An Alternative To Buying A Property To Call Your Own.
Many of us expats who head over to the Philippines to settle down and live would love to own our own piece of paradise. Except for condominiums, we can’t own land, simple as that!
If you have an asawa you trust, then you can always buy the land in her name. For many, though, the reason they are in the PI is because a female of the species has taken them apart emotionally, financially and in virtually every other way possible. How then to trust again? For some it is getting too late in life to pay off another swag of debts from a divorce, start building the wealth again and see out the rest of ones days in comfort.
If you find you just can’t bring yourself to trust your loved one with the rest of your life’s savings, yet you still want more than a condo, what can you do?’ You can move to Panama where I believe you are able to buy land, or Sri Lanka or somewhere else. But if you wish to remain in the Philippines then you actually have a few decent options you can explore.
Without going into complicated corporate holdings and offshore set ups, the simplest way for a foreigner to own land here is to lease it.
Leasing confers all the rights of ownership, but for a set period. The maximum period currently allowed is fifty years, WITH A TWENTY FIVE YEAR OPTION TO EXTEND! Like who is going to be around in 75 years? If you are, lets be generous, 30 now, you will be 105 when the time comes to vacate the property!
That is the maximum period of lease, you can of course lease for much shorter periods. Too short a period, say 1 to 5 years and you may as well just rent the property. The difference between renting and leasing is one has you as a tenant and the other way a virtual owner for a set period of time. I would say the ideal lease period would be ten to fifteen years with a further ten to fifteen year extension.
Say Jim is 50 and he’s taken an early retirement from moving widgets in Wisconsin. If he takes out a 15/10 Lease, he will be 65 when it comes time to extend, and 75 when the lease runs out. At that time he invokes the clause that has him reimbursed for the capital improvements on the land (perhaps he built a dream house?) and he shuffles off to a condo closer to his heart specialist. Or maybe he negotiates a new lease.
If he died during the lease, Maycelle his asawa and some 25 years his junior, decides she doesn’t want to remain there all alone and heads back to her family in the province. Jim was smart enough to negotiate a lease that had money pumped in up front to cover the possibility of his bowing out early. Maycelle was covered if she wanted to remain on the property but she also had the option to vacate. Perhaps the improvements were left as payment for early termination, or maybe the lessor reimburses Jim’s widow a pro-rata amount for the house they built. It is up to the parties at the time of negotiating the lease to agree on these things.
This is the beauty of leasing. You can negotiate the terms to suit both parties. Let’s look at an example. Pete has a Lot up for lease. It is 3000sqm, quite a big piece of dirt. He offers it for lease but Jim doesn’t need all of it, so they agree on Jim leasing 1000sqm in the west corner. Lovely! If Pete was to sell his lot he could realise, say P200 per sqm (rural lot, nice and cheap!) The 1000sqm he is leasing to Jim is therefore worth P200,000 if he were to sell it. If he leases it at P1000 per month over 20 years, he will earn P240,000; P40,000 more than if he sold it.
Of course by the time he receives the final payment that P240,000 won’t be worth then what P200,000 is worth now, but at least he still has the land.
A better plan for Pete is to lease the 1000sqm to Jim this way. Jim pays P100,000 up front and has the first 12 months lease of the land free of further charges. This keeps his cash flowing for the building of the house he wants to live in. After the first 12 months he starts paying lease fees of P1000 per month for the next 14 years. At the end of the 15 years initial lease he has paid P100,000 in a lump initial payment and a total of P168,000 in monthly payments. Pete was able to use the lump sum to buy some other property he had his eye on and the monthly fees kept his fridge full of beer.
Jim now has the option to extend a further 10 years. If he does then he can either keep paying the P1000 a month lease fee (P120,000) or he pays nothing more and at the end of the lease vacates the land and leaves the house he built for Pete to take over, demolish or whatever. They had agreed on a basic standard of house when it was being built so Pete is happy with the improvements to the lot and Jim saves a lot of cash. By the end of the lease he is pretty close to spending his days dozing in a hammock oblivious to the world and unable to even spell Alzheimers.
Pete gets his money, plus a little extra and a house he can now live in or rent out and Jim and his asawa have spent 25 of the best years of their lives together, the last 10 absolutely rent free which allowed him to save a fair amount of his retirement income each month. Jim lived there happy in the knowledge that if he were to pass away, Maycelle was allowed to live on in the house for a further 2 years if she chose, rent free no matter where in the lease period they were when Jim died. How come? Because Pete and Jim agreed on everything when they negotiated the lease, wrote it in plain English and had it notarised by a Notary Public at the local courthouse. Simple and understood by all parties.
You can take advantage of the benefits of leasing over owning. Anytime you see a Lot for Sale, consider asking if the vendor would like to keep hold of their property and negotiate a lease? If you can offer close to the purchase price and then moderate monthly lease payments then there is every chance a vendor may prefer to lease you their land.
Leasing is a handy vehicle if you want to operate a resort. You lease the land as a foreigner, then sub-let it to a corporation put together to run the resort. You hold 40% of the corporation and make sure at least another 40% is held by a Filipino you trust, or the other four incorporators hold 15% each only. The corporation then operates the resort on the land it sub leases from you, using buildings you have built and therefore own. If any of the Filipino partners in the corporation running the resort play funny games, you as the lease holder can terminate the contract to operate the resort with the corporation. You would have it renewable year to year anyway to protect yourself. You recover your 40% invested in the corporation but you retain the buildings and the lease on the land. At the end of the lease period you are reimbursed for any improvements made to the land as provided by Philippine Law!
Leases can be a wonderful tool for a foreigner in the Philippines. The trick is to negotiate up front all the clauses you need. You can sub-let, so long as you include that in the original lease and the lessor agrees at that time You can write anything in and it is binding so long as it isn’t illegal per se and the lessor agrees of their own free will.
Naturally, a smart investor would have the lease properly checked by a trusted attorney, unless they trust the lessor totally or more than they trust their attorney! Keep everything written in plain English
and keep it simple and leasing should prove a viable alternative for those who really want their own block of dirt to do with as they wish, yet can’t legally own it. Make sure the lease is fair to both parties and there is little chance of any dispute, even if it reached court, favouring one party over another purely because the lease itself is too heavily weighted in the other party’s favour.
For more information on real estate get our Philippines Property Primer e-guide