Amsterdams should clear the decks regarding leaseholds
June 19, 2015
The Land Value Committee “Perpetual Leasehold,” consisting of professors Tom Berkhout (Nyenrode), Dirk Brounen (TIAS/Tilburg University), and Piet Eichholtz (Maastricht University), presented its advice, entitled “Schoon Schip (Clearing the Decks),” to the Amsterdam council Planning committee. After months of research and discussions with various stakeholders, interest groups and experts, a committee with Professor Brounen concluded that Amsterdam needs clear simplicity with respect to future leaseholds.
Image: © Nationale Beeldbank
"The current system of ground rent revision is no longer functioning," says Professor Dr. Tom Berkhout, chairman of the Land Value Committee. In a growing number of cases leaseholders are rejecting the offer from the municipality for a new ground rent. A lot is unclear in the current method and additional costs are incurred to reach a compromise. "Our findings provide clear directions for the reform of the system in perpetual leasehold. In order to achieve broad public support, the municipality should make the ground rent determination system transparent and simple."
The Land Value Committee advises the municipality to handle the residual value method to determine the land value. This method assumes that the value of the land is the difference (residue) between the market value of the property (land plus building) and the value of the building. This method is not new, and fits Amsterdam's leasehold system well. The committee has, however, raised the question on which points the application of this residual value method in Amsterdam can be improved, and gives three pieces of advice.
The Land Value Committee recommends:
- Determining the object value based on the official WOZ value (according to the Real Estate Valuation Act);
- Estimating the construction costs and depreciation of the building on a scientific basis;
- Fixing the ground rent rate based on the financial theory.
The Committee thus calls for a greater use of objective theory to underpin foundations and for more use of from large (public) data sources for the development.
To achieve this new method, the Committee has made some practical recommendations. (1) Make the new leasehold offerings attractive. The municipality should determine how much it can and wants to "invest" to make perpetual leasehold an attractive alternative to the leaseholders. (2) Offer the citizens choices. The Land Value Committee recommends that the municipality allows every leaseholder to choose from three offers of equal economic value: a fixed annual ground rent; a lower but inflation-indexed annual ground rent; or a one-time purchase of the lease for an amount equal to the present value of the ground rent payments. (3) Communicate new offers in a crystal clear way. The offer that every leaseholder will receive from the municipality must be comprehensible to everyone.