Land leases can be like musical chairs

We're preparing to list a condominium that sits on leased land. Land leases aren't common in the Phoenix area, but they do exist.

The most common way to own real property in the Valley is simple: You own the land and all the structures on it, plus any mineral, water and air rights that haven't been alienated by legislation or previous sale.

A very distant second way of owning property is the condominium plat: You own the airspace described by your interior walls, and you and all of your neighbors own the land and structures in common.

Most often, you will also own the air-conditioner, and possibly the roof. These are expensive to replace, so crafty developers and their HOAs socialize the risk to you.

We have a few co-ops in the Phoenix area, but very few. In a cooperative, you and all of your neighbors own the land and the structures in common, and you have a right to occupy your living space.

In a land lease, the structures can be owned in three ways - by individuals, by a condominium HOA or by a cooperative corporation.

The important difference is that the land is owned by a landlord, and the landlord will be taking that land back someday.

What happens to the structures? They revert to the landlord's ownership, and the former owners are left owning nothing.

In essence, it's a game of musical chairs. The structures on the leasehold pass from owner to owner, but when the music stops, no one then on that land has a place to sit. This tends to depress property values on leased land.

But land leases are written for long terms, and a lot can happen in that time. If the landlord gets a huge offer for the land, the people who own the structures could get bought out early at a big premium.

In the meantime, in exchange for taking the downstream risk of a depressed resale price, buyers can purchase a home at a bargain price.

Greg Swann is with Bloodhound Realty.