What To Expect When Purchasing A Property
Once you have found a property you wish to purchase, avoid putting any serious money on the table until/unless you have commissioned a comprehensive land due diligence analysis by an independent third party professional. Never pay a deposit to a sales representative, make sure you go to their office and receive a company receipt for the deposit. Even for a small deposit payment to the notaris or agency handling the sale, an English escrow agreement is advised. If a villa or other structure is being, or is already, built on the property to be purchased you need to be sure there is an IMB. This is a residential building permit. If there is no building permit it can be demolished or a very complex process of trying to obtain one retrospectively me be required.
In the case of unimproved, bare land, the seller should produce a certificate from the kepala desa (village chief) confirming eligibility of the land for an IMB. Proof of ownership should be evidenced; whilst not common it has occurred where the actual person selling the property does not own it. Insist on seeing the original certificate of ownership, not a copy. A red flag goes up if the seller cannot produce the original. It most probably means the bank has it. Be certain of boundary line definitions. If the ownership certificate is more than 4 years old, chances are the survey sketch it contains is inaccurate. Reason is, the earlier way of measurement with a transit and strings is far less precise than today’s method utilizing GPS devices. Once the survey either re-defines or confirms the boundary lines, have BPN sink their concrete posts in all corners. Pay a bit extra for the kind with the re-bar feet radiating out from the bottom of the post which are impossible for anyone to pull up and move later, with concrete poured all around those feet underground. Ask the seller to produce evidence of property tax compliance. And make sure there are no set-backs or easements about which you need to know.
Like most of South East Asia, foreigners are not permitted to have outright title to property in Bali. Hak Milik (Freehold) is the type of title that can only be held by an Indonesian citizen. However, foreign individuals can legally acquire property interests in Indonesia and enjoy full beneficial rights. We still recommend to clients that they should secure the best legal advice when securing property in Bali. Below is some information regarding purchasing property in Bali, and Indonesia in general. There are 3 main ways for foreigners to own rights to property in Indonesia:
• Long Term Land Capital Development Investment
• Hak Pakai (Right of Use)
• Hak Guna Bangunan, another form of title can be held by an Indonesian P.T. (limited liability domestic or foreign investment Company) in which you can assert control and/or ownership.
• Method 1
Long Term Land Capital Development Investment.
The most common method utilized to “acquire” land in Bali has been to do so in the name of an Indonesian individual, i.e. to collaborate with an Indonesian joint venture partner, to purchase the property. There are always risks inherent with purchasing property with a partner, but this method has been used for many years and a clear process has now evolved with legal precedents being established. In some cases the Notary will be your partner. Once the appropriate property has been selected, and has passed land due diligence (LDD), the land is purchased from the seller in the partner’s name. It is always important to have a change in ownership from one individual to another, registered on the land title deed.
We strongly recommend that the original landowner does not become the foreigner’s nominated individual, as there is no clear transition of ownership. Where this has occurred previously, families have successfully contested that a transfer never took place. Simultaneously to acquiring the land, the Indonesian partner completes three additional agreements with the foreigner:
Basically, there are major agreements the local partner should sign with the foreigner:
1. A loan agreement which acknowledges that the foreigner has loaned to the partner the purchased price of the land. This is then registered on the land exactly the same as a first mortgage or caveat and it is noted on both the title at the Land Department (we called it “HAK AKTA TANGGUNGAN” – registration at the Land Dept. is 0.5% of the loan) and the copy held by the owner. There can be no dealing in the property until the loan agreement is cleared from the title documents (Or if you wish the property sold only by you, you can state that on the agreement). With the foreigner’s loan details registered on the title, it also prevents the reissuing of new title deeds without the foreigner’s consent.
2. An irrevocable power of attorney is signed giving the foreigner complete authority to sell, mortgage, lease, build on, improve or otherwise deal in the land. Without notice to the partner, the foreigner can sell or otherwise deal in the property. It is important to include the power of attorney to freely substitute the partner at any time.
3. A permanent right of use agreement is completed, giving the foreigner rights to use and occupy the land.
To cover the event of death of the partner, the Power of Attorney is drafted in such a manner so that the governing conditions are passed on to the foreigner’s heirs. In the event of subsequent dispute with the partner, the Power of Attorney also allows the foreigner to sell the property to another Indonesian.
• Method 2
Utilization of a Company.
In 1997 the Indonesian Government introduced the PMA program (Penanaman Modal Asing or Foreign Investment Company) to encourage overseas investment. A PMA allows foreigners to set up a company in Indonesia which can be owned 98% by the foreigner and which can in turn own property as part of its assets.To establish a PMA company you will be required to:
1. Submit a detailed business plan.
2. Make an appropriate cash deposit in an Indonesian based bank as working capital. (The amount of deposit is calculated from the total capital employed).
3. List the property investment as an asset of the company.
4. Pay the PMA start up fee, which at the time of this publication was between Rp. 50-100 million (approx Au$5,000 – $10,000).
The non-Indonesian investor can effectively control 100% of the shares in a PMA but should bear in mind that only the HGB form of title is available, which is valid for 20 years and a further extension of 20 years and then another 20 years (for a total of 80 years). Each 20 year renewal requires payment of a renewal tax in the approximate amount of US$2,000. Also bear in mind that all PMA entities are highly regulated and must submit semi-annual comprehensive reports on the status of the company including payment of taxes, all assets acquisitions and changes in ownership to BKPM, the central administering authority for PMA companies in Indonesia. The main area foreigners have fallen down with this method of ownership is they have not submitted any tax returns after forming the PMA Company. A local accountant can do this for you at a very modest cost to keep the PMA compliant and if you have received any rent for your property the tax liability will be minimal.
• Method 3
Leasehold title granted to a foreign individual domiciled in Indonesia.
A foreign individual domiciled in Indonesia and satisfying a number of conditions can enter into a 25 or 40 year lease renewable for a further 25 or 40 years. The Lessee can use the land and building (if any) for that certain period. This is common if the property will be used for business or commercial reasons, such as rental villas, warehouse, shops, etc. or in strategic locations where you find it difficult to buy land in the area. If the property you wish to purchase already has a certificate, the acquisition can be very quick. The first step in any property acquisition is to have both the buyer and seller sign an ‘akte jual beli’ or ‘binding sale agreement’. This document will lock in both parties whilst the certificates are being prepared. Land purchases in Indonesia must be witnessed by an officially appointed Notary and the standard contracts are written in the Indonesian language. However, translations can be arranged upon request. Prior to completion the Notarise will arrange for the Government property transfer tax to be paid. This tax is based on 10% of the taxable value of the land, which is assessed by the Land Registry Office and is usually considerably lower than the actual price being paid for the property. 5% is payable by the buyer and 5% is payable by the seller.
Under Indonesian law foreigners are not permitted to have freehold property title in Indonesia. This is a summary of the various alternatives.
1. Enter into a legal arrangement with an Indonesian partner, either an individual or PT company, whereby he/she/corporation holds title to the property. Simultaneously, executes, legalized by a notaris, various instruments securing your capital land development investment, such as a loan, mortgage, lease and power of attorney, as the the foreign investor.
2. Make a leasehold investment in the property, up to 25 years. Partnerships with Indonesian citizens are not required in leasehold transactions. This method does offer complete protection to the foreigner during the term of the lease, however, once the lease term has expired the agreement can be extended or the property reverts to the Owner.
3. Form a foreign investment company (PMA). Here the foreigner can own the company 98% and the title of the property will be in the company name. However, title in this case could only last for successive 20 year terms as PMA companies have to re-apply to the Indonesian Government to extend their license every 20 years.
Buying The Property
Simplified, buying land in Bali can be illustrated with the following steps:
1. Choose your Real Estate Agent
2. Engage a legal consultant (the more experienced the better)
3. Enter into an English pre-sale agreement with the agent/notaris, pursuant to which an nominal amount is deposited with the Agent or Notaris conditioning payment to seller upon landclearance by the Land Due Diligence.
4. Commission a comprehensive Land Due Diligence (LDD) analysis of the property.
5. Negotiate price on your chosen property.
6. Sign a letter of intent in English with seller agreeing to price, final completion date and payment schedule.
7. Completion and final payment at the Notaris office, preferably with your Legal Consultant in attendance.
8. If you are using a land capital development investment ensure that your partner, simultaneously signs the ‘power of attorney’, lease, loan agreement, mortgage documents, legalized by the Notaris.
9. Obtain copies of all original signed, legalized documents, including the akte jual beli, mortgage papers, etc. which are to be filed at BPN (land office), by the Notaris.
• Notary: 1% of the value of the transaction.
• Vendor Tax & Purchaser Tax: The vendor pays 2.5% and purchaser pays 5% tax on the value of land and property sales.
*Note this is not on the actual purchase price in most cases.
Other Documents If Necessary
• Mortgage Certificate Cost (If necessary):
• 0.5 % of total mortgage value for BPN land affairs office.
• Power of Attorney – granting exclusive rights to Mortgagor to release the Mortgage.
• Financial Loan Agreement.
• Power of Attorney for all rights to the land.
• Statement Letter – outlining proof of payment for the property.
• Statement of Indemnity (for partner).
• Power of Attorney for IMB – authority for Building Permit.
• Statement Letter – No second mortgage.
• Lease Agreement