A three part series of articles for the Robert Schalkenbach Foundation’s Center for Property Tax Reform.
Part 3: The Future of Land Lease
Last year, a devastating report on municipal ground lease in Amsterdam was published. In the third part of this series, we will discuss the future of ground lease. Are the original goals still important and is this the best way to capture economic rent? Or should we do away with ground lease altogether and replace it with an alternative system?
After Amsterdam, Rotterdam is the largest Dutch municipality in terms of population. Since the 1970s, this municipality has given out almost all of its new land under ground lease conditions. One of the goals of the ground lease system was to allow the entire community to benefit from the increase in land value, instead of just the individual land owner.
(Read more about the origins of municipal leasehold in the first article of this series.)
In 2003, however, this objective was explicitly dismissed in Rotterdam. From then on, the increase in value of the land would no longer be collected by the community, but by the user of the land. So the council of mayor and aldermen judged, and probably not entirely coincidentally the first council since World War II without the social-democratic party PvdA. The idea was that individuals should be able to build up their own capital through land ownership and would thus develop a more intensive bond with their living environment. From that year on, private ownership of land became the new standard in Rotterdam and leasehold the exception.
In Amsterdam, too, a council without the social democrats took office in 2014, after the PvdA had been represented in the municipal council for more than a century. More than 125 years ago, Amsterdam had been the first Dutch municipality in which it was decided to issue all land under ground lease conditions. The municipality nowadays still owns about 80 percent of the land. And since its introduction in 1896, the original goal of allowing the increase in the value of land to benefit the community had never been changed.
But here too, in 2015, the municipal council opted for a radical change to the leasehold system. In doing so, they did not go as far as in Rotterdam, where the land was now in principle issued in ownership. Instead, they opted for a perpetual leasehold system, with the option to buy off the canon forever (see the second article in this series for an explanation of this change). Officially, the original goal still stood. But it was clear that this goal could no longer be (fully) achieved after the system change.
"It wasn't good, but now it's even worse."
Zeeger Ernsting, council member for the Green and Progressive Party (GroenLinks, with 8 seats the second party in the capital), thinks this is a real shame. GroenLinks has been back in the municipal council since 2018, and he is visibly struggling with the fact that his party now has to work with a system that he was firmly opposed to. But no one wants any new adjustments, he realizes. “Not homeowners, who have now almost all switched to the new system and finally have clarity. And neither do politicians, because after years of heated discussion, they believe that the leasehold debate should now calm down.” Moreover, there is not much left to adjust: ‘The new agreements with leaseholders are perpetual and therefore irreversible.”
Diederik Boomsma, council member for the Christian Democratic Party (CDA, 1 seat), is also far from satisfied with the new system. “It wasn’t good, but now it’s even worse,” is how he summarizes the situation. He calls the transition to the perpetual system “the greatest theft in Amsterdam’s history.” But contrary to what you might think, he does not mean that the increase in the value of land is now unjustly disappearing into the pockets of individual landowners.
On the contrary: the fact that this increase in value should benefit the community is, he says, being misused by other political parties as an argument to disadvantage homeowners. “Invoking solidarity, the municipality behaves like the biggest loan shark who abuses a monopoly position and state power.” Of course he understands that the municipality needs money for things like road maintenance, healthcare, and education. And of course residents of the city are happy to contribute to these facilities. “But through ground lease,” he says, “those costs are now unilaterally placed with a small group.” That is, with the homeowners.
His criticism focuses mainly on the calculation method used by the municipality to determine the land value. It is much too complex and not transparent, explains Boomsma, and leads to far too high costs for the leaseholder. “Even if you think the government should be able to collect more money from homeowners, this is probably the least efficient and effective way to do that.”
Complicated Form of Land Tax
My grandfather, who was chairman of the Dutch Georgian organization ‘Grondvest’ for decades, would have passionately agreed with him on the latter. Although leasehold serves the same purpose as Henry George’s land value tax, he was not very enthusiastic about the system.
Annual lease payments have actually become a complicated form of land tax, concludes the Berenschot consultancy firm, which conducted research into the perpetual leasehold system in Amsterdam at the request of the city council. So the question arises: couldn’t it be much simpler?
One of the problems that the perpetual system was supposed to solve was the abrupt increase in the canon after a period of fifty years. My grandfather thought that homeowners who are confronted with a considerably higher ground rent after fifty years had little reason to complain. Because, he believed, that actually meant they had paid too little for 49 years. His solution was simple: asses the current land value every year and allow the amount to be paid to increase each year accordingly. Then homeowners would no longer be faced with such major surprises. To ease the pain of an annual increase, other taxes could be lowered.
Another fundamental problem with leasehold is the inequality between leaseholders. Ground lease is a private agreement between the municipality and the user of the land. As a result, two neighbors may have a completely different contract with the municipality, and may therefore have to pay a completely different amount, even if the land under their houses is worth the same.
And what is also not fair is that not everyone pays ground lease: some people do own a house on their own land. In Amsterdam this is precisely the case in the richest neighborhoods: the canal belt and around the Vondelpark. This is easy to explain historically: that land was already privately owned when the leasehold system was introduced.
But it does mean that those landowners get to benefit themselves from the increase in the value of land, while their fellow townspeople pay it for the public interest. In addition, the Amsterdam landowners pay relatively little property tax, which is a municipal tax for home and land owners on both the land and the buildings on it. Thanks to the ground lease income, this is lower in Amsterdam than in other municipalities.
Fairer and More Democratic
With a land value tax, all homeowners would pay their fair share. Because taxes fall under public law, the conditions would be the same for all citizens. This makes a land value tax not only more fair, but also more transparent and democratic than the leasehold system. The leasehold system is so complex and opaque that even experts don’t always understand it anymore. It is difficult for house buyers to take into account the future development of costs when determining how much they are able to pay for a house. Also politicians find the leasehold system difficult and complicated. It takes council members a lot of time to understand the conditions and calculations, and they do not always understand the consequences of adjustments. This makes it difficult for them to exercise democratic oversight.
In short, a land value tax is much simpler, fairer and more democratic than the existing leasehold system. So can leasehold just as well be abolished?
Neither Boomsma nor Ernsting want to go that far. “The leasehold system may well have a future,” says Boomsma, “provided there is good consumer protection.” Ernsting thinks selling all municipal land is far too radical and irreversible. “That land belongs to all of us, including the tenants.”
Tax Shift
But a good thing about a land value tax is that municipalities do not have to sell the land they own. Ground lease and land tax can coexist perfectly together. It may seem as if leaseholders then pay double, but that is not the case. After all, in the perpetual system, the increase in the value of the land no longer ends up with the municipality but with the homeowner. Over that income, he will pay a land value tax. The leasehold itself then only serves as a rent for the use of the land, comparable to renting a house.
Instead of abolishing the leasehold system, it would make more sense to convert the municipal property tax into a land value tax, says professor of Land and Real Estate Development Edwin Buitelaar (Utrecht University). A land value tax is much more efficient than a tax on both land and buildings. With the property tax, a landowner will pay more if he or she invests in a home or builds additional homes. With a land value tax, it costs money to leave the land barren and it pays to invest in (more) homes. A tax shift is an easy solution and can be implemented gradually: “The part you pay for the house and other buildings can be slowly reduced, and the part for the land increased proportionally.”
Shortage of Affordable Housing
And then leasehold can be used for a completely different purpose: making it easier for people to buy a home. Because if you only have to buy the house and not the land under it, you would have to borrow less money from the bank. Several Dutch municipalities are already using leasehold in this way. Moreover, agreements can be made with project developers via the ground lease conditions about the percentage of affordable rental homes in new-build projects, says council member Ernsting. Municipalities in cities such as Vienna (Austria), Zurich (Switzerland), and Munich (Germany) have also been using long leases successfully for decades as an instrument to realize affordable housing.
Just like the goal to allow the increase in the value of the land to accrue to the community, encouraging housing construction was also one of the original objectives when the leasehold system was introduced in Amsterdam in 1896. And, sad to say, this objective has lost none of its urgency in the last 125 years. In 2022, according to Atlas Research, there was a shortage of 390 thousand homes in the Netherlands. And that makes the debate about municipal leasehold remarkably urgent again.
