Are you facing the challenge of determining the value of a leasehold or a property encumbered with it? An incorrect property valuation for a leasehold can be costly. Learn here how to avoid pitfalls and establish a solid basis for valuation.
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The topic briefly and concisely
In the valuation of land under leasehold rights, the leasehold right and the encumbered property must be assessed as two separate economic units.
Important influencing factors are the remaining term of the leasehold agreement, the amount and adjustability of the ground rent, as well as the specific contract conditions.
The ImmoWertV 2021 introduced new regulations for the valuation of leasehold rights, which require expert application.
Valuing property with leasehold rights presents many property owners and heirs with complex questions. Unlike full ownership, you must consider two separate economic entities: the leasehold right itself and the encumbered property. This requires specific knowledge, as factors like remaining term, ground rent, and the conditions of the leasehold agreement significantly affect the value. A well-founded valuation protects you from financial disadvantages, whether in terms of sale, inheritance, or for tax purposes. This article guides you through the key aspects of correct property valuation in the context of leasehold rights and shows you how to arrive at a realistic value.
Understanding the Basics of Property Valuation with Leasehold
The hereditary building right, often colloquially referred to as leasehold, is the transferable and inheritable right to own and use a building on someone else's land. This right is typically granted for a long period, often 60 to 99 years. For property valuation, this means that the hereditary building right and the land are treated as two separate economic assets, whose values must be determined separately. The legal basis for this is primarily found in the Valuation Act (BewG) and the Hereditary Building Rights Act (ErbbauRG). A precise foundation investigation is the first step to a valid valuation. The complexity often requires a detailed analysis of the contract documents to capture all value-relevant aspects. This careful preparation is crucial to avoid surprises in the valuation process later on.
Identify the key factors for valuation
Several specific factors significantly influence the valuation of leasehold properties. The remaining term of the leasehold contract is a crucial point: the shorter the remaining duration, the lower the leasehold value tends to be. Banks often refuse financing if the remaining term falls below 40 years. Another important aspect is the ground rent, which is the regular payment to the landowner. This rent, usually between 3% and 5% of the property's value at the time the contract is signed, affects profitability and thus the value. The specific contractual conditions, such as regulations for adjusting the ground rent (indexation clauses) or compensation payments at the end of the contract, also play a significant role. Not to be overlooked is the current market situation, which influences the demand for leaseholds and therefore their price. An accurate valuation takes all these dynamic components into account. The analysis of these factors forms the foundation for a realistic assessment.
Correctly calculate and evaluate the ground rent
The ground rent is the annual fee that the leaseholder pays to the landowner. Its amount is based on the land value at the time of the contract signing and is often between 3% and 5% of this value. For a land value of 200,000 euros, for instance, and a ground rent of 4%, the annual payment would be 8,000 euros. It is important to distinguish between the agreed (achievable) ground rent and the market-standard appropriate ground rent. If they differ, this difference must be taken into account in the property appraisal of the heritable building right. An adjustment to the ground rent is legally permissible no sooner than three years and must not exceed the general price development. For a detailed valuation methodology, precise analysis of the ground rent is essential. The correct classification of the ground rent is a cornerstone of the entire valuation.
Important aspects of ground rent analysis:
Accurate assessment of the ground rent is essential for a solid property appraisal in leasehold law. The following points should be noted:
Contractually agreed ground rent: The actual annual charge resulting from the leasehold agreement. This can be fixed for decades or include adjustment clauses.
Appropriate market-standard ground rent: The rent that would be market-standard if a comparable heritable building right were newly arranged on the valuation date. This can significantly differ from the contractual rent.
Value safeguarding clauses: Provisions in the contract that allow the ground rent to be adjusted to the general rate of inflation (e.g. consumer price index). Such clauses secure the real value of revenue for the landowner.
Remaining term of the interest rate lock: Are there phases with a fixed interest rate, and when is the next adjustment due? This affects the future financial burden.
Capitalisation of the ground rent difference: The difference between the contractual and the appropriate ground rent is capitalised over the remaining term and influences the value of the heritable building right positively or negatively.
This detailed analysis helps to precisely quantify the financial advantage or disadvantage from the existing ground rent.
Apply assessment procedures for leasehold rights
Various valuation methods are applied to the property valuation of leasehold rights, which must be adapted to the peculiarities of leasehold rights. The German Valuation Act (BewG) stipulates that the value of the leasehold right and the value of the encumbered property must be determined separately. For the leasehold right itself, the comparative value method is often applied, provided there are sufficient comparison prices for similar leasehold rights (§ 193 BewG). Alternatively, financial mathematical methods are used, which consider the present value of future revenues (ground rent payments) and the land value share. The ImmoWertV 2021 has introduced new regulations, replacing old methods. A well-founded appraisal is essential to clearly present the complex calculations. The choice of the correct method depends on the available data and the specific circumstances of the individual case. The correct application of these methods ensures a market-compliant valuation.
Understanding the Role of Remaining Term and Reversion
The remaining term of the leasehold significantly affects its value. As the remaining term decreases, the value of the leasehold generally diminishes, since the period of use for the leaseholder becomes shorter. With less than 40 years left, it often becomes difficult to obtain financing. At the end of the lease term, the so-called reversion occurs: the property, along with any buildings on it, reverts to the property owner. Typically, the leasehold agreement stipulates compensation for the value of the building to the leaseholder. The amount of this compensation, often two-thirds of the market value of the building, is an important factor in the valuation of leasehold property. The specific terms regarding reversion and compensation must be taken from the leasehold contract. This final assessment is crucial for the overall valuation.
Typical regulations regarding compensation upon reversion:
The compensation regulations at the end of the contract are a core element of the leasehold agreement and have a direct impact on its valuation. Here are some common variations:
Full market value of the building: The leaseholder receives compensation equivalent to the current market value of the building. This is the most favourable option for the leaseholder.
Two-thirds of the market value: A commonly encountered regulation, also legally regarded as the minimum standard for residential buildings unless otherwise agreed (§ 27 Abs. 2 ErbbauRG).
Book value or specific value: The compensation is based on the book value in the accounts or a specifically defined value, which may differ from the market value.
No compensation: In rare cases, particularly with very old contracts or specific circumstances, compensation may be excluded. This significantly reduces the value of the leasehold.
Obligation to take over under specific conditions: The property owner is required to take over the building at a pre-agreed price or according to a specific formula.
Precise knowledge of this clause is crucial for assessing the value of the leasehold, especially towards the end of the term.
Consideration of tax aspects in the valuation of hereditary building rights
The valuation of leasehold rights is also relevant for tax purposes, for example, in inheritance and gift tax or property tax. The Valuation Act (BewG) sets out the framework conditions for this. The ground rent paid can be claimed as deductible advertising costs for tax purposes in the case of rented properties. For owner-occupied properties, this is usually not possible. Upon sale or acquisition of a leasehold, land transfer tax is due, the basis of assessment of which is calculated differently than for full ownership. It is based on the capitalised annual rent. A professional valuation report preparation can provide clarity and help avoid tax disadvantages. Tax implications should be considered early in all deliberations.
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The valuation of leasehold real estate is a complex process that requires specific expertise. The separate consideration of leasehold and property, the analysis of remaining term, ground rent, and contract details are crucial for an accurate result. An inaccurate valuation can lead to significant financial losses, whether in sale, inheritance, or tax assessments. Given the complexity and financial implications, it is advisable to seek expert support. A professional, data-driven valuation by Auctoa or an initial assessment through our ImmoGPT chat can help you gain clarity and avoid costly mistakes. Secure your decision with a well-founded valuation.
Additional useful links
Wikipedia offers a comprehensive overview of the leasehold law.
Gesetze im Internet contains paragraph 48 of the ImmoWertV 2022, which deals with the valuation of properties with leasehold rights.
Statistisches Bundesamt (Destatis) provides an explanation of the leasehold law.
Gesetze im Internet makes available the complete Leasehold Act (ErbbauRG), the legal foundation for leasehold law.
Deutscher Städtetag publishes a press release on the renaissance of leasehold law.
Bundesfinanzhof provides a decision by the Federal Finance Court regarding leasehold law.
Deutscher Verband für Wohnungswesen, Städtebau und Raumordnung e.V. offers documentation of a professional dialogue on the topic of leasehold law.
Deutscher Erbbaurechtsverband is the official website of the German Leasehold Association, a central point for information on leasehold law.
FAQ
How long does a leasehold typically last?
Leasehold agreements typically have a long duration, often between 60 and 99 years.
Can the ground rent be increased during the term?
Yes, if an escalation clause is included in the contract. However, an increase is only permissible after three years at the earliest and must not exceed the general economic development (inflation).
What happens at the end of a leasehold term?
At the end of the term, the land along with the building reverts to the landowner (reversion). The leaseholder usually receives compensation for the building, the amount of which is specified in the contract (often 2/3 of the building's value).
What laws govern leasehold rights and their valuation?
The essential legal foundations are the ErbbauRG (Leasehold Act) and for valuation, the BewG (Valuation Act) as well as the ImmoWertV (Real Estate Valuation Ordinance).
Who pays the property tax with a leasehold?
The leaseholder is typically regarded as the beneficial owner of the building and the user of the property, thus is responsible for paying property tax.
Can I sell a house on a leasehold property?
Yes, the leasehold itself can be sold and inherited. However, selling often requires the consent of the landowner, as stipulated in the leasehold contract.
