Leasehold (Rmait) vs. Private Ownership: A Complete Legal and Economic Comparison Guide

What are Leasehold (Rmait) and Long-Term Leasehold?

Leasehold (Rmait — Israeli residential land) is a unique legal and economic system in Israel that allows families to purchase ownership of a building or apartment while leasing the land on which it stands for an extended period — typically 49, 98, or 125 years. Unlike full private ownership, in a long-term leasehold, the apartment holder does not own the land but rather holds a right of use and enjoyment for a limited period. This right is called a "lease" and has deep legal and economic significance, affecting the property price, financing ability, mortgage interest rates, and more.

Full private ownership, by contrast, means that the property — both the apartment and the land — belong entirely to the owner. There is no time limit, no annual ground rent, and no need for the landowner's consent for transfer or improvements.

Why Was the Leasehold System Created in Israel?

The Leasehold system was established in the 1950s and 1960s as a means to enable the broader population to purchase apartments at a time when land in Israel was under public or collective ownership. Landowners (mostly the Jewish National Fund or public bodies) preferred to retain land ownership while leasing it to families. This created a system of "building ownership" and "land leasehold." Although circumstances have changed over the years, and many leasehold apartments have been converted to full private ownership (lease extension), thousands of leasehold apartments still exist in Israel.

Key Differences Between Leasehold and Private Ownership

The differences between the two systems are profound and pervasive in every aspect of property ownership. Here are the main differences:

• Land Ownership: In leasehold, you own the apartment/building but not the land. In private ownership, you own everything.
• Lease Term: Leasehold is limited in time (49, 98, or 125 years). Private ownership is not limited.
• Annual Ground Rent: In a lease, annual rent is paid to the landowner. In private ownership, there is no such rent.
• Lease Extension (Redemption): As a lease approaches expiration, the property value drops significantly. In private ownership, value is more stable.
• Financing and Mortgages: Banks and financing bodies prefer to lend on privately owned properties. Short leases are negatively affected by the ability to obtain financing.
• Transfer and Inheritance: Private ownership is simpler in transfer and inheritance. Leasehold requires additional checks and consents.

Cost Comparison: Leasehold vs. Private Ownership

One of the most significant differences between the two systems is the annual and total expenses associated with ownership. In long-term leasehold, there are costs that do not exist in private ownership, and vice versa. Here is a detailed comparison:

Annual Costs in Long-Term Leasehold (Rmait)

• Ground Rent: The landowner charges annual rent to the leaseholder. The rent varies depending on lease terms but typically increases according to index adjustment or a fixed rate. These payments can be substantial and affect the monthly budget.
• Property Tax: As in private ownership, annual property tax must be paid. However, in very short leases (less than 20 years), there may be a discount or change in calculation.
• Building Insurance: Required as in private ownership.
• Maintenance and Upkeep Costs: Similar to private ownership.
• Lease Extension Costs (if converting to full ownership): A significant one-time cost that covers the remaining land value and the amortized lease.

Costs in Full Private Ownership

• No Ground Rent: This is the greatest advantage. You pay no annual rent on the land.
• Property Tax: As in leasehold, but typically at a fixed and stable rate.
• Building Insurance: Required as in leasehold.
• Maintenance and Upkeep Costs: Similar to leasehold.
• No Extension Costs: You do not need to invest additional money to convert the right.

Impact on Property Price

The property price in the real estate market directly reflects the differences in costs. A leasehold apartment with 40 years of lease remaining will be significantly cheaper than a privately owned apartment in the same neighborhood. The price difference can reach 20%-40% or even more, depending on the remaining years of the lease. This reflects the buyer's risk, as when a lease approaches expiration, the property becomes less valuable and more difficult to transfer or finance.

Capitalization of Leasehold: The Transition from Leashold to Private Ownership

Capitalization of leasehold is a legal and economic process in which a leaseholder of a leasehold property purchases the land rights from the landowner (usually a public body such as the Jewish National Fund), thereby converting their right into full private ownership. This is one of the most important things to understand when discussing leasehold properties.

What Exactly is Capitalization of Leasehold?

Capitalization of leasehold means that the owners of the apartment pay a one-time sum to the landowner, and in return, they receive full rights to the land. After capitalization, the property becomes full private ownership — there are no more annual lease payments, no limited lease period, and the property becomes something that can be sold, mortgaged, and inherited like any other asset.

Cost of Capitalization of Leasehold

The cost of capitalization of leasehold varies depending on several factors: the size of the property, its location, the remaining lease years, the current economic index, and the landowner's policy. Generally, the cost reflects the current value of the land rights for the remaining lease period. In other words, if 30 years remain on the lease, the capitalization cost will be an appraisal of what the land is worth for that period. In a large city like Tel Aviv or Jerusalem, the cost of capitalization can be significant — sometimes hundreds of thousands of shekels or more. In a smaller city or for a lower-value property, the amount will be lower.

The Legal Process of Capitalization

Capitalization of leasehold requires agreement between the parties and legal validity. Typically, this process begins with an approach to the landowner requesting capitalization. The landowner will appraise the value of the land and offer a price. The parties can then negotiate. When an agreement is reached, a legal transaction is executed that includes payment and signing of documents. Subsequently, the Tabu (registration with the government Land Registry) must be updated to reflect the change in ownership. This process can take several months, depending on the landowner's responsiveness and the workload at the Land Registry.

Advantages of Capitalization of Leasehold

• Full Ownership: After capitalization, you are the full owner of the property and land.
• Legal Security: There is no risk that the lease will end or be renewed on worse terms.
• Stable Property Value: Full private ownership preserves better value over time.
• Easier to Sell or Mortgage: Banks prefer to lend on full ownership, and potential buyers will be more interested.
• No Annual Lease Payments: Significant savings in the long term.

Challenges and Risks of Capitalization

• High Cost: The initial investment can be substantial, and not all owners may be able to afford it.
• Capital Gains Tax: The landowner may incur capital gains tax liability on the profit from capitalization. This can affect the final amount.
• Agreement from Both Parties: If the landowner is not interested in capitalization, or prefers not to do so, you cannot force them. However, the law contains provisions that sometimes allow forced capitalization under certain circumstances.
• Update Registration: You must ensure that the Tabu is updated to reflect the change in ownership.

The Impact of Leasehold on Financing and Mortgage Loans

One of the most significant impacts of choosing between leasehold and private ownership is the effect on your ability to obtain financing. Banks and financing entities consider the type of ownership as part of their risk assessment.

Financing Issues with Short Leases

When a lease is nearing expiration (typically fewer than 20 years remaining), banks begin to resist lending. The reason is that the property's value decreases as the lease approaches expiration, making the property a less secure collateral. Additionally, if the lease expires, the property will become nearly worthless (legally, the leaseholder will lose the right to use it). Therefore, a bank may demand a higher interest rate, or even refuse to lend at all.

Impact on Interest Rates

Even when a bank agrees to lend on a property with a leasehold, it may offer a higher interest rate than on full private ownership. This reflects the higher risk. If you are choosing between two similar apartments — one leasehold and one in full private ownership — the interest rate you pay on the leasehold may be 0.5%-1% higher or more. On a loan of one million shekels, this could be a difference of tens of thousands of shekels over the life of the loan.

Full Private Ownership: The Right to Borrow Easily

Full private ownership makes the property a more attractive mortgage. Banks prefer to lend on full ownership because the property retains its value over time, and there is no risk of the right "expiring." This means you will be able to obtain financing on better terms, at a lower interest rate, and on generally easier conditions.

Tenant Rights and Key Information You Should Know

Whether you own a Tama rental apartment or hold private ownership, you have rights and obligations as a tenant and property owner. Some are identical, while others differ depending on the type of ownership.

Tenant Rights Under Long-Term Leasehold

• Right to Use: Throughout the lease term, you have full rights to use the apartment — to reside in it, to rent it to others (with the landowner's consent in certain cases), and to pass it on by inheritance.
• Right to Improve the Property: You may make improvements to the apartment, provided you properly maintain the property.
• Protection from Eviction: The landowner cannot evict you from the apartment before the lease term ends (under normal circumstances). This is important legal protection.
• Right to Capitalize: Under certain circumstances, you have the legal right to capitalize the lease, meaning you can purchase the land rights.

Tenant Obligations Under Leasehold

• Payment of Ground Rent: A legal obligation to pay annual ground lease fees, updated annually.
• Property Maintenance: An obligation to maintain the apartment in good condition and not cause damage.
• Relations with Landowner: At times, the landowner may impose additional requirements in the lease agreement (for example, restrictions on certain uses).

Rights Under Full Private Ownership

• Complete Ownership: You own both the apartment and the land. There are no time limitations.
• Freedom of Use: You may use the property as you wish (within building codes and applicable laws).
• No Ground Rent Payments: You do not pay annual ground lease fees to any entity.
• More Stable Property Value: The property value increases or remains more stable over time.

Obligations Under Private Ownership

• Maintenance: You are responsible for maintaining the property.
• Property Tax and Insurance: Standard obligations as with leasehold ownership.
• Compliance with Laws: You must comply with building codes, planning and construction laws, and local regulations.

Comparison Table: Leasehold (RAMI) vs. Full Private Ownership

The above table presents a general comparison. Each case is unique, and the actual effects depend on specific property data, location, lease term, and market conditions.