A three part series of articles for the Robert Schalkenbach Foundation’s Center for Property Tax Reform.
Part 2: The Reform of Municipal Ground Lease in the Netherlands
Since the introduction of the municipal ground lease in Amsterdam in 1896, the conditions have continually been subject to changes. Despite that, still no one is really satisfied with the ground lease system. After the most recent change, the question is whether its original goals can still be achieved.
“On a Sunday afternoon, the city council of Amsterdam flushed 100 years of progressive policy down the drain,” says journalist Hans de Geus. “Melancholy, disappointment and a fighting spirit” prevail in the green progressive party (GroenLinks). “A historic blunder,” according to Marjolein Moorman, currently alderman for the social-democratic party (PvdA). The reactions to the most recent change in the Amsterdam ground lease system were quite severe. The tenor of these reactions was that in 2016, the system was so fundamentally changed that it was de facto abolished. In contrast, there was a euphoric mood among homeowners and right-wing parties. “It’s done,” tweeted a supporter of the liberal party (VVD) enthusiastically.
The system change had been a fervent wish of the liberals, who traditionally stand up for the interests of homeowners. Remarkable, because it had also been a liberal, alderman Treub, who had stood at the beginning of the Amsterdam ground lease system. By no longer selling municipal land, and instead giving it out on long lease, the municipality at the end of the 19th century wanted to get a grip on the uncontrolled growth of the city, stimulate the construction of houses, fight speculation, and make sure the growing value of the land would benefit the community, instead of the individual land owner.
From Temporary to Continuous
In the first years after the introduction, Amsterdam opted for a system of temporary leasehold. The ground lease was accorded for a certain amount of years, after which the land would have to be returned to the municipality if it so desired. In this way, the municipality wanted to maintain control over the use of the land. But it soon became clear that temporary contracts were not practical at all. After all, the homeowner ran the risk that the municipality would not extend the contract after the lease term expired. This made banks hesitant to provide a mortgage for a house on leasehold land. Investing any money in maintenance also became a risk, because why would you invest in a house that you might be forced to leave?
Within twenty years of its introduction, in 1915, the first major change was therefore made: instead of temporary leasehold, the city switched to continuous leasehold. This meant that the ground lease contract was automatically extended after the expiration of the term. The amount to be paid, the so called canon, was regularly reviewed. Since 1966, the amount has been adjusted for inflation every five years, and after 50 years the canon was revised with the increase in land value.
More Security for Homeowners
This was in line with the goal of letting the rising land value benefit the community rather than the individual homeowner. However, that increase in value could be considerable in a sought-after city like Amsterdam. By only revising the canon after 50 years, huge leaps were made in the amount to be paid: from a few tens a month one could suddenly go to up to hundreds of euros (initially still guilders). This caused a lot of unrest and dissatisfaction among homeowners who could get into financial problems as a result.
In order to offer homeowners more security, it was decided in 2015 to overhaul the system again: homeowners were given the option of switching from continuous ground lease to perpetual ground lease. New contracts would by default fall under the perpetual system. The linguistic difference in meaning between continuous and perpetual may seem small, but the consequences are far-reaching. In the new system, the future increase in the value of the land is already included in the canon, which can therefore become a fixed amount. This offers more security for the leaseholder, who will no longer be confronted with a large ground rent increase in the future. Owners also get the choice to buy off the canon for the entire period at once.
Perpetual or Abolished
Amsterdam was the last municipality to switch to this system of perpetual leasehold. During the 20th century, other Dutch municipalities had followed in the footsteps of Amsterdam and started to issue (part of) their land on long lease terms. The Hague followed in 1911; others, such as Rotterdam and Utrecht, as late as in the 1970s. In some of the municipalities however, the ground lease experiment was only short-lived. The small municipality of Assen in the north of the Netherlands probably takes the cake: in 1978 the council opted for a ground lease system with 14 votes in favor and 13 against. Only one year later, the leasehold system came to an end again, with 15 votes to abolish it and 14 to keep it.
Some of the big cities had switched to a perpetual system earlier: the Hague in 1986, Utrecht in 1989, and Rotterdam in 2003. Moreover, in Rotterdam from that moment on, buyers also had the opportunity to acquire ownership of the land, just like in Utrecht in 2016. According to researcher Reint Bolhuis, the choice for perpetual leasehold has often been the beginning of the end: after that, less and less land is issued on leasehold and the option to convert it into ownership is increasingly offered. In some municipalities the ground lease system eventually got abolished over time.
Complex and Opaque
In Amsterdam that point has not yet been reached. It is the only municipality in the Netherlands where as a rule, all land is still leased out. But changing to the perpetual system far from solved the original problems and discontent. The initial enthusiasm among homeowners and right-wing parties about the perpetual system quickly ebbed away. Homeowners were shocked when they received the council’s proposal to switch to perpetual terms or to buy off the whole canon at once. It turned out to involve huge amounts of money, based on calculations so complex and opaque that even experts could no longer understand them.
Meanwhile, the left-wing progressive parties were not happy either. With the choice for a perpetual canon and the option to buy it off, the future growth of the value of the land fell to the community once more, but after that it was the individual homeowner who would benefit. What was left of the purpose of the ground lease now?
Gordian Knot
The municipality does not have a clear answer to this question, according to the independent consultancy agency Berenschot, which was commissioned by the city council to investigate the consumer protection under the ground lease system. Their judgment was harsh. They described the Amsterdam ground lease conditions as a Gordian knot, which no one was actually satisfied with.
One of the problems they identified is that it is unclear what the municipality does with the ground lease income. The cash flows are insufficiently visible in the budget, because the income (226.4 million euros in 2020) is added to the general resources. The income from ground lease therefore has no clear relationship with the expenditure on public facilities. That undermines public support for the system.
The municipality had also set as a condition for the system change that they should not suffer financially in the short term. Combined with the complex calculations of the ground rent, that gives way to the impression that the municipality only uses the ground lease as a cash cow and additional source of income.
Not the How, But the Why
The researchers note that the original goals of the ground lease system, as defined more than 125 years ago, have never been adapted to current social and political developments. There are now better ways to regulate spatial planning and there are laws that prevent speculation. As a result, those goals have lost their urgency, while no new goals have been formulated. The most important goal that still stood, to allow the increase in the value of land to accrue to the community, is no longer (fully) realized due to the latest system change. This makes the question of why the ground lease system exists more urgent than ever.
And it is precisely this question which has been asked too little in recent decades, while the ground lease system has been continuously adapted in order to improve and refine it. All these adjustments had been about the how, never about the why. And although the researchers recognize that most of these changes can be justified independently of each other, the system as a whole has become far too complicated as a result. Now, it is impossible for neither the inhabitants of the city nor their political representatives to oversee what ground lease should contribute to and whether that goal is being met. Where the choice for the perpetual system should have secured the future of ground lease, its existence can now be questioned more than ever.
Part 3: Does the municipal ground lease still have a future?
