klaus
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Mar 27, 2005, 2:33 PM
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Tenure: Do I Lease or Buy?
There seems to be an enormous amount of confusion surrounding the various forms of tenure available in many so-called seniors’ communities. In fact, some individuals are confused by the very word, tenure, as it seems relevant to job security for university profs. The Webster’s Dictionary of the English Language defines the word tenure as “the act, manner or right of holding office or property, esp. real estate”.
In today’s retirement communities, there are numerous forms of tenure, each unique to a given community, yet all broadly governed by the laws of the jurisdiction in which it is located.
Freehold- this is the simplest and most straightforward tenure, meaning that the purchaser owns the home, as well as the lot that the home sits on. In this form of tenure, the municipality usually provides for the care and maintenance of the streets, garbage removal, water and sewage. The homeowner is obligated to maintain the property to municipal standards and is required to use his home only in the manner and for the purposes permitted by the municipal zoning and by-laws. In addition, there is also the matter of property taxes, which in this case are calculated on the value of the home as well as the land.
In the context of a freehold adult lifestyle community, however, there could be certain protective restrictions, usually set forth in a legal codicil of the Offer of Purchase and Sale and subsequently registered on title on closing. These could include the number of permanent residents occupying the dwelling and/or compulsory contribution to the care and maintenance of a common area, such as a community center, clubhouse or other facility. Failure to pay one’s share of scheduled fees is lienable by the residents’ association and has withstood legal challenges in the past.
Condominium- we all tend to associate the word “condominium” with a high-rise apartment building. However, condominiums do not necessarily have to be high rise multi-unit dwellings. There are adult lifestyle projects in North America selling detached bungalows as condominiums.
Condominium tenure, on this basis, means that you own your home up to the inside walls, with the exterior components of your home, including care, maintenance and landscaping of the lot, being the responsibility of the condominium corporation. There are certain advantages in living under this form of tenure, not the least of which is that one can truly savour a leisure lifestyle, as all the maintenance is done for you. Certainly, the costs are higher than they would be under freehold tenure. In addition to having to pay for the various maintenance tasks, corporation members must also provide a monthly stipend earmarked as reserve funds to cover the costs of future major repairs and renovations. On the “plus” side, there are fewer things about which you have to worry and as a shareholder of a condo corporation you enjoy greater purchasing power when it comes to things like roof replacement, etc.
Condominium tenure also means that you are obligated to pay taxes on the value of your unit, as well as your percentage share of the common areas and amenities. It tends to be slightly more risky than simple freehold in that the builder usually has to achieve a certain percentage of presales in order.
Freehold Condominium- there are numerous adult lifestyle communities that are located outside of an urban envelope where municipal services such as water, sewage, garbage removal and road maintenance cannot be provided. In these cases, the developer will often opt for freehold condominium as a viable form of tenure. Freehold condominium means that instead of owning your home to the inside walls of your dwelling, the condominium boundary is extended to the property line of your lot. As such, you are responsible for the care and maintenance of your entire home and lot and additionally, are also financially responsible for your portion of the care and maintenance of the common areas, such as roadways, recreational facilities, walkways, etc. You will also be obligated to pay a portion of the cost of garbage removal, the community water supply and the sewage treatment facilities.
Municipal taxes are calculated in a similar fashion to regular condominiums in that your assessment will be based on the value of your home as well as your percentage portion of the common areas.
Land-Lease- Land-lease means that you own your home, but you lease the lot that it sits on. While this makes perfect sense in situations where the home is a movable unit, such as a park model or double wide, it gives one cause to stop and think when you are dealing with a stick-built home sitting on a full basement.
Strictly speaking, land lease tenure is perfectly viable in most cases and there are some real advantages. For instance, under land-lease you purchase and pay for the home and then lease the lot on a monthly basis, meaning you do not pay for the lot. Therefore you can afford to spend more for the home, enabling you to enjoy greater luxury, or you can invest the money you save on the lot and use the proceeds to help pay for your monthly land-lease. If the price of a lot is $50-60,000, that’s a significant saving.
Land-lease communities usually fall under landlord/tenant legislation and as a lessee in such a community you would enjoy the same protection and obligations that other renters do. In addition to the monthly land lease, pretty well all communities of this nature also have a maintenance and common area fee. This is where things could get dicey, as cost increases are passed on to the residents. In addition, the owner of the community usually passes on the municipal tax assessment of the lot your home sits on to you and you are then obligated to pay taxes on both your home as well as the lot you are renting.
Land-lease communities also find it easier to keep the integrity of adult lifestyle communities through restrictive covenants in the lease that provides for the number of permanent residents allowed, etc.
Some lawyers tend to be unfamiliar with land-lease tenancy and dismiss it altogether. If you are considering a land-lease community and want legal advice, try to find a lawyer that understands it, so that the pros and cons can be clearly explained. One word of caution: if you require mortgage financing to purchase a home in a land-lease community you will have to find a bank that is willing to finance a home without being able to secure the property it sits on in its mortgage.
Life Lease- Here’s a form of tenure that works best if you have a registered, charitable organization provide low cost housing to its residents.
Life-leases basically require the tenant to pay a significant portion of their total lease in advance. So, if a life lease is for a 20 year term and the agreed upon monthly rental for a unit is $800.00, a life-lease that calls for prepayment of half the lease amount, or $86,000 is paid to the builder in advance of beginning construction.
In some cases this could be a risky venture, as there is no guarantee that once the money is paid to a builder, the builder will fulfill his end of the bargain and build a life lease residence. When entering into a life lease agreement, make sure that the group leasing the residence is on the up and up and be sure to have a competent attorney.
While there surely are life lease projects that work well, on the whole I consider them too risky to recommend as viable form of tenure.
The one thing to remember: if you’re confused about which tenure is being offered at a community you are considering, then make sure you get independent legal advice from a reputable lawyer and don’t make any decisions until all your questions are answered to your satisfaction.
Klaus Rohrich is President and Creative Director of Taylor/Rohrich Associates Inc., a marketing and advertising firm that specializes in niche marketing retirement real estate developments http://www.maturitymarketing.com.
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