There are a number of different ways to control real estate. Most of us own our homes or buildings on a "fee simple" basis, which means that we own the land and anything on it for as long as we want to, including the right to control what happens with it after we die. The other extreme is a leasehold interest, where someone else owns the land, but gives us the right to use it for a period of time. After the lease expires, we lose the right to use the land, and both ownership and use revert to the owner.
Benefits of Fee Simple Ownership
Fee simple ownership of land is a very powerful thing. Other than the government's right to control, tax or confiscate your property, once you have fee ownership, a piece of property is yours to do what you wish with for as long as you want. You can improve it, knowing that you will own the improvements and their benefits, or you can borrow against it, since a lender knows that their money is protected by your property. In addition, because total control of property is valuable, you can also sell it to someone else.
Benefits of a Leasehold Interest
One of the key benefits of a leasehold interest is that it is usually much less expensive than owning land. This is one of the reasons that farmers frequently lease land--they are able to better use their expensive equipment and their know-how, without having to tie a lot of their money up into land. In addition, leased land is flexible. Rather than owning property which may need to be sold in the future, it allows a business to use the land while it works for them, then walk away from it in the future. Leasing land may be the only way to get control of a particular piece of property because the landowner is unwilling to sell it. This has historically been the case in many areas of Hawaii, for instance. Finally, a leasehold interest in investment property receives favorable tax treatment, making it more profitable to own.
Drawbacks to A Leasehold Interest
The largest drawback to a leasehold interest is that it eventually goes away. While most land goes up in value over time, a leasehold interest will eventually become worthless. In addition, most leasehold interests require payments to the landowner, while fee simple property can be bought outright or paid off. Leasehold interests are also much harder to sell because buyers typically prefer fee simple ownership. Finally, a leasehold interest is not real property. When you own a leasehold interest, all that you own, ultimately, is a piece of paper that outlines your rights and responsibilities.
Other Types of Estates
There are other ways to hold real estate which fall between the absolute ownership of a fee simple interest and the limited temporary rights of a leasehold interest. Two other types of ownership are the life estate and the estate-for-years. A life estate is the equivalent of fee simple ownership, but it expires when the owner dies, reverting back to the previous owner. An estate-for-years is similar to a life estate but is tied to a set period of time, instead of a flexible period tied to a person's life.
Solomon Poretsky has been writing since 1996 and has been published in a number of trade publications including the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." He holds a Bachelor of Arts, cum laude, from Columbia University and has extensive experience in the fields of financial services, real estate and technology.