What is a Land Lease Fee?

Some real estate terms are easy to understand: sprawling views, excellent location, great schools. But other terms may leave some buyers scratching their heads. One of them is “land lease fee.” This term may be spotted in listings, and then glossed over by buyers in favor of virtual tours and daydreaming of furniture placement. However, it serves buyers well to know if a land lease fee applies to a prospective property, and what that might mean in the long run.

Land Lease Definition

When the land under a building is owned by a third party, and the building (or portion) is owned by homeowners, the third party can charge for use of the land or ground upon which your new dream home sits. You are in effect leasing the land and only own the home or piece of property for which you have paid.

This is the reverse of the more typical freehold, which is the where the homeowner owns both the building and the land. Land leases are more common in commercial real estate, but there is a substantial amount of residential land leases to merit some guidance.

Why Is There a Land Lease Fee?

Often individual or group landholders want to retain their land while turning it into an income generator, without necessarily having to develop it. In some sunny vacation or retirement locales like Arizona, Mexico and California, land leases are more common. For instance, American Indian tribal land is commonly used for homebuilding, with the tribe then collecting lease fees.

If property pricing is low for a cash buyer who is able to strike a favorable deal with one of these landowners, it can be the perfect opportunity for all parties. Keep in mind, however, that the lease will always exist and price increases (or worst case, lease losses) are controlled by the landowner. For some of these cash buyers, it’s worth the risk to only pay HOA and land lease fees each month, which may ultimately be an economical win.

Should I Buy a Property With a Land Lease Fee?

Land leases can offer an opportunity to get into homes at a fairly low price in a great location, which makes the fee seem worth it in the long run. Still, first time or inexperienced homebuyers can get into sticky situations when buying a condo or townhouse, discovering high HOA fees and then land lease fees as the cherry on top.

So is it worth it? One advantage to leased land is that home prices tend to be about five percent cheaper and taxes are lower as the land is not considered in your home’s valuation. On the other hand, the complexities attached to this type of property may make it harder to get financing and sell the property later on.

While there’s no right or wrong answer, it’s important to know the facts. Make sure you read through the entire lease carefully and take note of the length of the lease, any buyout clauses, exactly what you’ll owe every month, and to whom you’ll owe it. A Redfin real estate agent can help; find an agent in your area.