Leasehold vs. Ownership — Which Legal Choice is Better?

Introduction: Leasehold vs. Ownership — Two Different Ways to Hold a Property

When you are looking to purchase or hold a real estate property in Israel, you face a fundamental legal choice: whether to be the full owner of the property (ownership) or to hold it under a long-term lease? These two options differ substantially in costs, rights, obligations and real-world implications for your financial and legal circumstances.

Full ownership means that you are the ultimate owner of the property — both the land and the building — and your right to it is perpetual. A long-term lease, on the other hand, is a right to use a property for an extended period (often up to 99 years), but the land remains in the hands of another owner (usually the State or a public body). This difference is the most critical one, and it has profound implications for every aspect of property ownership.

At our firm, Mandelbaum, Gor, Witzman-Gor and Partners, we have guided real estate buyers and sellers in Ramat Gan and Petah Tikva for over 18 years. We have examined many cases of buyers who did not understand the critical differences between these two options until it was too late. This guide provides you with the legal knowledge you need to decide wisely.

What is Full Ownership of a Real Estate Property?

Full ownership (or free ownership) means that you are the ultimate owner of the property, including the land and everything built on it. Your right to the property is registered in the Land Registry (Tabu) in your name alone, and your right is complete proprietary ownership — that is, perpetual and without time limit.

Advantages of Full Ownership:

• Perpetual right to the property — You are the owner forever, and your right passes to your heirs after your death without any legal complications.
• Complete freedom of use — You can modify, renovate, add construction (subject to zoning and building regulations) without requiring the approval of any third party.
• No annual lease payments — You do not need to pay annual usage fees to any body (as would be the case with a long-term lease).
• Stable and increasing economic value — Usually, full ownership reflects higher economic value, mainly because the value of the land itself increases over time.
• Easier to obtain financing — Banks and financial institutions prefer loans on full ownership properties, as their risk is lower.

Disadvantages of Full Ownership:

• High purchase cost — Full ownership is typically more expensive than a long-term lease, mainly due to the value of the land.
• Full responsibility for maintenance — You are responsible for all repairs, renovations and property maintenance, including infrastructure and roof.
• High taxes and purchase fees — Full ownership involves the payment of property appreciation tax, purchase tax and higher registration fees.

What is a Leasehold and How Does It Work?

A leasehold is a legal right to use a property (usually land) for an extended period, typically 99 years (sometimes 49 or 125 years, depending on local laws). Ownership of the land remains with the lessor (often the state, municipality, or public foundation), and the lessee pays annual lease fees for the right to use the property.

In Israel, a leasehold is a particularly common legal mechanism for public properties, urban renewal projects (such as TAMA 38), and certain areas where the land is owned by the public or local authorities.

Advantages of a Leasehold:

• Lower purchase cost — A leasehold is typically significantly cheaper than full ownership, as you pay only for the right to use the property, not for the land itself.
• Lower acquisition fees and taxes — Purchase tax and registration fees for a leasehold are usually substantially lower than those for full ownership.
• Indexation to government costs — Lease fees are typically indexed to the Consumer Price Index (CPI) and do not increase arbitrarily.
• Convenient option for residents in renewal projects — In TAMA 38 and similar projects, a leasehold is often the only option available to new residents.

Disadvantages of a Leasehold:

• Annual lease fee payments — Each year, you must pay the landowner fees that can become substantial over time.
• Property value decreases over time — As the end of the lease period approaches, the property value decreases significantly, as your right to it becomes shorter.
• Difficulty obtaining financing — Banks typically offer lower loans on leasehold properties, especially when less than 40 years remain on the lease term.
• Need for consent for major investments — If you wish to undertake significant renovations or add construction, you may need approval from the landowner.
• Lease renewal is not guaranteed — When the lease period ends, you cannot guarantee that you will be able to renew it on favorable terms, or that it will be renewed at all.
• Inheritance is more complicated — When you transfer a leasehold to your heirs, the property value is already lower, and there may be legal complications in the transfer process.

Legal and Economic Comparison — Comprehensive Comparison Table

To understand the differences between long-term leasehold and full ownership clearly, here is a comparison table detailing all important parameters:

As can be seen from the table, each option has significant advantages and disadvantages. The choice between long-term leasehold and full ownership depends on your personal circumstances, your long-term plans, and your financial goals.

Lease Valuation — How Do You Calculate the True Value of a Leasehold?

One of the most important concepts when comparing a leasehold to full ownership is lease valuation. Lease valuation is a legal-economic process in which the true value of a leasehold right is calculated by deducting annual lease fees from the property price.

In Israel, particularly in the context of RMI (Land Registration Union), lease valuation is an important tool for asset appraisal. When a leaseholder wishes to sell their right in a property or transfer it, it is necessary to calculate the true value of the right while taking into account the cost of annual fees.

Basic lease valuation formula:

Lease value = Full ownership value − (Annual lease fees × Discount factor)

The factor varies depending on the interest rate, the number of remaining years in the lease, and other economic factors. Generally, the more years remaining in the lease, the higher the lease value. When fewer than 40 years remain, the value decreases significantly.

Practical example: Suppose a property in full ownership is worth 2 million shekels. The same property in leasehold (with 50 years remaining) and annual lease fees of 10,000 shekels may be worth approximately 1.2–1.4 million shekels only, depending on the discount rate used.

This also explains why banks grant lower loans on leasehold properties — the nominal value of the property decreases over time, and the bank's risk increases.

Important Legal Issues in Leasehold

When you are considering a leasehold, there are several legal issues you must understand in depth:

1. Lease Renewal at the End of the Term

One of the most important questions is: what happens when the lease term ends? In Israel, there is no automatic statutory right to renew a leasehold. Lease renewal depends on the goodwill of the landowners (usually the government or local authority). In some cases, particularly with public properties, you can apply for renewal, but this is not guaranteed. Some laws grant existing tenants preferential renewal rights, but the terms of renewal (including new lease fees) may be very different from the original terms.

2. RMI — Land Registration Union

In some urban renewal projects, particularly in Tama 38, a process called RMI (Land Registration Union) is used. RMI is a legal mechanism that allows leaseholders of apartments in a project to acquire full ownership of their construction (the apartment itself) while remaining tenants of the land. This gives residents slightly more legal and economic status than a regular lease, but the land remains in the ownership of the government or local authority.

3. Lease Fees — Ongoing Costs

Annual lease fees are not static. Typically, they are indexed to the price index (CPI), meaning they rise each year at the rate of inflation. Over time, these fees can become a significant cost. For example, lease fees that were 10,000 shekels in the first year may be 15,000 shekels after 10 years, taking into account indexation to the price index.

4. Mortgage Arrangements on Leasehold

If you wish to obtain a mortgage on a leasehold property, banks typically grant lower loans and lower LTV (Loan to Value) ratios. Also, when fewer than 40 years remain on the lease, most banks will withdraw the loan or reduce it significantly. This is because the value of the property decreases as the end of the lease approaches, and the bank's risk increases.

Why You Should Consult with an Attorney Before Choosing Between a Long-Term Lease and Full Ownership

Choosing between a long-term lease and full ownership is a significant legal and economic decision that can impact your financial life for decades. Each option involves complex legal issues, different risks, and long-term consequences that are not always clear to someone without legal experience.

Our attorneys at Mandelbaum, Gor, Witzman-Gor and Co. have assisted real estate buyers and sellers in Ramat Gan and Petah Tikva for over 18 years. Our experience enables us to understand the complexities of real estate transactions, long-term leases, RMI, TAMA 38, and urban renewal projects. We help our clients:

• Understand their rights and obligations in each legal option.
• Identify risks that may not be clear at the initial stage.
• Determine costs — not just the initial price, but also ongoing costs, taxes, and long-term implications.
• Choose the best path for your personal situation, long-term plans, and financial goals.
• Manage the process with confidence — from signing the purchase agreement to registration with the Land Registry.

Our first consultation meeting is at no cost. During the meeting, we can discuss your unique circumstances, answer all your questions, and provide you with clear guidance in plain Hebrew (not in complicated legal language). We believe that every client deserves to understand exactly what they are doing and why.