Perpetual ground lease in Amsterdam
The impact of clinging and inflation on the redemption price
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Amsterdam has a comprehensive system for ground lease. Erfpacht means that you rent the land under your home from the municipality. As a homeowner, you pay a fee (canon) to the municipality for this.
Since the introduction of the switch policy to perpetual ground lease in 2017, many Amsterdam ground lease holders have considered (132,500 applications) converting their perpetual ground lease. This policy offers leaseholders the opportunity to switch to a perpetual ground lease. See the gray box for explanations of these terms.
An important aspect of this policy is the "clinging" of the canon. By clamping the canon, we mean that a buyer has had the amount of the perpetual ground lease recorded in the land registry. This applies to plots where they have chosen not to buy off the ground rent in its entirety. A total of 73% of applications have been transferred.
Glossary
Perpetual ground lease is a form of ground lease that gives you the right to use the land under your home indefinitely. This right is divided into periods of time, usually of 50 or 75 years. During such a period, the terms and the canon (the annual fee for using the land) remain the same.
Perpetual ground lease means you fix the right to the land forever. You can choose to redeem the canon forever in one lump sum, or continue to pay annually. With annual payments, the amount is adjusted only for inflation, no longer for land value. This gives you as a leaseholder more certainty about your future costs.
What does fixing the canon mean for your annual payment?
When canon is tacked on, the annual payment is determined based on the WOZ value x the BSQ (Neighborhood StreetQuote) = leasehold land value times the applicable canon rate at the time of transfer. However, latching on also carries certain risks and many owners are not (yet) aware of this. People think that with the word "pegging" the future canon amount payable never changes again. And unfortunately this is not true.
This is because the perpetual canon is then adjusted annually for full inflation, with a lower limit of 0%. This means that the canon can never decrease in the case of deflation, but can increase in the case of inflation. This creates an annual increase in the canon, which can lead to higher costs for leaseholders in the long run. It is important to understand how this annual canon increase can greatly affect your monthly costs in the future, especially if inflation is high.
Redemption and the impact of inflation
Leaseholders who choose to lock in their canon have/had the option of buying out the perpetual canon. The redemption price is calculated based on the present value of all future canon payments, which will therefore increase each year due to inflation. Because the canon increases each year, the redemption price also increases as time passes. This means that leaseholders who wait to redeem will eventually face a higher redemption price in the future. So the phrase that is often named ''that's only 20 years from now'' has more impact on the value of your home than people think.
The possibility of buying off the canon provides long-term security, as it allows the leaseholder to permanently safeguard himself from future canon payment and the risk of (high) inflation. However, this security has its price. Usually this is 42x the annual ground rent minus a little. A homeowner must have or be able to free up this money in the mortgage.
Declining deferral time is increasing redemption price
A very important factor that affects the amount of the redemption payment is the deferral period. This is period between the time of latching on and the end of the current continuing leasehold contract is called the deferral period. As this period shortens, the present value of future canon payments increases, resulting in a higher surrender price. This effect is further compounded by the annual inflation adjustment of the canon, which can lead to significant increases in the redemption price if the leaseholder decides to transfer at a later date. A basic rule is that the redemption price is basically going to double every 10 years.
The difference in latching the canon
What do the terms and inflation look like if you haven't snagged the canon?
Note! This refers to an example to illustrate that current switching conditions are often significantly more expensive than the favorable conditions of the beginning of the switching scheme. Depending on the property, the differences may be less or greater than presented.
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Figure 2: canon amounts with the favorable conditions from 2017 and inflation from 2017-2025. With the terms from 2025.
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Figure 3: Surrender price if you snagged it with the favorable terms from 2017 and inflation from 2017-2025.
What does this mean for you as a home buyer or seller?
It is important for home buyers and sellers in Amsterdam to be well informed about ground lease terms, as they can affect the price and financial planning of your home. If you are considering buying a property in Amsterdam that is on leasehold land, or if you are looking to sell a property that is on leasehold land, it is crucial to understand how latching on, inflation adjustments and declining deferment periods can (significantly) affect your future costs. This is where an MVA real estate agent can serve you well. In particular, MVA Leasehold Experts can help you well with questions surrounding leasehold. Do you want a broker who specializes in ground lease look at this page. They can make an MVA Leasehold Analysis for your property so you know exactly what the value of the property you want to buy or sell is.
Practical tips for home buyers in Amsterdam
Be aware of ground lease terms: If you want to buy a property in Amsterdam, always check if it is a property with perpetual and/or perpetual ground lease and what specific conditions apply. Pay particular attention to the amount of the current and future canon and any latching payments and whether the seller has done his homework properly.
Calculate the impact of inflation: The annual inflation adjustment can increase your monthly expenses. It is important to get a good idea of how canon will evolve in the coming years. This can have a major impact on your financial planning.
Consider surrender options: When buying a property with a ground lease, you can also consider buying out the canon obligation immediately. This can be a good option if you want peace of mind that you won't face rising canon payments in the future. Calculate in advance the amount of the redemption payment and the impact on your finances.
Please note the shortened deferral period: If you decide to redeem the canon, be prepared for a higher redemption fee as the deferral period shortens. This can significantly increase costs in the short term, so make sure you make an informed decision.
Contact an expert: Given the complexity of ground leases and the impact of inflation, it is advisable to seek the advice of an expert, such as an MVA Ground Lease Expert, to understand how ground lease terms may affect the value of the property and your future financial obligations.
So, are you buying or selling in Amsterdam? Engage an MVA Erfpacht Expert in! They have the right expertise and will relieve you every step of the way in these complex regulations.
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About this blogger
Pieter Joep van den Brink is a Registered Real Estate Agent and MVA leasehold expert. He and his team at the Carla van den Brink office have been serving Amsterdam residents since 1979. With in-depth knowledge of Amsterdam ground lease and decades of experience, Pieter Joep guides both buyers and sellers in all issues surrounding ground lease.
Do you have any questions for Pieter Joep? If so, please contact his office.