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Ryan Walters has considered buying a city-owned leasehold townhouse in False Creek in Vancouver, where the price tags are significantly lower than for similar freeehold properties nearby. Brett Beadle for The Globe and Mail

Brett Beadle/The Globe and Mail

In a city where waterfront property is considered the domain of the rich, there is a two-level townhouse with a front door that opens onto the seawall currently listed for well under $1-million.

It is 1,554 square feet with a private back yard, deck, wood-burning fireplace, garage, and ensuite laundry, all within the heart of Vancouver's central west side neighbourhood of False Creek. It has one of the best views in the city and is mere steps to Granville Island.

Price tag: $795,000.

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The catch? It is owned by the City of Vancouver, and is leased until 2036. Whoever buys the property is buying the prepaid lease and the right to live there until that time. Almost all of False Creek is comprised of leasehold properties owned by the city and all are priced well below market value.

Would-be buyer Ryan Walters recently considered a 1,000-square-foot leasehold property in False Creek priced at $300,000. The townhouse also had a water view and was a stone's throw to Granville Island. It sold a few days ago, and Mr. Walters, who was hesitant to dive into leasehold ownership, wonders if he missed out on a deal or a nightmare.

"If you were looking at a freehold condo, it easily would be $1.2[-million]or $1.5-million for that," he says. "If you're just looking for lifestyle, it's probably something to look into for sure, because that's one of the best neighbourhoods in the city."

Mr. Walters, a 30-year-old machinist from Ontario, rents an apartment on Main Street. He is one a growing group of Vancouver residents who've decided that renting and investing money elsewhere may be a better option than depending on a home for equity. Because Vancouver house prices are still high and the market is uncertain, a leasehold property may work for someone like Mr. Walters. Leaseholds are generally spacious and located in central, desirable locations.

"If you do the math, that works out to some ridiculously low rent …," he says.

"The big question in my mind is, is it going to be a crazy awesome deal or is everyone going to get shafted?'

In Vancouver, there are hundreds of leasehold condos in the West End, and leasehold townhouses and detached houses in False Creek, Fairview Slopes and Point Grey. They are either owned by the city, the federal government, the UBC Properties Trust, the Musqueam native band or private individuals. Leasehold ownership means the tenant owns the right to use the property for a given amount of time, which is usually 99 years.

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As to whether leasehold ownership is a good deal depends on whom you ask. There are risks, such as if it's not prepaid for the term, there are regular lease payments on top of mortgage payments. Those payments could come up for renewal that is based on a much higher market value than when the property was purchased.

The most famous example of a hike in lease payments was in 1995, when Musqueam Park leases came up for renewal after 30 years. The Musqueam band raised the payments in accordance with then-current market values on the tony west side properties. It meant average lease payments went from about $400 to more than $2,000 a month.

Senior mortgage consultant Rob Regan-Pollock helped several devastated clients through the price hike and ensuing court battle, including one who was forced to declare bankruptcy. That client emerged from the crisis and went on to purchase land again - freehold.

"Their lease payments were in some cases higher than their mortgage payments," Mr. Regan-Pollock says.

The other risk is that a leasehold property is marketable only when there's lots of time left on the lease. As it gets closer to its renewal date, its value is certain to drop. Each lender is different, but banks generally only finance leaseholds that have at least five years remaining on top of the amortization period, Mr. Regan-Pollock says. But most leaseholds in Vancouver are young, which means they're still marketable.

If a 30-year-old buys a leasehold with 80 years left, for example, he or she could live there for 40 years and still have a marketable property to the average lender.

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"We run into difficulties with financing leasehold when the lease is coming up for renewal. If you're the first in, it's fine. If you're the last one in, it gets tricky. … You'll have limited marketability. You need someone willing to take the chance of occupying it and seeing if the lease is renewed and how much the escalation will be, because the reset of the lease terms are going to be done in current dollars. And it will be a huge increase from 70 years ago."

Because some deals have gone sour, leasehold ownership has a bad reputation among some in the industry. Financial lecturer, author and former MP Garth Turner advises consumers to steer clear.

"In my experience it's much more of a B.C. phenomenon than anywhere else," says Mr. Turner, who operates a popular blog called the Greater Fool. "From an investment point of view, leaseholds are generally not a good investment. They should be selling at a discount to freehold properties, for obvious reasons.

A leasehold property is only of value, Mr. Turner says, when compared with the cost of renting.

"It is only the rent equivalent that gives it intrinsic value."

Realtor Ken Leong has a $500,000 leasehold waterfront townhouse currently listed. He says it would be worth $800,000 as freehold.

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"The price of entry is cheaper because you don't own the land. You look at it like you're renting an apartment," he says. "You don't want to pay the $3,000 a month to own that $800,000 place. You are saving money over the long term."

Financial securities adviser Susan Stevenson purchased a prepaid leasehold apartment downtown five years ago, and she hasn't looked back. She had it recently appraised and it's gone up in value nearly $200,000. The apartment has stunning views of English Bay, and Ms. Stevenson can be at work within five minutes.

Like any condo, she pays monthly maintenance fees on top of her mortgage. Her lease has more than 70 years remaining on it.

"I probably won't be here when it expires," she says, laughing. "So for me, that wasn't a concern. If I am here another 25 or 30 years, it will still be worth quite a lot because it's waterfront property."

Contrary to popular thinking, leaseholds do appreciate, but just not as much as a freehold, Mr. Regan-Pollock says.

"They appreciate because rents also escalate. When you buy leasehold property, you are buying the right to occupy that unit in today's dollars - which down the road will be more, because everything goes up after a while."

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It's like any major financial decision, he adds. You need a long-term plan.

"Make sure there's a minimum of 30 years on the lease when you plan to exit so that someone else can have a successful run with it, and the next buyer will have to deal with the exit plan."

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