As we continue to face a housing affordability struggle in the GTA and beyond, it’s important to look at alternative models of ownership that can help people find a home of their own.
One model that is pretty misunderstood are land lease properties. As the name indicates, it is where you own a home but you’re just leasing (renting) the land that it sits upon. It’s a misunderstood option and we thought we’d clear up some of the confusion and talk about how it works.
We have helped a number of clients buy and sell such properties and while it is a bit different from the “traditional” model of home ownership, it is definitely a great option to consider if current home prices are out of your reach.
Without further ado, let’s get into it!
So, it’s a trailer park?
While the earliest examples of land lease developments were manufactured mobile homes (RVs, trailers, etc.), that has changed over time. Many new leased land communities are being built using modular, manufactured, and traditional built homes. Whether built on slab or with a limited foundation (think crawl space rather than basement), they are not homes on wheels you can move easily.
A fuller description of land lease properties would be something like “house purchase but leasing of land” as we’re definitely talking about a physical house you buy and own.
The key difference is that land lease home ownership allows someone to own a home without owning the land that it sits upon. This makes it more affordable to purchase than traditional freehold homes and it is growing in popularity as it lets you build equity while freeing up money for other priorities.
It’s not too dissimilar from owning a condo townhouse in terms of how it works, with the important caveat that in a condo townhouse you own the land, or at least the rights associated with the land. Despite that distinction, anyone who has lived in a condo townhouse is familiar with the idea of having their own home but having a communal responsibility (and shared costs) for other parts of the complex.
Land lease properties have long been popular for those seeking an affordable retirement but in recent years, it’s also become popular with young families looking to buy their first home. While not particularly popular in Canada, it is well established in the US and Europe.
If I don’t own the land, who does?
In Canada, there are three main types of land lease properties: commercial developers, First Nations, and institutional owners. Let’s review each type.
Commercial Developments
There are developers who build planned communities on land parcels and operate them on an ongoing basis. It’s often the model for retirement communities, but it can also be the model for a condominium-type setup in urban areas. Within Canada, Parkbridge is considered the leading operator, developer, and owner of land lease communities. At last count, they had more than 55 residential communities and 35 RV resort communities across the country.
First Nations
Another common source of leased land property are First Nation bands that are leasing land located on reserves set aside under the Indian Act of Canada. You may have encountered friends who have bought leased land cottages where the land is owned by a First Nation band. Just like with the retirement communities that are the common commercial development model, it’s not much different than owning any other cottage, except for the price.
Institutions
Finally, there are some institutional owners who sell land lease properties, though it is more uncommon. There are some municipalities, universities, and other public institutions who have designated some of their property for a long-term land lease either because it’s endowed or has some long-term value. If you’re a Toronto resident, you’re likely familiar with the Toronto Islands, which are an example of institutional owned land leases. There are 262 residential properties on Ward’s Island and Algonquin Island, overseen by the Toronto Islands Residential Community Trust.
What’s it cost to rent this land?
It’s impossible to give a specific average cost for a monthly land lease fee, as the actual monthly cost to lease land depends on a number of factors.
First and foremost, the local real estate market dictates the value of the land. While you may not be buying the land, commercial developers did – and the cost they charge for lease is based on what market rates allow. In the case of First Nations bands or institutional owners, the land has likely been owned for a long time, but following the principal of “highest, best use”, rent is charged that makes sense given the market conditions.
Using the same logic, the size of the lot you’re renting heavily influences the rent being charged, as if you weren’t renting it, they could be doing something else with that plot. Other considerations that impact the rental rate are amenities associated with the development, upcoming investments to be made within the development and services provided.
For the most common type of land leases, commercially owned communities, the monthly rent includes lease of the site and use of the property, as well as professional community management. Often this includes such things as community garbage and recycling, tree maintenance, fire hydrant inspections, sewer and pond maintenance, drainage, underground infrastructure repairs, and municipal property tax for the common areas. While the list of what is covered under a land lease varies from community to community, it often also includes landscaping and maintenance of common greenspaces, parks, roads, walkways, community facilities, hall spaces, and related equipment.
It isn’t too much of a stretch to say that whatever you’d consider the responsibility of the municipality in a typical freehold home where you own the land, is instead the responsibility of the developer. Whether this costs are bundled into an overall land lease fee, or broken out separately (as is often the case due to variability each year), a monthly fee covers off these costs.
As a homeowner of a land lease property, you’d be responsible for the regular maintenance and upkeep of the home and yard as well as your own utilities, including natural gas/propane, water, electricity, cable, internet and telephone. The monthly bill that you pay to the operator of the land lease community will likely list a land lease fee as well as taxes, exterior maintenance, water and sewer.
Just like with maintenance fees for a condo unit, well managed developments keep the monthly costs low, while developments facing issues often see increasing costs billed to land lease tenants. These costs tend to go up over time, which leads us to the next topic.
How long is this lease?
When you don’t own the land that your home is sitting upon, the length of your lease obviously becomes very important. While the Residential Tenancies Act applies to land lease communities, there are significant differences between the rental of a house or condo unit (where you are always only renting the space, not the land) and a land lease.
The length of the term of a land lease will vary by province, due to provincial legislation and other considerations, so leases are anywhere from 1 to 99 years. While you could in theory sign a very short-term lease of land (i.e. just a couple of years), this is obviously only practical if the home you put on the land is a mobile home that can be moved easily.
The length of the lease that is able to be signed by a new owner is a very impactful aspect of the value and therefore the sale price of a land lease property. This is true both from the perspective of being certain how long you can live in the home on that piece of land, as well as in regards to the financing of the property.
Can you still get a mortgage on a house on leased land?
The short answer is yes, you can get a mortgage on leased land properties.
The longer answer is that there are additional considerations that apply, so let’s review.
In areas where they’re common, you’ll likely find local lending institutions have developed packages to address the specific particulars of a land lease. The CMHC will insure most land lease mortgages, but there are certain caveats.
We mentioned the importance of the lease term for the value of a leased land home, but it also directly impacts getting a mortgage or refinancing such a property.
While underwriting guidelines vary, you should assume that the lender will be checking to make sure that the remaining term of the lease exceeds the amortization period of the Mortgage by a minimum of five years. For example, if you are considering buying a land lease property where the standard lease term in the community is 21 years, don’t expect to be able to get a mortgage with a 25 year amortization. Instead, you’ll likely be offered a 15 year amortization to make sure there is a buffer between when your mortgage ends and your lease ends.
From a debt servicing perspective, buying a land lease home may also come with higher monthly costs as described in the earlier review of land lease costs. While the home itself is cheaper than the freehold equivalent, you’ll have additional costs (land lease, maintenance, etc.) that will factor into the total debt servicing ratio. This is somewhat mitigated by the lower property taxes as you don’t own the land, but it depends on the lender and how they calculate debt service ratios.
Please note that while a mortgage may be possible most lenders ask for a down payment of between 25% to 30% on the home. While a lower purchase price makes this easier for a potential home buyer, it is still a far cry away from putting down 10% to 20% on a more typical freehold home purchase.
So, how much cheaper are these type of properties?
While it can be difficult to assign a specific discount to lease hold homes compared to freehold homes where you are buying the land as well, the price for a land lease home can be as much as 25 to 30 per cent lower than freehold.
In addition, the Ontario Land Transfer Tax applies when land, or an interest in it, is purchased, but it does not apply to leases whose total terms do not exceed 50 years. While Toronto is the only municipality with an additional municipal land transfer tax, the provincial land transfer tax is still pretty hefty. If you were considering a $500,000 freehold home with land versus a $500,000 land lease property, you’d save $6,475 in land transfer taxes if you bought the land lease option.
It is worth mentioning that a lower purchase price on land lease properties is fundamentally because that while buyers enjoy the equity of owning the house, and benefit from any increase in value of that home, they will not share in increased land values. In short, you can buy at a discounted price from the freehold market, but you should also expect to sell at an equivalent discount in the market when you sell.
Speaking of selling…how do these homes do in terms of appreciation?
It makes sense to us that in a sharply increasing market, where prices are rising quickly, land lease properties may do better than the market as a whole as they remain a much more affordable option. Conversely, if the market is dropping and we’re seeing lower average sale prices compared to a few years ago, buyers who previously would have only been able to afford a leased land house may be able to afford a home with land. In that situation, we’d predict that the lease land market would do worse than the market as a whole.
If you’re considering buying a land lease property, work with agents who can do the research to tell you how homes in that development have done in the past in terms of appreciation (or depreciation). It isn’t an easy thing to do, but relying on past general market changes and applying it to a land lease property is quite risky.
We hope you found this review of land lease properties useful. Given the ongoing housing affordability crisis we’re facing, it is a model worth considering. If you’re thinking about buying (or hoping to do so) and want to discuss your specific situation, we’d love to see if we can help you move forward. Get in touch with us to book a time to chat!
