There are quite a few houses in Holland which are built on land leased from a third part owner. These are called "leasehold properties" and bring certain rights to the land and the property itself. Instead of owning the land, you are in effect renting it.
The difference between renting a home and renting the land (leasehold) on which it stands is that this right is transferable and one can establish a mortgage right with respect to it. This type of lease does not end when the lessor (the land owner) dies, nor can the lessor terminate the leasehold without the consent of the lessee (ie the tenant).
The lessee therefore holds real property rights from a financial point of view. This means that the lessee has building rights and also the right to sell the leasehold property. The lessee pays the land owner (lessor) an annual fee, called the "canon" which these days is quite often paid in advance for the duration of the leasehold. In bygone days, a canon was often symbolic, paid simply in order to formally register the lessor’s ownership of the land.
In case of perpetual leasehold, the lease is normally granted for periods of 50 or 99 years. Leasehold is an ancient concept, and has an agricultural background. As early as in ancient Egypt, land was issued leasehold for the farmers to work on. The Romans used the leasehold concept to levy additional tax.
In Holland it has also been known for centuries; but in more recent history, several municipalities started working with the leasehold concept in order to be able to influence the planning and housing development of their town. Amsterdam, in the 15th century, was the first city to issue leasehold plots, and in a more structured way since 1896. By leasing out land rather than selling it outright, it enabled (and still enables) the municipalities to enjoy the appreciation in land value.
In practice, the lease is renewable at the end of the leasehold term, but the lessor has the right to demand a reappraisal which usually results in a higher canon. In doing so, municipalities can profit from the appreciation in the value of the land. Because of this, some private landowners / developers have adopted the leasehold concept when developing and selling property.
Private leasehold is, however, somewhat controversial in the current market, since banks are reluctant to give mortgage loans on privately held leasehold properties. This is because the system is inadequately monitored. Ironically, though, home owners whose leasehold is held by their municipality are also equally uneasy about their landlords. Nevertheless, the banks differentiate between these two groups when it comes to the granting of mortgages on the property.
One of the few good points about leasehold is that the periodic payment for the leasehold, the canon, is tax deductible. And a property built on leasehold land is often (but not always!) cheaper than a property that is not. The disadvantage however is that the annual canon is an additional recurring cost on top of mortgage payments.
Regretfully, though, if you decide to pay off (i.e. surrender) the canon for the leasehold in perpetuity, the amount you pay to that effect is not tax-deductible.
However, increasing your mortgage in order to finance the surrender of the leasehold, does at least enable you to deduct the interest payments on the mortgage increase.
Generally speaking it is cheaper in the long run to own a property with land owned outright rather than to own a leasehold property. For this reason it may be worth your while to pay off the leasehold in perpetuity.
Very often it is possible to pay off the leasehold for its term or better still, to acquire full ownership of the land. Whether or not this makes sense depends on the circumstances and I would urge everyone to seek advice first.
But the possible advantages are clear since:
› one is no longer dependent upon the whims of the municipality or the private land owner
› it is much easier to get a mortgage (especially in the case of private leasehold!)
› it is easier to sell your property, since the new owner will face fewer uncertainties (and, of course, it is easier for the buyer to get a mortgage)
Most municipalities in the Netherlands are gradually abolishing their system of leaseholds. However, Amsterdam is sticking to its guns and is still issuing new leaseholds. More than 80% of Amsterdam land is owned by the municipality and is thereby earning Amsterdam roughly 50 million euros per year.
Strangely enough, there is virtually no monitoring, either by legal organisations or by the Financial Authorities (AFM) of this leasehold market. And it is also remarkable that the tax authorities, for their determination of the value (WOZ) for municipal taxes etc., do not differentiate between a leasehold property or one where the land is actually fully owned.
Thus there are plenty of reasons to seek advice before buying a leasehold property. And should you already be the proud owner of a leasehold property, from a financial point of view it does not hurt to find out what your options are...
Jose de Boer is an Expat Service Provider who helps internationals to feel at home in the world of Dutch finances. For inquiries and / or remarks, feel free to comment below or contact Financial Consultants De Boer directly.