Property prices are rising steadily throughout Germany. Experts agree that this trend will also come to an end, but it is difficult to predict when this will be the case. If you still want to enjoy the benefits of owning your own property, you will either have to be patient for the time being or come up with another way to finance your business project.
The term “real estate leasing” is being used more and more frequently – but is this also an option for you? Most people are familiar with leasing from the motor vehicle market, but the term is less common in relation to real estate – especially among private individuals.
For this reason, we have taken a closer look at the topic, clarified the most important questions and provided you with information on whether real estate leasing is worthwhile for you – or not.
What exactly is real estate leasing?
A generally valid definition of leasing can be formulated as follows:
While you pay a fixed monthly leasing rate to the lessor, similar to renting, you have the option to buy the asset at the end of the contractual term, provided you have been granted this option in the contract. Although the lessor remains the owner of the asset for the entire period, the lessee has unrestricted use of the asset.
The difference between renting and leasing is therefore that the rights, risks and obligations that a tenant normally transfers to the landlord must be borne by the tenant. However, the property can be used as if it were owned for the specified period and is not subject to any restrictions in this respect. In contrast to the tenant, the lessee usually has the option to purchase the property at the end of the contractually agreed period.
Real estate leasing occupies a special position here in accordance with §499 of the German Civil Code (BGB) – while leasing can – simply put – be compared to a usage fee, real estate leasing is considered a financial aid. Nevertheless, unless otherwise agreed in the contract, you must assume any repair and maintenance costs instead of the owner or take out appropriate insurance.
How does real estate leasing work?
Real estate leasing is a medium to long-term financing option, usually with a term of 20 to 30 years – the so-called basic lease term.
Important: You cannot terminate your leasing contract during the basic rental period.
When the contract expires, you as the lessee have a right of first refusal, which allows you to purchase the property and include the leasing installments already paid in the purchase price. However, the purchase option for real estate leasing is not mandatory. A distinction is made here between Full amortization leasing (Full-Pay-Out) from partial amortization leasing (Non-Pay-Out)
With the full amortization leasing the entire investment costs incurred are amortized for the lessor, i.e. included in the leasing rate during the basic rental period and thus paid off. This type of leasing is often used for properties that depreciate quickly and plays a subordinate role for real estate.
The partial amortization leasing On the other hand, a decree issued by the Federal Ministry of Finance in 1991 for immovable assets does not amortize the entire investment, but only part of it. In this case, the economic residual value at the end of the basic lease period is contractually fixed and corresponds to the calculated value of the asset at the end of this period. This offers the lessee the opportunity of an increase in value, as the leased property can be acquired at the straight-line residual book value plus the book value of the land.
What types of real estate leasing are there?
There are three types of real estate leasing: new construction leasing, sale and lease back and buy and lease.
For new construction leasing you as the lessee are given the opportunity to design a property according to your wishes. The lessor buys a plot of land and builds a property on it according to your wishes.
Sale and Lease Back means that real estate is sold to a lessor but leased back so that it can be used immediately by the lessee. The property is therefore available to the lessee for further use without interruption.
Under Buy and Lease is understood to mean the acquisition of an existing property by the lessor, which is then leased to you. This type of real estate leasing is similar to sale and lease back, except that the property is acquired by a third party and not the lessee itself.
Real estate leasing: the advantages and disadvantages at a glance
Advantages
Real estate leasing offers you tax advantages in particular – a property financed in the conventional way is normally paid off via VAT-free loan installments. With a sale and lease back, for example, a VAT liability arises which you can ultimately offset against VAT in your VAT return.
The lessor also benefits by being spared the VAT on income from leasing installments, which means that the VAT on the construction costs can be neutralized by the input tax deduction.
Furthermore, you can sit back and relax during the planning and completion of your property and transfer these tasks to the lessor. Compared to traditional financing, you do not need any equity, which is precisely why real estate leasing can be interesting for new companies.
Lessees can then use their capital elsewhere and at the same time deduct the leasing rate as a business expense for tax purposes. The monthly fixed costs are ideal for long-term planning.
Disadvantages
If the purchase option is exercised at the end of the leasing contract, the total costs are generally higher than with financing.
Property leasing can also become a financial burden, as you have no option to terminate the contract during the basic rental period – in the event that you are no longer able to pay the installment, the contract can be terminated without notice and compensation can be claimed.
And even if you as the lessee retain a say in real estate leasing, the lessor ultimately remains the owner of the property and must first grant you permission to sublet it, for example.
Finally, probably the most often overlooked disadvantage of real estate leasing is the complexity and associated uncertainties in accounting.
Real estate leasing: What do you need to look out for in your contract?
In order to take full advantage of the benefits of real estate leasing, the contractual structure is crucial, although it cannot be determined in a generalized way, as each customer and each property must first be considered individually. In most cases, however, you will negotiate a partial amortization contract with the lessor, in which you should ensure that your liquidity is not too heavily burdened to be able to service the contract over the entire basic term.
When determining the leasing rate, also pay attention to which items are included in the calculation, which may also include notary fees, for example.
You can agree special payments in the contract with the lessor, for example to reduce the leasing rate or shorten the contract term.
If necessary, consult your tax advisor so that you can fully weigh up the advantages over traditional financing and correctly assess any risks.
Conclusion: For whom is real estate financing through leasing worthwhile?
In order to finance a property through leasing, you should – as with conventional financing – be able to present a convincing business concept.
However, real estate leasing is rarely a sensible alternative for private individuals, as the costs of leasing can be higher than those of a real estate loan. The investment volume is at least two to three million euros and the ongoing costs for repairs and maintenance – for a property that you don’t even own yet – can also represent a not inconsiderable cost factor. For these reasons, the model is not widely used among private developers.
In a commercial context, however, the situation is quite different – real estate leasing should be considered especially for companies with limited liquidity, as it can be used to finance business premises that would otherwise be out of scope. In line with the principle of pay-as-you-earn, equity and liquidity are conserved.
