Yukonomist: A lease that will outlive you

Yukonomist Keith Halliday

“In the long run, we are all dead,” quipped legendary economist John Maynard Keynes.

His saying definitely applies to 125-year leases such as the ones we will see coming to market for residential land in Whitehorse. The Kwanlin Dün First Nation recently announced 97 lots for the area behind Falcon Drive in Copper Ridge. The Ta’an Kwäch’än Council has similar plans for its land.

Officials from all four levels of government, plus lawyers and bankers, have done a lot of work so such leases can become a mainstream part of the Yukon real-estate market.

These leases could be a big win for both Yukon families and the two First Nations. Yukoners will get access to new land for housing. The First Nations will earn money from their land holdings and — this is a big deal — receive a share of the income tax paid by people living on the properties.

The Yukon government and the City of Whitehorse will also benefit, since the availability of First Nations lots will reduce the white-hot temperature of the criticism they receive for failing to develop enough lots to keep up with predicted population growth.

The First Nation lease idea shares some characteristics with the land trust idea of U.S. presidential candidate Bernie Sanders, who developed the idea while a mayor in Vermont. This separates ownership of the land and the house on it.

In the case of First Nation leases, the homeowner owns the house but not the land. Since they are renting the land, in effect, they do not need to add the cost of the land into their mortgage.

If the First Nation also organizes financing for the cost of putting water, sewer and other services into the lots, then that would further sweeten the deal. Suppose the feds or Yukon government made a long-term loan, say 50 years, to the First Nation. The money would be used to pay for the water and sewer connections, then recovered from families leasing the land over many decades. The federal government’s long-term borrowing rate is currently around three per cent. With a cheap long-term arrangement like this, homeowners would avoid adding another upfront cost into their mortgages.

So should you sign up for one of these leases?

The leases are an excellent idea in general. But the devil resides where he usually does in real estate deals; in the fine print.

Potential lessees will want to think through a few questions.

The first is to ask how the math compares to a similar house on traditional, fee-simple land. The house will be cheaper on leased land, but comes with that ongoing land-lease payment. For the first 25 years, your mortgage payments will be lower. But after that, you will still be paying the land-lease for decades. And since you don’t own the land, you give up the possibility of profiting if land prices go up.

Some people focus heavily on those trade-offs. But getting a house cheaper up front has huge and immediate value. Not everyone wants or needs to invest in land, so the lease option will make a lot of sense for some Yukoners.

The second question is to think about re-sale value. Again, critics of long-term leases ask who will want to buy your house in 20 years if the lease is getting closer to expiry. On a 125-year lease this will become quite an important question, around the year 2122. If you want to retire and sell your house in 20 years, at that point it will be a 105-year lease. The buyer’s logic will be quite similar to your logic today.

The third question is about how the rate resets over time. Often, very long-term leases have clauses that reset the monthly payment every, say, 25 years. This makes sense, since if there is a bout of inflation the owner of the land will want to be protected. If you were paying a 125-year lease in downtown Whitehorse whose rate had not been reset since 1897, it would be a sweetheart deal indeed.

The question of how the rate is reset is critical. It is safest for lessees if the rate reset is tied to something independent and related to the cost of living, like the Statistics Canada Consumer Price Index. If it is to be reset based on something vague like “market prices,” that exposes the homeowner to risk.

After you build your house on a lot, your bargaining position is weak if the landowner has the ability to hike the land payments. At that point, it’s not easy to pick up your house and move it to cheaper land.

Well implemented, the long-term land lease has the potential to be a true “win-win” for First Nations and Yukon families. Just make sure you read the fine print and make sure it is right for you.

Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He is a Ma Murray award-winner for best columnist.

Yukonomist