IV. Legal Issues

Dealing with the Issue of Ownership

The most frequently asked property acquisition question, and perhaps the one question that is least understood by most people, is "Can foreigner buyers own real estate?" The answer is No.

Under no circumstances can a foreigner hold freehold title to a parcel of land. In fact, Indonesian law is even more specific. No amount of manipulation with either civil contract or corporate law can give a foreigner ownership rights.

So How Do Most Foreign Investors Solve this Problem?

We all have seen or heard of numerous cases where foreigners live in Indonesia and claim to own land. How does that happen? The truth is the terms such as "to buy" and "to own" are used in the loosely defined, abstract connotation of the word, not in the legal sense. More accurate terms are "to invest", "to occupy", or "to rent" property.

The method you use to occupy land depends will upon your intended use and particular situation.

The Nominee Method for Investing in and Occupying Property

If you intend to buy property buy property as an investment and perhaps build a single residence, then using the nominee method is almost universally preferred. This is also the way you (and your partner) can buy a large parcel of land, make various improvements, and then sell off smaller parcels at a later date.

The precise procedures for establishing a nominee relationship are not universally agreed upon. At the most basic level, a foreigner is the financial partner who provides money to an Indonesian partner who will own the land 100% in his name. The Indonesian partner usually receives a 5-10% commission when the land sells and the partnership terminated.

Using an Indonesian nominee as a way to invest in property has never addressed by Indonesian law. A nominee agreement is created by a civil contract between two people, much as you might establish when you loan someone money for any purpose. Obviously, the use of a nominee relies heavily upon trust between an Indonesian citizen and foreign investor, so choose your partner carefully.

The courts have recognized the right of a foreigner to be compensated if the contract is breached, but the compensation cannot be in the form of land. Since use of the land is the issue of contention, finding a satisfactory solution can be difficult. Often, 3rd party ownership arrangements must be set up, where a promissory note is issued to the foreign investor. The foreign investor gives the note to a new nominee who in turn buys the land from the original owner at a pre-established price. A new Nominee Agreement is signed with the new nominee and the foreigner continues to use the property. Not an elegant solution, but accomplishes the purpose.

Over the years, lawyers have drawn up various agreements in an effort to cement the contractual relationship between the nominee and the foreign investor. More recently, the nominee arrangement has been created through series of increasingly complex agreements. In one case, the foreigner loans money to the citizen to buy land, where the loan is actually written in the form of a mortgage. Under such an arrangement, the citizen would normally be expected to make monthly payments to retire the mortgage. However, in a second agreement, the foreigner agrees to rent the property from the Indonesian citizen. Not coincidentally, the rent paid to the citizen exactly equals the mortgage amount. The result of this arrangement is that the rent payment and mortgage payment cancel out each other and no money changes hands. (see side column)

These complex agreements are intended to create a lingering debt obligation if the Indonesian nominee fails to perform according to expectations. The fundamental problem with such agreements is they tacitly give the foreigner beneficial ownership rights, something not allowed by law. Every document, including the irrevocable power of attorney, is subject to revocation if the intent is to transfer any land ownership rights away from the nominee. In fact the mere existence of these ancillary documents could complicate any future lawsuit. Lawyers call such agreement "raping the law".

A great deal of debate constantly takes place among lawyers regarding the best provisions to include in a parntership agreement. Complex nominee agreements must be approached with great caution. Potential property buyers should not be lulled into a false sense of security because they are signing nominee agreements whose intent is only to limit the rights of the Indonesian owner.

Foreign Direct Investment Company for Starting and Running a Business

If your intention is to start a business, build apartments, or some other advanced use, then you will need to form a corporation or a PT. For foreigners, Indonesian law has established a special type of corporation for Foreign Direct Investment company (FDI) known as a PT PMA, or simply PMA (Penanaman Modal Asing).

The PMA is not a way that a foreigner can buy and own freehold land for a residence. It is a way foreign investors can set up a company in Indonesia, without having to have Indonesian partners. The PMA can be 100% owned by the foreign investor. However, the moment the PMA wishes buy land, the company must bring in an Indonesian citizen to hold title.

The law governing a PMA does establish a formal method whereby a foreign company can acquire the rights to build on and use a piece of property. An Indonesian citizen must still hold ownership rights of the underlying property, but the PMA can acquire all rights to use and build upon the property. This right is formalized with the issuance of a second, subordinate title to the land, known as a Hak Guna Bangunan (HGB).

Unfortunately, the HGB title is effective for only a specified period of time, usually 25 years with an option to extend for another 45 years. In many ways, the PMA is simply leasing the land for 70 years, with one important difference. The HGB title is held as an asset and can be used as collateral for a bank loan.

Setting up a PMA takes approximately 3 to 4 months. Once its completed; the company can apply for work permits for the foreign directors, 3 permits in the first year of operation. The cost of setting up the PMA is between IDR 30 to 40 Million or equivalent of USD 4,500. A functioning PMA is required to file extensive financial and operational information to the government each year plus pay personal and corporate taxes.

Because of your status as a government permitted, your PMA company will always be under close government scrutiny and subject to future changes in the federal laws.

If you do not intend to run a business, then a PMA is not the preferred way to own property.

One Final Option

Any type of land use arrangement can be established with a civil contract with an Indonesian landowner, similar to a Nominee Agreement, which establishes a lease on the land. The advantage of this approach is you can tailor your contract to specific requirements, such as occupancy on a part-time basis or paying rent for the use of the land over the life of the contract. This way, a large lump sum of money is not required at the beginning of the contract.

You may choose to use a contract to establish a lease to rent the land for the purpose of building a business. If you are able to establish a successful business, then the land lease and the business can be transferred (i.e. sold) to another foreigner in the future. If the value of the business goes up, you can make a profit by selling the lease at a significantly higher price than the original cost to establish the lease.

For a more detailed explanation of the legal aspects of land ownership, two highly informative interviews were conducted with a woman named Rainy Hendriany who is both a Notary Public and lawyer in Bali. The interviews happened a year apart. The first Website reference is the first interview that lays down the fundamentals. The second reference is a follow-up and provides more details. I strongly suggest you read both and don't worry if you do not understand everything 100% until you are familiar with all the terminology.

Here the links: First Intervew
Second Interview.

I.Important Facts to Consider

A.Is ownership risky?

B.Lombok: A Different Culture

C.Living on Lombok

II.Summary Steps to Buying Land

A. Get familiar with Lombok

B. Choosing a Partner("Nominee")

C. Find a parcel of Land

D. When You Find a Parcel

E. Negotiate the Price

F. Comprehensive Due Diligence.

G. Initiate Title Transfer.

H. Issuance Land Certificate

III. Visit All Lombok First

A. From Tourist to Resident

B. Explore the Hidden Lombok

C. Starting a Checklist

IV. Legal Issues

A. The Issue of Ownership

B. Foreigners Solve the Problem

C. The Nominee Method

D. Foreign Direct Investment(PMA)

E. One Final Option

V. Choose Partner and Team

A. Start Looking Early

B. Wide Variety of Skills

C. Other Trustworthy People

D. Check if Trustworthy

VI. Places that Sell Land

A. General Warnings

B. Real Estate Companies and Websites

C. The Local Tour Guide

E. The Local Gossip Mill

F. Miscellaneous Sources

VII. When You Find a a Parcel

A. Initiate Early Discussions

B. The history of the land

C. Get to know the Players

D. Slowly Get to the Price

VIII. Through an Engineer's Eyes

A. Clear access

B. Public facilities

C. Everything Belongs to you?

D. Check the Drainage

E. Check the Stability

F. Double Check Everything

IX. Settle Price and Terms

A. Necessary Preparations

B. Establish Proper Atmosphere

C. Conduct the Negotiations

D. The Issue of Parcel Size

E. Money is Not the Only Issue

F. Giving a Deposit?

X. The Written Agreement

A. How do I Pay Money?

XI. Due Diligence and Research

A. Risk versus Benefit

B. Due Diligence

C. Checking Public Records

D. Digging for the Unwritten Truth

XII.The Notaris Office

A. Settling the Final Terms

B. Notaris - Initiate Title Transfer

C. Sign the Nominee Agreement

XIII. Finally a Certificate