Pat Hune, Broker 1st Southwest Realty and Various Sources, February 2023
Land-leased properties can be confusing. First, what is a land lease? A land lease is where one person owns the structure on the property and someone else owns the land. The structure owner is essentially renting the land from the owner with no option to ever actually own the land. The contracts are usually very long, like 20 or 30 years. The structure owner pays the landowner rent every month. At the end of the lease agreement, the landowner typically negotiates a higher amount of rent. The monthly amount may go up by some percentage every year. In some cases the land lease is tied to the sales price of the house. In Briarwood 4 in Scottsdale, the land lease is 1/10th of one percent of the sales price. In this case, the property sold for $800,000 so the structure owner is paying $800 a month. What does the structure owner get for the monthly lease payment? Zero.
There are several land lease properties in Scottsdale including Santa Tomas at McCormick Ranch, multiple Briarwood developments, Casa del Monte and Camelback House near Scottsdale Fashion Square, and golf patio homes at the Phoenician. In 2021, I saw an owner create a land lease on a 4-plex in Tempe.
Is there any advantage to a land lease? Well maybe; One buyer said they like land lease properties because they could buy more house for less money. One seller touted the benefits of the location of her property in Scottsdale located at Scottsdale Road and McDonald. She said she could not afford to buy a “traditional house” with the land included in the area because she could not afford it. In her opinion it was worth the additional cost of the land lease because her structure and lease payments combined were lower than the traditional house payment. Her argument was she could invest the money she saved every month and make more than if she was making the larger house payment. This did not make sense to me because she just said she couldn’t afford the traditional house payments anyway.
When it is time to sell the structure on the leased land it will be very difficult to get a loan. The structure will not qualify for a traditional mortgage. Most of the sales will be cash. This severely limits the buyer pool. To make it even more difficult there might be restrictions in the land lease that prevents the structure buyer from getting a loan even if the buyer can find a lender. In one land lease the structure buyer cannot encumber the structure for more than 80% of its value AND the landowner needs to approve the lender. Wow.
If the structure owner can no longer make the lease payments the landowner will repossess the property. Since this is a lease the landowner can do this quickly – usually about 45 days. If the structure owner improved the property then both the initial purchase price and cost of upgrades will be gone. If the landowner decides they don’t want to renew the land lease the structure owner has to remove all the improvements or abandon them at no cost to the property owner. Here is an example. There is company that wants to put up a commercial structure like a hospital. They offer the landowner better terms than the landowner is getting from the current renters. At the end of the land lease the landowner simply says they will not renew. The structure owners are out their money because they cannot sell the structure.
In my opinion land lease properties are not worth it. It is simply a landowner who wants to make as much money as possible from their land without any risk.