Because the Italian property market has been stationary for some time now, owners of Italian properties sometimes look for alternative ways of releasing some equity from their properties without actually selling them. The pros of these options tend to be that apart from getting some liquidity, the owner can continue to enjoy his Italian property. The cons are usually a loss of freedom to use and dispose of one`s property and the costs and interests payable on the operation.
The writer is a lawyer and not a financial adviser – these notes are not intended to give financial advice but simply to provide general information, an outline of the various available options under Italian law.
There are two main options in Italy: either to split the legal ownership of the Italian property in two and to sell one part, or basically applying for a particular kind of loan secured by a mortgage.
The first option involves the splitting of the legal title to the Italian property into two parts. A part of legal title (present time) remains with the current owner, who will continue to use and enjoy his property for the rest of his life or for a stated number of years and is called “Usufrutto“. A second part, called “Nuda proprieta” (bare ownership) relates to the future ownership of the same property and can be sold to someone else. Funds are generated at the present time, by this sale of the future ownership of the same Italian property called “Nuda proprieta`”(Bare ownership). Basically the owner sells today the future ownership of his property, thus continuing to enjoy it for some time and raising funds from the sale proceeds.
A variation of this procedure is created when the original owner sells the whole of his property to third parties, thus immediately obtaining funds / sale proceeds, subject to his right of abode / habitation in the same property. The owner becomes a sort of tenant who pays no rent. This variation is called “Abitazione“.
The second option is really a loan secured by a mortgage. Funds are paid today by a bank to the current owner. Upon his death the bank will claim the capital sum advanced, interest and costs. This particular loan is called “Prestito Vitalizio Ipotecario” in Italy.
Here follow some further details:
Usufrutto – This is an established property right fairly frequent in Italy, regulated by the Italian Civil Code. The owner of Italian real estate can sell the bare ownership (Nuda proprieta`) of his property, while retaining the Usufrutto for the rest of his life, or for a stated number of years.
The original owner who retained the Usufrutto (called: Usufruttuario) can continue to use and enjoy his Italian property within the limits of its current, normal use. He can let it but he can no longer sell or dispose of it. The bare owner (Nudo proprietario) on the other hand acquires a potential future, full property right, which will automatically realise upon the death of the Usufruttuario or upon the lapse of the agreed term of the Usufrutto.
Under Italian law a Nudo proprietario (bare owner) automatically becomes a full owner of the property in his own right upon the death of the Usufruttuario or upon the lapse of the agreed term of the Usufrutto.
A Usufruttuario cannot make any additions nor innovations that may change the normal economic use / nature of the subject matter real estate. He must pay Italian council tax and other annual taxes and the day to day, normal maintenance expenses. A Nudo proprietario, on the other hand only pays for any extraordinary expenses or charges, that may be required to maintain the real estate. The Civil Code provides detailed regulation of the rights and duties of both parties.
According to the Rapporto Immobiliare 2018 (The “2018 Property report”) of the Italian Revenue (Agenzia delle Entrate) there were 24,021 sales of Nuda proprieta`, by Italian property owners who retained the Usufrutto in 2017. There has been a slight ( + 1.3% ) increase of these property transactions when compared with the previous year (2016).
How is the value of the Nuda Proprieta (which is being sold), calculated ?
The Italian Revenue periodically issues statutory information on how to calculate the value of Nuda Proprieta. The value is calculated by deducting from the current value of the relevant property the value of the Usufrutto. The starting point for this, is the multiplication of the current market value of the property by the current statutory interest rate (Interesse legale, which is currently 0.3%), this value is then, in turn multiplied by statistical coefficients, which reflect the age of the Usufruttuario. The older the Usufruttuario, the smaller is the value of the Usufrutto and the highest is the value of the Nuda Proprieta` being sold. These are only tax calculations, however they give a fairly good idea of the market value that can be realised on a sale of the Nuda Proprieta`.
Abitazione – This is also an established right in Italian real estate, regulated by the Civil Code. The property owner can sell his Italian property and retain the Diritto di abitazione (Right of abode) in it.
This right is very similar to Usufrutto, however it is more restrictive. The person having right of abode in a property can only use it himself or with his family. He cannot let it, nor allow others to use it. Normally if the person entitled to Abitazione no longer requires such right, he can renounce it upon payment of compensation, payable to the owner of the real estate.
Prestito Vitalizio Ipotecario – This is a new concept, at least in Italy. It is basically a reverse mortgage (Prestito a contrario) introduced by legislation in Italy in 2015.
A mature Italian residential property owner (over 60) can apply to a bank for a loan secured with a mortgage on his property. This will only be possible for residential property that is not already subject to a mortgage or a charge. The borrower can freely continue to use his property and no periodical payments are required during his lifetime. However, upon the borrower`s death the bank will claim the amount originally advanced, costs, charges and interest accrued.
There are some strings attached. Whereas the borrower can continue to use and enjoy his property, he cannot dispose of it, let it, grant third parties rights over the property, mortgage the property or fail to manage and maintain it correctly. Any action likely to substantially affect the value of the property subject to Prestito Vitalizio Ipotecario will trigger the immediate termination of the arrangement. The loan may be immediately revoked, and must be paid back with interest accrued and charges. It is therefore essential to take careful note of all restrictions as to the use and enjoyment of the property before entering into any agreement, in order to avoid unexpected issues at a later stage. Reference must always be made to the loan agreement / the contract actually signed by the borrower.
Normally, upon the death of the borrower, the property is sold and the bank is paid out of the proceeds. Any balance of the sale price left over, is paid to the beneficiaries of the borrower`s estate. The beneficiaries usually have the option of refunding the bank within 12 months from the date of death of the borrower, thus preventing a sale of the property. Reference for the details of the arrangement must always be made to the actual contract signed.
Where the property subject to Prestito Vitalizio Ipotecario cannot be sold within 12 months from the date when it was placed on the market, the asking price can be reduced annually by the bank for up to 15% of its value, until the property is actually sold and the loan with interest and charges, repaid.
Clearly, the amount actually offered and paid out by the bank is related to the age of the borrower and to the market value of the property. Where this form of finance is offered, the actual amount tends to range between 15% (over 60) and 50% where the borrower is 80 or over.
Very few Italian banks and financial institutions offer Prestito Vitalizio Ipotecario. Here follows a list of Italian banks and of their financial products for your information (this is not intended to be a recommendation nor a reference – it is only general information provided without accepting any responsibility):
Banca Popolare di Sondrio : please refer to “Prestito Ipotecario Vitalizio”
Intesa SanPaolo: please refer to “Per Te”
Monte dei Paschi di Siena: please refer to “Prestisenior”
Unicredit : please refer to “Valore casa”
A few issues have already been raised to Prestito Vitalizio Ipotecario:
- compounding of yearly interest accrued. Compounding of interest is usually not allowed in Italy, however Prestito Vitalizio Ipotecario is the notable exception. As a result, interest soon grows to substantial amounts.
- Restrictions to the use and enjoyment of the property, that cannot be let or changed / restructured in any way. It must always be insured and properly maintained – this can cause substantial expenses for extraordinary maintenance, over the years.
- Comparatively short time (12 months from the death of the borrower) allowed to the beneficiaries to find the finance to pay up the debt outstanding, in order to prevent a sale of the property.
- Only a few banks offer this form of finance in Italy, and sometimes, not even all branches of the same bank.
- Frequently banks apply additional restrictions, which make the whole proposition unacceptable / expensive.
Thus, great care must be taken when considering Prestito Vitalizio Ipotecario, in all its forms.
This article is not intended to provide financial advice. It may be advisable to seek the advice of a specialised financial adviser and of a lawyer, because the contractual documentation is frequently complex and difficult to understand.
Anyone interested in this form of finance, should carefully read the small print and consider all available options … as the saying goes in Italy, all that glitters is not gold (“Non e` sempre oro quel che luccica “).
Dr Claudio Del Giudice – Copyrights reserved – 15.12.2018