When you have a leasehold estate, you have a temporary right to use a piece of property, but you don't own any real estate. For example, consider an apartment lease. You have the right to use the unit, but you don't really own anything other than the piece of paper that holds the lease. Whether you're the landlord or the tenant, leasehold estates have both benefits and drawbacks relative to real property ownership.
A leasehold estate is a contract that allows a tenant the exclusive rights to lease a property for a certain period of time.
Types of Leasehold Estates
Leasehold estates come in four types: a "term of years" estate has a set time during which the tenant can occupy it, much like a 99-year land lease in Hawaii or a three-year office lease; a "periodic tenancy," like a month-to-month apartment or self-storage lease, starts with a set term, then continues renewing until either tenant or owner changes or cancels it; "tenancy at will" has no set time and can be canceled by either party; and, a "tenancy at sufferance" happens when a tenant stays past the expiration of his lease.
Benefits for Tenants
Leasehold estates offer many benefits for tenants. It's usually cheaper to lease a property than to buy it, at least in the short run. A leasehold also is flexible, since you can leave it once the lease expires. If the owner is unwilling to sell a piece of land or property to you, a leasehold may be the only way that you can use it. Finally, payments for leaseholds are completely tax-deductible for businesses, while only the interest portion of an mortgage payment is tax deductible.
Benefits for Landlords
Landlords lease their properties to make money. In the case of land, leasing it instead of selling it, lets you maintain control of it in case its value increases significantly in the future. Another benefit of leasing land is that when the tenant's interest in it expires, you usually inherit his building or improvements at little or no cost to you.
Alternatives to Leasing
If you don't wish to lease a property, you can gain legal control over it as a freehold estate, meaning you can buy it. If you own your house, for example, you have a freehold estate. The most common freehold estate is the "fee simple estate," where you own the property and can do whatever you want with it. An "estate for life" ends upon death.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.