Property on Leased Land
Properties on a ground lease are usually significantly more affordable than comparable freehold real estate. Yet, the numerous formal details are often not easy to interpret at first glance.
A real-world example illustrates this: A thoroughly renovated condominium near Lake Zurich with 80 square meters of living space is offered for 860,000 Swiss francs plus a garage parking space. Comparing this to the local average price for similar properties, the benchmark in the respective municipality is often around 1.5 million Swiss francs. The mystery behind this striking price difference is solved by looking at the property description: Purchase under a ground lease (Baurecht). But what exactly does this model mean for the buyer?
The Principle of the Ground Lease
According to the Swiss Civil Code (ZGB), a ground lease exists when a landowner grants a third party the right to construct or maintain a building on the surface of the land. In short: You become the owner of the building or condominium, while the land remains the property of the ground lessor. In return, the leaseholder pays a recurring, contractually agreed ground rent (Baurechtszins).
The public sector (cantons and municipalities) as well as institutional investors or foundations frequently use this instrument. Instead of selling their land to private investors, they retain long-term control and ultimate ownership of the real estate via the ground lease while simultaneously creating residential space. The most prominent example in Zurich's recent history is the Corbusier Pavilion in Seefeld, which impressively demonstrated that the contractual framework—particularly regarding the eventual reversion (Heimfall)—requires legal precision.
The statutory maximum term for an independent and permanent ground lease is 100 years.
Ground Rent and Lease Terms
The ground rent represents the financial compensation for using the land. There are no rigid statutory requirements for setting the rent amount. In practice, however, the adjustment of the ground rent is usually linked to the Swiss Consumer Price Index (CPI / LIK) and periodically adjusted to current land values.
When a contract expires—such as in our opening example in the year 2080 following a classic 99-year term—both parties are free to extend the ground lease by up to an additional 100 years. If no extension is agreed upon, the so-called reversion occurs: The building transfers by law into the ownership of the landowner. The leaseholder is typically compensated through a contractually agreed reversion payment reflecting the value of the structure.
Overview of Advantages and Disadvantages
Advantages for the buyer: The greatest benefit lies in the sharply reduced upfront investment costs, as the capital-intensive land purchase is eliminated. Given the stringent affordability guidelines of Swiss banks, this opens up an attractive path to owning a home in prime locations with significantly less equity.
Financing and amortization requirements: Banks routinely finance leasehold properties; however, due to the limited term, they generally require full amortization of the mortgage by the time the ground lease contract expires. Assuming a loan amount of 430,000 Swiss francs over the remaining 57 years, this corresponds to an annual amortization of approximately 7,500 Swiss francs. Combined with a low interest rate for a long-term fixed-rate mortgage, the ground rent, and ancillary expenses, this results in predictable and attractive monthly housing costs.
Disadvantage: The owner does not hold absolute ownership over the land and remains bound by the provisions of the ground lease contract. Without a contractually guaranteed option to renew, reselling the property toward the end of the term can become more challenging.
Conclusion
Due to its complexity, the topic of ground leases often triggers unfounded skepticism in the market. Yet, with a thorough contract review, it offers outstanding financial opportunities. Having successfully brokered leasehold properties in the past, we are well versed in the potential pitfalls and regulatory specifics.Are you interested in a leasehold property or would you like to have your property's existing ground lease contract professionally analyzed? We are at your side with our expertise.