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Land Leases - The Smart Alternative

8/13/2014 - 8:23:56 AM
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Land Leases - The Smart Alternative

 

Home ownership is a rite of passage for most Americans. Many prospective homebuyers think it is necessary to buy a house and the land that’s underneath. If they can’t afford a property then they look for a townhouse, apartment or condo. Thankfully, there is another option that is quickly gaining appeal: land leases. Essentially, owning the home and leasing the land it sits upon.

 

Advantages of Leasing Land

 

First and foremost the most attractive advantage of buying a home and leasing the land is the greatly reduced purchase price of the home. Land increases the purchase price of a property substantially. Being able to lease the land that a house is built on allows buyers to live in higher end houses they might not have been able to afford otherwise. For example, at the Quentin Villa at Alden Place, the list value is $75,000 less than a comparable property with a purchased lot. With such a significantly reduced purchase price, the money that the buyers save can be invested, spent on traveling, or used to cover expenses.

 

The next advantage: lower property taxes. In a land lease, leasees pay the improvement portion of the property tax , the development owners pay the land portion. For most of the properties at Alden Place the land portion of the property tax would be around $1200 a year if the purchaser did not lease the land. Instead,land leases start at $349 a month which covers the land lease, the share of property tax, and trash collection.

 

I will explain this in graph form so lets set some parameters: the properties are owned for 20 years. The properties have comparable square footage and similar features. The land leased property has a purchase price of $75,000 less and monthly lease payment of $349.00 (includes land portion of property taxes and garbage collection). The lease will adjust after 3 years and every two years after that, following a formula based on the CPI ( consumer Price Index)and remain set after fifth adjustment (explained in detail lower in this post).

 

Next set of parameters, we are comparing to a similar property where the land is owned. Property taxes are $1200 a year that increase at 2% a year. Garbage collection is $240 and increases at 3% a year. (Please note that for a property comparable to what is offered at Alden Place these numbers are conservative; most properties would have higher taxes and the garbage collection would be more per year since Alden Place is able to buy garbage collection in bulk).

 

After 20 years this is how everything graphs out. The yearly payment total comes to $102,229.08 (blue column). The red column is the $75,000 the lessee saved by leasing the land rather than buying. Let’s say they then invested and earned a meager 4% interest ($89,334.24). The property tax for the home with owned land comes to $29,739.98 and garbage expense of $6,642.36 both after 20 years.


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Your initial response may be that the land lease is expensive. Yet the last two columns are expenses that would be included in the land lease property. Therefore, we can subtract those from the blue column as they are already being paid in the land lease. Now, the graph looks like this:

Big difference! With a land lease that includes the ground portion of property tax and garbage collection services, the lessee is able to save over $36,000. Add this to the invested money (the $75,000 invested at 4%) and suddenly the lessee is ahead of the game over $23,000. In essence, by leasing your land and investing the money in a modest growth investment you can get paid to live at Alden Place.

 

Why Lease at Alden Place Instead of Another Land Lease Community?

 

Glad you asked.

 

Generally, land leases have a set length and expiration date. At Alden Place, leases are 99 years in length and then automatically renew every 20 years. This is an important factor when comparing land leases because as leases near their expiration dates homeowners begin to lose equity in their home. This drop in equity is because many land leases have surrender clauses. Essentially, a surrender clause states that at the expiration of your lease the homeowner will need to pay a penalty. Some of these surrender clauses state that at the expiration date the homeowner is required to give up any improvements to the leased land. These ‘improvements’ are referring to the homes built on the land. Pretty nasty. At Alden Place, there are no surrender clauses. Additionally, unlike most communities with land leasing, Alden Place has a land lease option that does not expire. Therefore, homeowners will not lose equity in their homes, or get hit by penalties from surrender clauses like in other land lease communities.

 

Most real estate professionals agree that leasing land is an ineffective way to hedge against inflation. Land and home values increase with inflation. With leasing land, as the lease nears expiration the home value decreases. In addition, as the years go by land leases increase their fees. This effectively burns the financial candle at both ends for the homeowner. This is not the case at Alden Place at Cornwall. The lease is setup to help homeowners hedge against inflation. The first adjustment to the lease is after three years of ownership. Then, the lease only adjusts every two years after that. Finally, the lease is capped for the current lease holder at the fifth adjustment. Also, these adjustments are always based off the first lease amount; meaning the lessee isn’t fighting the snowball effect of compounding interest.

 

Another benefit, at Alden Place the increase in the lease will only occur if the Consumer Price Index increases. No increase in the CPI, no increase in the lease. As mentioned before, the lease never expires at Alden Place which therefore avoids the decrease in property value seen with other land lease properties.

Conclusion

 

Land leasing at Alden Place can be summed up as: allowing buyers to purchase a property in a fantastic, active adult community for a greatly reduced price that in turn allows them to invest for the future. Additionally, having a lease that never expires to decrease home value, and lease fees that are capped to help hedge against inflation, it is apparent why many buyers are looking at the benefits of leasing land at Alden Place.

 

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4/14/2018 - 7:45:05 AM
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