A Little History: In the 1860s, the Federal Government granted the Southern Pacific railroad a large swath of land on each side of the railroad right-of-way, but with only the odd-numbered sections being granted.
By executive order in 1876, President U.S. Grant created the Agua Caliente Indian Reservation with the remaining, even-numbered sections allotted to the Tribe and its members The result was a checkerboard of private fee land interlaced with Tribal land.
In the 1950s, the Agua Caliente began leasing land typically for 65 years, although some leases were executed for up to 99 years, the longest term permissible.
Today, there are nearly 8,000 residential leases, with the bulk of them being in Palm Springs where roughly one half the homes are built on lease land. To put this into perspective, Agua Caliente members lease more residential land than any other tribe in the nation.
A vast number of 65-year residential leases were executed in the 1980s with expiry coming due in 2045, more or less. Although mid-century seems like a long time from now, there is a very important, long-term instrument that runs headlong into lease expiration dates: the Home Mortgage.
Mortgage lenders require any manner of land lease to run at least five years longer than the term of the mortgage. So, to get a 30-year loan in 2020, there must be no fewer than 35 years remaining on the lease — in this case, the year 2055! Homeowners and home buyers today should be keen on being able to sell their home sometime in the future taking comfort that the purchaser can obtain a full-term home loan.
There’s a rush to extending, replacing or eliminating existing leases. In home communities, many leases were executed by the developer, who then provided sub-leases to the homeowners. The development company negotiates an extension to its master lease with the landowner, which may contemplate an increase to the annual rent and/or a one-time fee for extending. Often there is a grace period for the sub-lessee to sign onto the extension, but steep increases are typically incurred if delayed too long.
Some communities have negotiated out of their leases entirely by successfully purchasing the land from the owner. An example of this is Greenhouse East condo homeowners purchased their land from the Agua Caliente landowners in 2008.
Sometimes, a lease extension is not possible: the master lease holder and owner may be unable or unwilling to negotiate an extension. Rather than extending the existing lease, a new successor lease may be executed thanks to a recent change in Federal law allowing the new lease to be drawn up many years in advance.
With its current lease expiring midnight December 22, 2047, Parc Andreas, a community in South Palm Springs, found itself in this very predicament. So, the Parc Andreas HOA elected to negotiate directly with the landowner with both parties reaching agreement on a new lease succeeding the original, commencing at 12am on December 23, 2047. This is the first lease of its kind in the nation, and many communities have been closely watching its development and deployment.
For Parc Andreas, it’s a true win-win-win result: The landowner has a far better lease for itself and its heirs. The HOA owns the successor master lease on behalf of the homeowners and for that there will no longer be a “middleman” to take a cut of the rent. And with the new, extendable expiry date of 2081, there’s no impediment to mortgage loans.