General information on the German ground rent regime
Basic Concept:
Ground leases are the rent for the use of the land by a building’s owner. Ground rent contracts define the rights of the building’s owner to use the land for the duration of the contract. Buildings can thus be encumbered with mortgages, be divided, torn down and redeveloped, sold or inherited with the original ground rent contract remaining in place. Ground leases have been common for centuries in Germany.
Seniority:
As the relation between the owners of land and buildings is of key importance, ground rent contracts are entered in the first rank of the land register in Germany by legal definition.
Inflation Adjustments:
With commercial properties market practice is to link ground rents to Eurozone CPI and 100% annual inflation adjustment. For residential contracts, ground rents are linked to the German CPI and are 100% adjusted every three years. Ground rents are not linked to rent levels or sqm so that higher rent levels or redevelopments have a positive net effect for the building’s owner.
Term:
The typical duration of a ground lease contract is 198 years, (potentially also 99 years) with the ground lease contract either extended or the building being acquired by the owner of the ground.
Maintenance:
All costs associated with the building (CAPEX, OPEX etc.) are the obligation of the owner of the building.
Reversion Rights:
The owner of the land has to offer to the building’s owner to either renew the ground rent contract upon expiration or to buy back the building at a c. 25%-33% discount to market value.
