Investment sale price of office building can affect WOZ value

Yes, the investment sale price of a leased office building can influence the WOZ value. By law, the WOZ value is determined as if the property were sold unleased and free of encumbrances (the so-called WOZ fictions). Nevertheless, the Amsterdam Court of Appeal ruled (judgment of March 1, 2018) that the price from an investment transaction may indeed be taken into account as substantiation, provided that price is first adjusted for the effect of the existing lease. Consequently, for a buyer-investor, a higher purchase price can have tax implications in the annual tax assessments based on the WOZ value.

What is the WOZ value and how is it determined?

The Valuation of Immovable Property Act (WOZ Act) aims to value real estate objectively. The underlying principle is that two identical office buildings should, in principle, be assigned the same WOZ value, regardless of which building happens to have a better or higher-paying tenant. The municipality determines the WOZ value annually, using a valuation date that falls on January 1 of the year preceding the tax year.

For standard commercial properties such as offices and shops, the rental value capitalization method used. In this method, the annual market rental value of the property is multiplied by a capitalization factor. The result is the estimated market value, also known as the WOZ value.

In short: WOZ value = market rental value on the reference date x capitalization factor. The actual (sometimes lower) rent paid by your current tenant does not, in principle, count towards the WOZ.

The WOZ fictions: why “unrented status” counts

When determining the WOZ value, several legal assumptions apply, the so-called objectification fictions. The most important are that the property is valued as if it:

• free and unencumbered (the transfer fiction);
• is transferred in an unrented state , so that the actual tenant does not count;
• in full ownership and put into immediate use (the fiction of acquisition).

Due to these fictions, the actual rental price is not taken as the starting point, but rather the current market rental value on the reference date. This is precisely where the tension lies with an investment sale, because in such a transaction, the property is sold *with* existing rental contracts.

Why an investment sale differs from a “regular” sale

In practice, significant differences in rental prices are evident between properties, and this is entirely due to market developments. New tenants generally pay the current, higher rental prices, while existing tenants sometimes still fall under an older, lower rate, even if an indexation clause is included in the contract.

Anyone buying an office building therefore usually does so as part of an investment sale: the existing lease agreements and rental prices simply continue. This has two sides:

• Disadvantage: the buyer-investor is tied to the current rental prices, which are sometimes below market rate.
• Advantage: the buyer does not have to look for a tenant and thereby saves on vacancy, real estate agent fees, and start-up losses.

Because an investment sale takes place in a rented state, and the WOZ valuation is based on an unrented state, blindly adopting the investment sale price as the WOZ value is not a good idea. Nevertheless, such a price has proven in case law to be a usable starting point.

The case at the Amsterdam Court of Appeal

The case that brought this debate to a head revolved around a large office building in the Amsterdam Zuidas, one of the most sought-after business districts in the Netherlands. The municipality had determined the WOZ value, but a few years after completion, when it was already largely leased, the building was purchased by an investor for an amount significantly above that established WOZ value. A dispute arose over that difference, which was eventually brought before the court.

The court of first instance appointed an expert. He concluded that investment sales often provide the best indication of the value of an office building, precisely because such properties are usually sold in a rented state. At the same time, the expert emphasized that the calculation must be adjusted for the value attached to that rented state. Both the District Court and the Amsterdam Court of Appeal followed this line.

How the calculation is corrected

The expert proposed first applying the rental value capitalization method: multiplying the annual rent by a capitalization factor. This factor is derived from the ratio between the selling price and the annual rent. Subsequently, this factor must be adjusted due to the WOZ fictions. This takes into account, among other things:

• the (fictitious) initial vacancy;
• market and entrepreneurial risk;
• an entrepreneurial reward;
• the operating costs;
• Ongoing marketing costs.

The precise calculation is technical and we will omit it here. The core issue is that there can be a significant difference between the adjusted capitalization factor and the “raw” factor from the investment sale. It boils down to the fact that the selling price is partially factored into the WOZ assessment, but only after correction for the rental effect.

What does this mean for you as an entrepreneur or investor?

For those buying or owning an office building, the WOZ value can have direct financial consequences. The WOZ value is the basis for, among other things, property tax (OZB) and can impact other levies. Consequently, a higher purchase price can lead to higher annual costs via the WOZ.

A few practical points to consider:

• Check the WOZ assessment annually. If the valuation deviates significantly from what you expect, you can lodge an objection with the municipality within the statutory period.
• Have the valuation legally and fiscally reviewed if you have just purchased a property in a rented state and the municipality is relying heavily on your purchase price.
• Carefully document your rental agreements. The rent and any indexation are not only relevant to your return but can also factor into the valuation. Furthermore, sound agreements under tenancy law prevent disputes with your tenant.

Step-by-step plan: objecting to an excessively high WOZ value

Do you find the WOZ value of your office building too high? Then proceed in a structured manner:

1. Request the valuation report. The municipality must substantiate how it arrived at the value, including the rental value used and the capitalization factor.
2. Check the assumptions. Is the market rent used correct? Has the capitalization factor been adjusted for the WOZ fictions if the municipality relies on an investment sale?
3. Gather counter-evidence. Consider comparable sales or rental figures for similar properties in the area.
4. File an objection in a timely manner. Adhere to the statutory objection period stated on your decision; if you are late, your objection will in principle lapse.
5. Engage assistance if necessary. For substantial interests, legal or tax support is often worthwhile.

Frequently asked questions about WOZ value and selling price of an office building

Does the purchase price always determine the WOZ value of my office building?

No. The WOZ value is legally determined as if the property were sold unrented and free of encumbrances. The purchase price from an investment sale may be included as substantiation, but must first be adjusted for the effect of the existing rental. According to case law, adopting the price one-to-one is incorrect.

What is an investment sale in real estate?

An investment sale is the sale of a property in a rented state, where the existing lease agreements simply transfer to the buyer. The buyer-investor takes over the property, including the tenant(s) and rental income, and therefore does not need to look for a new tenant.

What is the rental value capitalization method?

With this method, the WOZ value of a marketable commercial property is calculated by multiplying the annual market rental value by a capitalization factor. The factor reflects, among other things, the return and risks associated with this type of real estate.

What is the valuation date for the WOZ?

The reference date is the moment at which the WOZ value is determined. This falls on January 1 of the year preceding the tax year. The value of your office property is therefore assessed based on market conditions at that reference moment, not on the current day on which you receive the assessment notice.

Can I object to an excessively high WOZ value?

Yes. You can lodge an objection with the municipality against the WOZ assessment within the statutory period. It is worthwhile to carefully review (or have reviewed) the substantiation of the valuation, especially if the municipality bases its assessment on a recent investment sale without correctly applying the WOZ fictions.

Does a higher WOZ value affect my tax assessment?

Yes, that is possible. The WOZ value forms the basis for property tax and can also affect other levies. In practice, a higher valuation often means higher annual costs, which underscores the importance of an accurate valuation.

Conclusion and assistance with your real estate contracts

The case discussed at the Amsterdam Court of Appeal demonstrates that the selling price of a leased office building can indeed influence the final WOZ value, provided that price is first adjusted for its leased status. This can have noticeable financial consequences for tax purposes. Therefore, discuss your situation with a tax or legal specialist and bear in mind that a higher purchase price can have tax implications.

Are you investing in real estate or leasing commercial space? Then a watertight contract is half the battle. MKB Juristen drafts the necessary business lease agreements for you and advises on your legal position. Do you have questions about your contracts or are you facing a dispute? View our options for legal assistance or schedule a no-obligation intake meeting. We would be happy to explain what we can do for you.