Fee Simple vs. Leasehold Property Ownership

Some real estate markets have more than one type or option for owning property. These are Fee Simple ownership and Leasehold ownership. Let’s take a look at what each one is and how they differ.

What is Fee Simple?Fee Simple vs. Leasehold Property Ownership

Fee simple ownership is defined by the person purchasing the property-owning the entire property including the land. The owner holds all of the power in the land and can make any improvements to the land and any structures/buildings on the land. The property may be mortgaged and taxed, but with fee simple ownership you have the authority to sell all or part of the property whenever you desire.

What is Leasehold?

Leasehold means there is an agreement between the fee simple owner of the land and a lessee. A lessee most often refers to the person or party that will occupy the property or make use of it. Leasehold means that a lessee has entered into a contractual agreement with the property owner. This means there is a fixed term contract. The lessee can make use of the property according to the terms in the lease contract. In most cases the lessee is paying rent and any operating expenses for the property. When the contract is up, complete property use rights return back to the owner of the property. Whether the lessee can take possession of improvement materials at the end of the contract or has to leave them behind depends on the lease agreement contract.

It is uncommon to see a leasehold agreement with residential property. In some areas, you may hear the term ground lease instead of leasehold. But in some areas, this could mean something entirely different and refers to developing land with no restrictions, unlike a traditional leasehold.

The Difference Between Fee Simple and Leasehold

The simplest and most profound difference between the two is whether you own the actual property you are using. The preference of what type of ownership and better decision on which one you use depends on your particular situation and what you will use the property for. In most cases, residential homeowners prefer a fee simple model of ownership.

In the case of commercial land use, it is very common to find leasehold agreements among business owners. It is often a preferred way to own a storefront. Fee simple ownership does not require rent to be paid for property use, but you will be paying property taxes in full. Leasehold agreements require rent payments and may require a portion or all of the property taxes be paid. How much is paid in leasehold rent varies upon the desirability of location, type of property being used, current real estate market in the area, etc.

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