Thinking of Buying Leasehold Property? With the price of Real Estate in Metro Vancouver being so high, we are getting more and more inquiries about leasehold properties. A lot of the time buyers aren’t aware of what a leasehold property is. Even when they are, they often don’t know what the pros and cons of buying leasehold property are or how it works. So, we put together the below guide, which will help you decide whether buying leasehold property is right for you.
What Does Leasehold Mean?
When you are buying leasehold property you are purchasing the right to occupy a structure and leasing (renting) the land that it is built on. The landowner essentially rents the land out to a developer, who builds on it and rents it out for money. These leases are typically long term (99+ years.)
Not All Leases Are The Same!
There are different types of leases including First Nations, Municipal, University (SFU & UBC,) and Private. It is important to know the difference between these, so you can decide what type of leasehold property, if any, works for you. However, regardless of the type of lease some basic things you need to look into include:
- Who is the leaseholder?
- When does the lease expire?
- Is the lease pre-paid or is there a monthly lease cost? If the lease is not pre-paid, what is the monthly cost? Keep in mind this cost would be in addition to a maintenance/management fee and property taxes.
- Does the lease outline procedures that need to be followed in order to sell the property?
- Does the lease outline whether the lease term can be extended?
- What happens at the end of the lease term?
Why Would You Buy a Leasehold Property?
Regardless of the type of lease, leasehold properties are typically significantly cheaper to purchase than an identical unit that is freehold. This allows buyers to buy into more desirable neighbourhoods or larger units at a lower price point.
Many buyers are scared away by leasehold properties, they often don’t even know what they are, or don’t have them included in their buying search criteria. This leads to less exposure for the property making it less likely to go into a multiple offer situation. Because of this, you will have a better chance of being able to purchase it.
The Negatives of Leasehold Property
The lack of competition may help you purchase a leasehold property, but it will work against you when you go to sell.
Regardless of the type of leasehold property you purchase, it can be difficult to obtain financing. Not all financial institutes are willing to lend money for leasehold properties and for certain types of leaseholds a larger than standard down payment is required. So, subject free offers are not recommended. Also, as the lease comes close to expiry, banks will only amortize the property for 5-years less than the remaining term of the lease. For example, if there are 20-years left on the lease the banks will only allow amortization for up to 15-years which will result in higher monthly mortgage payments.
Lastly, not all lawyers and notaries are skilled/trained to handle a leasehold closing. Due to the additional paperwork required for these closings, the lawyer/notaries fees will be higher than for a freehold transaction. The extra paperwork also means that we wouldn’t recommend having a 2-week closing!
The Different Types of Leases
Tsawwassen First Nations
In Metro Vancouver there are three different types of First Nations Leases: Tsawwassen, Musqueam and Tsleil-Waututh Nation. Each have their own systems and processes in place; however, our focus will be on the Tsawwassen First Nations Lands.
There is a combination of pre-paid leasehold strata condos, townhouses, detached homes on the Tsawwassen leasehold lands, in addition to amenities like the Tsawwassen Mills Mall, shops, and restaurants. Like freehold properties, the Tsawwassen First Nations use the Land Title Office to register real estate transactions. They do require your closing Lawyer/Notary to complete a Form C “Assignment of Lease,” so a short closing is not recommended.
Many lenders including TD, BMO, and RBC will fund Tsawwassen leases and CMHC will insure your mortgage if you meet their requirements. This means you do not require a 20%+ down payment, making this type of lease much more affordable.
It is important to know that the Tsawwassen First Nations has signed a treaty with the Provincial and Federal Governments which gives them to right to govern their land. This treaty gives them the ability to make laws relating to governance, land management, taxation, and social programming. Some of the laws are specific to Tsawwassen First Nation Members, while others apply to all people on Tsawwassen Lands. The Tsawwassen First Nations provide water and sewer services, contract waste removal services, provide building permits, and control property taxes for the Tsawwassen lands. They also have their own enforcement workers who work alongside the Delta Police Department.
City of Vancouver
The City of Vancouver has leasehold properties in False Creek and SE Marine/Champlain Heights. The properties in False Creek are primarily pre-paid strata condos and townhouses, but there are some which are not pre-paid. These were built in the 1970s and the leases expire between 2030-2046. The City of Vancouver is currently giving owners the option to extend their leases for a period of 20 years at a cost of $150,000 – $392,000 depending on the size of the unit.
The City of Vancouver leases on SE Marine/Champlain Heights are prepaid until between 2070 and 2095. They are a combination of strata townhouses and condos.
These leases are registered in the Land Title Office, just like freehold properties. However, the city will need to sign off on a From C “Assignment of Lease” prior to registration and this can take up to 5-business days.
Private Leaseholds
The most affordable type to leasehold property is typically private leaseholds.
There are private leasehold condo and townhouse properties located in Vancouver, Richmond and Surrey. The Lessor for many of these properties is Westsea Construction. Most buyers assume that these condos and townhouses are strata. However, this is not the case for these properties. What does this mean?
- There are no monthly strata meetings and minutes
- There is no strata council
- Owners do not vote on expenses, fees, and maintenance/repairs. The lessor set the budget for the next year and advises the lessees what they are required to pay each month.
a. If there is a shortfall in funds, a special levy is put in place.
b. The financials for the complex are audited each year, by a 3rd party accounting firm. - The rules and bylaws are set out in the lease agreement
- There is no strata plan
- You do not receive your own title. There is one title document which shows all the lessee names and their corresponding mortgages.
Private leasehold properties are the most difficult to obtain financing for. The banks that do fund them typically require a minimum down payment of 35% of the purchase price, which can be difficult for most first-time buyers to save.
SFU
SFU has a combination of pre-paid leasehold strata condos and townhouses with leases starting to expire around 2103. These transactions are registered through the Land Title Office, but require additional paperwork such as Schedule A letter, Assignment of Lease, and Tripartite Agreement. There is a processing fee that must be paid to SFU for these documents to be processed. It typically takes 3-business days to process the paperwork after the payment is received. This must be completed prior to the property registering at the Land Title Office. Since the properties at SFU are strata, they follow the Strata Property Act and operate just as a freehold strata complex would.
UBC
UBC has pre-paid leasehold strata condos and townhouses with leases expiring around 2102. Similar to SFU, they require all real estate transactions to have a signed Form C and a Tripartite Agreement. They are able to process these documents within 2-business days and they do not charge a service fee for them. Since the homes at UBC are strata, they follow the Strata Property Act and operate just as a freehold strata complex would.
Things People Ask
- Can I sell the property at any time? Yes, you can if you follow any rules set out in the head lease. Some leases will require approval of the new purchaser prior to subject removal.
- What happens at the end of the lease? Some leases give an option to negotiate an extension on the lease; however, if an agreement is not reached the lessee will be paid the current market value of their unit.
- Do leasehold properties increase in value? They do, but of course not at the same rate as freehold properties.
Purchasing a leasehold property is not for everyone; however, it can be a great way to get into the Metro Vancouver Real Estate market. The lower price point makes your monthly payments more affordable and can be a feasible option for many young families. If you are interested in purchasing a leasehold property or have any other questions, please reach out to Your Two Awesome Realtors and we will be happy to help!
