, fences etc)

One is leasehold
Leasehold interest in the land and improvements say 160k
Freehold interest in the land say 140K


Leasehold example
Buyer needs to have say 16k deposit if going in with 90% LVR instead of 30K.
Buyer pays say 5% ground rent on balance instead of bank interest rate.
May have up to 21 years on this fixed rental charge (then watch out as 21 years of rent increase comes due!!)
Buyer pays rates and insurances, it is their house.

For the owner of the freehold
No costs, rates or insurances
If rent not paid then the leaseholder has a big problem, lessor in the drivers seat.
What is the worst the tenant can do? Dig a big hole and steal your section!!
Owner backs up a truck and fills in the hole.
It is a long time between rent increases 7 to 21 years depending on the lease.
If you are writing your own lease of course it can be whatever you want.
There is a balance between being to hard in the lease terms and having to discount the sale at the start or offering easier lease terms, rent and achieving a higher selling price.

In some areas investors like owning leasehold. Deprecation on 100% of purchase price, lower finance costs, but balanced by capital growth or the lack of it.

Like any investing the more you know the more you stack the odds in your favour.
 
I think Joanna means that the tenant/purchaser would have to pay rental on the land component, thus her loan of $200k remains deductable.

Could be an interesting scenario.

that's exactly what i mean...perhaps i didn't explain myself properly
 
To give a less extreme example.

Two similar houses in one street.

One is freehold Value 300K made up of 150k land and 150K improvements (house, garage, fences etc)

One is leasehold
Leasehold interest in the land and improvements say 160k
Freehold interest in the land say 140K


Leasehold example
Buyer needs to have say 16k deposit if going in with 90% LVR instead of 30K.
Buyer pays say 5% ground rent on balance instead of bank interest rate.
May have up to 21 years on this fixed rental charge (then watch out as 21 years of rent increase comes due!!)
Buyer pays rates and insurances, it is their house.

For the owner of the freehold
No costs, rates or insurances
If rent not paid then the leaseholder has a big problem, lessor in the drivers seat.
What is the worst the tenant can do? Dig a big hole and steal your section!!
Owner backs up a truck and fills in the hole.
It is a long time between rent increases 7 to 21 years depending on the lease.
If you are writing your own lease of course it can be whatever you want.
There is a balance between being to hard in the lease terms and having to discount the sale at the start or offering easier lease terms, rent and achieving a higher selling price.

In some areas investors like owning leasehold. Deprecation on 100% of purchase price, lower finance costs, but balanced by capital growth or the lack of it.

Like any investing the more you know the more you stack the odds in your favour.

Sorry Jal - I might be a bit thick here but still have to figure out what the advantage is for the buyer. So the buyer buys the house (150k) and on top pays 5% annual lease on the 150k land value (just to use your figures approximately). Let's say on an interest rate of 7% the only advantage for the buyer in your example would be that he's paying 7% of 150k and 5% on the other 150k and that his deposit can be smaller. Disadvantage is that he only owns the house not the land (which is the bit that appreciates) and he's picking up all the cost associated with the property.

I'm just trying to think when this would be a good proposition for a buyer? When credit is tight / someone on low income and banks aren't lending easily would be one case I guess. A bit like a wrap where you enable someone to get into the property they want while taking your cut. Or the buyer wants to get into a really expensive area longterm, can't afford the deposit but has the cashflow...

Interesting! I wouldn't want to be the buyer in this scenario...

kaf
 
Joanna

I've already given you kudos in private, but I'd like to publicly say thanks for this thread (which, unlike those who want to argue theory and feed trolls, actually will get my attention).

I doubt very much I have anything intelligent to add - JAL seems to be the expert on this (Ta, JAL).

But two things I would throw in are:

a) for me the simplest way to think of this scenario is basically like a caravan park, where the park owner (land owner) rents so tenants can park their caravans (houses), and

b) Afaik, it's quite common in the US. Donald Trump, for example, owns buildings in NYC but not always the land they sit on (such as 40 Wall St).

M
 
Your circumstances will often determine where you see value.

Homebuyers can often buy sooner (with a lower deposit) and in a better area.
In some areas in a city you may have no choice, a whole suburb may be leasehold.

Although you could say that the holder of a leasehold interest is little better off than renting there are many differences.

As long as the lessee pays their rent they can stay on “forever”, at least many generations.

They can develop the land, build an extra bedroom, garage etc.

Have a big dog, plant trees and will the property to their children.

Really no different to paying your local council.
See how long you get to stay in your freehold home if you stop paying rates.

This can be useful in industrial property where a tenant may be able to own the buildings and so have the ability to customise them, while not owning the land portion and being able to use that capital as working capital in their business.
This as an alternative to a straight rental of land and buildings.

Leasehold often can involve three parties.
1 The freehold owner of the land.
2 The leasehold owner of the land and buildings (up to 999 years)
3 The tenant who rents the land and buildings “short term”


While rent increases can be quite spectacular if rent reviews are many years apart that is quite a modern situation.
It pays to remember that after the rent has increased it can be up to 21 years (or 7 ) before the next rent review.
Quite a few people would like to their mortgage payments fixed for 21 years ahead!

Pre the 1970’s inflation it was not uncommon for normal commercial leases to have 5 year or more rent reviews. More often was not needed because rents were very slow to move. Now 2-year reviews are common as are CPI adjustments annually.

If you work it out it is much cheaper for the leaseholder to have 7 or 21 year reviews that 2 year. The ground rents I am familiar with are reviewed up to market at the time of review, not forward looking.

Part of the magic of business that two or three people can take different sides of a deal and all gain something from the deal that makes it work for them.
 
As has been pointed out this kind of arrangemnt is common overseas. In the ACT I believe the governemnt leases the land. In NSW it is quite common for rural properties to be leased from the government albeit at non-commercial returns. You would need to work out what lease term would make it attractive for a lender to your tenant to be satisfied they have security.

The psychological difficulty is that this concept is so foreign to most buyers and lenders that potential buyers would be concerned that they would find it difficult to onsell. Bearing this in mind you would have to consider whether the work in establishing this idea in NSW would give you a better return than putting that same investment in time and resources into other projects.
 
b) Afaik, it's quite common in the US. Donald Trump, for example, owns buildings in NYC but not always the land they sit on (such as 40 Wall St).

M

Hi Mark,

You're correct, this is common in NYC from what i've read in the Trump books....and the problem is that it's so common over there that noone bats an eyelid, and doesn't even question it. The other thing is that it is used in NYC on very large parcels of land...so the question is, how do we make it work here on the average sized block in ordinary suburbia in a manner that makes everyone happy?
 
As has been pointed out this kind of arrangemnt is common overseas. In the ACT I believe the governemnt leases the land. In NSW it is quite common for rural properties to be leased from the government albeit at non-commercial returns. You would need to work out what lease term would make it attractive for a lender to your tenant to be satisfied they have security.

The psychological difficulty is that this concept is so foreign to most buyers and lenders that potential buyers would be concerned that they would find it difficult to onsell. Bearing this in mind you would have to consider whether the work in establishing this idea in NSW would give you a better return than putting that same investment in time and resources into other projects.

you're correct JRC, this concept does operate in ACT, and many parts of Sydney CBD, but the freehold owner of the land is the Govt or Govt departments and often the lease is for $1. But in those circumstances you will find that a house will sell for current market rates, whatever that may be from time to time.

What I am proposing is different in that I wouldn't lease the land for $1, but I also wouldn't sell the house for current market rates either!

I can see that there is potential to make it a viable alternative "home ownership" option for alot of people, but the million dollar key is balance: balance for the freehold owner, and balance for the lessee.

How do we attain that balance? Well that's what's potentially fascinating about this discussion.

JAL thanks for the great contributions and info on this topic.
 
I can see that there is potential to make it a viable alternative but the million dollar key is balance: balance for the freehold owner, and balance for the lessee.

How do we attain that balance?

Maybe you could balance it like we do with our industrial stuff.

The freehold owner has all the rights and is entitled to all of the money...balanced by the lessee getting all of the responsibilities and having to pay for everything. Works great !! :D
 
How about making it attractive to prospectives?

Make the leasehold reversible for a specific time in future?

Perhaps create a clause to make it a possibility in the future as convertible from leasehold to freehold.

I've been looking at something similar in QLD.

I've been looking at maps of the millions of acres in QLD alone that could possibly be convertible to freehold.

Cya
Aaron
 
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