Home generalBuy leasehold land - what is it? All advantages and disadvantages

Buy leasehold land - what is it? All advantages and disadvantages

  • Heritable building right - what is the "> advantages and disadvantages
  • Land use
  • Way out home fall
  • Variable property value
  • From whom to rent?
  • Legal features
  • For real estate professionals

Building on a built-up land is an alternative to buying land. It is much cheaper and thus provides the opportunity to get a property even on a limited budget. However, building on hereditary land has many legal hurdles and peculiarities that need to be known before building. A good knowledge of the legal situation is mandatory before the choice of this real estate acquisition, otherwise evil surprises threaten.

To bypass a large part of the construction costs

German law provides, in addition to the purchase of land, to rent them over the leasehold for a long time. This will save real estate developers a large part of the total costs. Instead of a one-time purchase price, the property is rented for 50 or 100 years. The rent, also traditionally called "lease", is not a fixed amount but is a percentage of the land value. Although the term "lease" is still widespread, it is no longer legally permissible.

This procedure offers great benefits for both sides. Land is subject to tax. An unused building plot therefore only causes costs without generating a return. Non-constructional commercial use (eg agriculture or animal husbandry) of a building plot is usually prohibited, but at least subject to authorization. The hereditary building right can offer the property owner such an interesting return, which goes far beyond the property tax.

Leasehold - what is it?

In the case of leasehold, landowners and real estate developers conclude a long-term contract for the rental-linked use of a property. The property has already been approved for real estate construction. However, how far the building plot has already been developed depends on the individual case. The real estate developer can theoretically start immediately with the construction of the building. However, he is also obliged to pay the ground rent from the date of the purchase agreement.

This interest is approximately 3-5% of the property value. However, since this can fluctuate, the return is provided with a certain variance for both sides. After the expiry of the license agreement, the right of ownership of the property ends. If the property has not been purchased by the property owner in the meantime, it will be refunded to the property owner without replacement. The same applies if the landlord no longer meets his payment obligations. This is a two-year grace period, after which the landowner can consider the contract as dissolved.

The built property falls to the landowner, however, he is obliged to pay a reasonable compensation.

The special feature of hereditary building law is that it can be inherited because of the long contract terms. Thus, the contract passes to the heirs of this real estate developer. However, this only applies to the specified time. The contract term used by the heir has also passed for the heir.

Advantages and disadvantages

The advantages of leasehold are for the renter:

  • Cheap way to purchase land
  • Significant reduction in construction costs
  • Inheritance of the property and the contract

The advantages of leasehold for the landlord:

  • Well secured interest on otherwise unused capital
  • Long-term generation of additional income
  • Rising income through the ground rent
  • At the end of the contract, a cheap building will be charged

The disadvantages of leasehold for the renter:

  • Feeling that you own your own house, but not your own land
  • Certain uncertainties about the annual financial burden
  • High responsibility to the landowner
  • Significantly complicated sale of the erected building.

The disadvantages of leasehold for the landlord:

  • Feeling of having a strange house on your own ground
  • To be instructed that the tenant handles the property with care
  • Full tax burden of rent
  • Long waiting period for non-payment of the rent
  • Elaborate annual valuation of the property

Land use

For a property used purely for residential purposes, it is already a challenge to guarantee the careful use of the property over the entire contract period. With such a long use, it is relatively likely that one or the other residents of the property will not take care of it. Particularly problematic here are hobby screwdrivers. Illegally dumped waste oil can usually only be assigned to a polluter after the expiry of a land lease. Often, the landowner here remains sitting on the renovation costs.

It is even more problematic in commercial buildings erected for leasehold purposes. The fluctuation of warehouse and production hall users can be very large, making it even more difficult to keep track of the actual use of the property. In principle, the landowner can indeed offset the value of the building with the expected renovation costs for the land. However, one should also remain realistic here: One would have to build a massive natural stone building so that it is still usable after 99 years. Masonry, steel construction or wood-stand buildings are generally ripe for demolition after 99 years.

Way out home fall

The landowner has the right, under certain conditions, to demand an early return of the property. This applies especially if it can prove that the property is not being used properly or properly. In contrast, own use is usually not enforceable with regard to ground lease. Here is the tenant protection, since finally for this purpose, the long contract period has been established.

In practice, however, enforcing a homecoming is not so easy. In most cases, payment default is used. However, at 24 months, the legislature provides for a very long time in which the landlord is to fulfill his obligations.

In addition, "improper use" is also a matter of interpretation. For example, it can not be fundamentally forbidden for a building erected on a leasehold to be re-let. It is not even necessary that the owner of the property should be informed about the current tenants of the building. In the interests of a good business relationship, however, both parties are always advised to treat each other as openly and transparently as possible. This prevents misunderstandings and prevents expensive legal disputes.

Variable property value

The three to five percent ground rent will be fixed by contract and will not change during the term of the contract. However, the land price is subject to fluctuations that affect its value and thus the rent. This can be regionally extremely different. In East Germany, for example, there are many regions that have experienced a dramatic decline in real estate and property prices in the last twenty years. Houses for between three and five thousand euros are not uncommon in these regions.

Conversely, there are regions in Germany where prices for real estate of all kinds have literally exploded. At present, the region around Frankfurt am Main is experiencing an unprecedented boom. Prices have more than doubled in the last ten years. As many banks are relocating many jobs from London to this financial region as a result of Brexit, this trend is likely to continue in the long term and to exacerbate further.

Here, however, one must simply look at the laws of the market in terms of their logic: In regions with weak real estate prices, nobody will offer a built-in property but always try to sell it. Where a buyer's market for real estate exists, it is usually uninteresting for the heritage solution. Conversely, in boom regions the plots are correspondingly expensive. Here is the letting of land for hereditary building right for both sides very intelligent way: The property remains with the owner and he can look forward to increasing revenues. However, the installer of the property can be much calmer approach his project, as the disadvantages regarding the saleability of the property also put into perspective.

From whom rent "> Legal characteristics

The tax assessment of a property in hereditary building right is always for the landlord only after the pure value of the land before the construction of the property. Although a built plot of land theoretically increases in value, however, the landlord can not charge the constructed property to increase the value of the property. After all, it's not his building that stands on his rented property. However, this consideration also has advantages for the landlord: The tax assessment of the property is also calculated on the basis of undeveloped land.

It is important for both sides that the transfer of obligations passes to potential subsequent users. This must be specified by contract, otherwise there may be considerable legal disputes with the buyers of the buildings or land. These then usually eat up all the financial benefits of the ground-built property.

For real estate professionals

Considered quite sober, the following picture emerges: The average repayment period for a built home takes 30 years. After that, a homeowner is the sole owner of his property without being accountable to anyone else. However, deducting a ground rent for thirty years also adds up to a considerable amount, so that the financial advantage for pure homeowners is rather low.

However, things are different for return-oriented home builders. A multi-family tenement on a leasehold property will yield much more quickly than if the property had to be purchased for the building. In addition, the annual ground rent can be deducted as expenditure, so that overall tax benefits can arise here.

Regardless of how you would like to use the leasehold property, in-depth, detailed legal advice and a watertight contract are essential for both sides. Only a clear contractual agreement can ensure that both sides can benefit optimally from the business. This is especially true if the original contract signatories assign their rights to third parties through sale or inheritance. A good leasehold agreement takes this case into account to a great extent and ensures that no problems can arise during the succession.

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