Mark McGuinness: Modern leaseholds are safe and smart

Prepaid leasehold is used in many countries to offer sensitive land for development. Photo / 123RF

Opinion

• Mark McGuinness is managing director of property development company Willis Bond & Co.

As councils around the country consider freeing up more prime waterfront land for development it's time to clear up the misperception around leasehold.

With most new waterfront apartments in premium developments in Wellington and Auckland being offered under leasehold agreements, it is important to understand the gulf which exists between those which require a ground rent to be paid every year, and those which are prepaid leasehold over a long term.

Those which have an escalating ground rent are tricky. It is these leaseholds which gave rise to the situation in Cornwall Park, where rents skyrocketed overnight and forced people to abandon their homes. Leaseholds of this type put building owners at the mercy of landowners and the market.

It also taints the perception of anything else with 'leasehold' in its name.

By contrast, prepaid leasehold, also known as terminating leasehold, typically has a contract period of up to 150 years (more usually around 120 years). No rent is payable for the duration of the lease; as implied by the name, the rent is settled up-front. There is often a provision for negotiation around extension at 90 years and all capital gain during the term accrues to the lessee, not the lessor.

The contrast between these types of leasehold couldn't be more different. The prepaid leasehold is, in practical terms, the same as freehold: you have full rights to the property for a period so long that neither you, your children or grandchildren are ever likely to need worry about it.

It is typical of the 'very prime land' found on desirable waterfronts like Wellington and Auckland to be offered as prepaid leasehold. The land belongs to the council, and by extension the people of New Zealand, at termination theoretically reverts to the council.

There is abundant international precedent for prepaid leasehold; almost all land in Hong Kong is developed in this way. It is a common method of offering sensitive land for development in the United Kingdom and in the United States, including New York City.

In Wellington and in Auckland, where multiple developments are in progress, buyers have snapped up hundreds of millions of dollars of apartments.

They recognise the enduring value of prepaid leasehold; they also recognise that affording a prime waterfront apartment is both highly desirable and is made accessible owing, at least in part, to the prepaid leasehold structure.

And the people behind the purchases weren't born yesterday. They include some of the country's top businesspeople and most informed real estate investors.

In short, perhaps the only commonality between a prepaid leasehold and a ground rent leasehold is in the partially shared name.

They are as fundamentally different as a motorcycle and a Rolls-Royce: Both vehicles will provide transport, but beyond that, there's no real comparison.