Understand why a developer may choose usufruct, how it changes initial funding, and why the full-term cost and remaining value still matter.
A developer may find the right site but discover that buying it would absorb a large part of the budget before construction begins. Usufruct raises a useful question: does the project need to own the land, or use it for long enough to support a viable business?
Saudi Arabia’s Civil Transactions Law defines usufruct as a real right to use and exploit property belonging to another. The creating instrument and the law determine the usufructuary’s rights and obligations. Civil Transactions Law, Articles 679 and 681.
A developer should therefore establish whether construction and leasing are permitted, which approvals are required, and whether the right can be transferred or included in financing security. The treatment of buildings at expiry also needs to be explicit. A contract’s commercial label does not settle these questions.
Consider a simplified hypothetical project: land costs SAR 10 million and development costs SAR 12 million. Buying the land requires SAR 22 million before other expenses. If a usufruct arrangement instead requires SAR 2 million upfront, the initial requirement becomes SAR 14 million—a difference of SAR 8 million.
That difference is initial liquidity, not realised profit or a final saving. The arrangement may require annual payments and periodic increases. A land purchaser, meanwhile, retains an asset that may have value at the comparison date. Applicable fees, taxes and other expenses must also be modelled separately for each alternative.
Available cash might support construction, fit-out or a contingency reserve. A smaller initial payment, however, cannot repair weak demand or expensive operations.
A landowner may prefer to retain ownership while allowing another party to develop and operate the site. Where both parties’ objectives align, usufruct can make a project possible even when purchasing its location is not an option. Planning suitability, permissions and commercial terms remain essential.
The available period must accommodate design, approvals, construction, leasing and stabilised operation. If the term starts before these activities are completed, delays may consume part of the revenue-generating period.
An uncommitted renewal should not support the base case. Handover, removal or reinstatement costs also need to be budgeted where the agreement requires them.
Buying may suit a strategy centred on long-term land ownership or future redevelopment, provided its funding and cost are workable. Usufruct may suit a project whose value mainly comes from operating during a defined period on commercially attractive terms.
A sound comparison uses a common time horizon, all cash flows, the remaining value each party can legitimately receive, and delay scenarios. The decision concerns the complete exchange of rights and obligations—not simply the smallest payment today.
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