The Facts about Leaseback Schemes

Leaseback France gives you the straight facts about  “leaseback” schemes. A lot of websites have exploded onto the internet recently selling ‘leaseback’ properties in France. We want to clear up some of the misinformation that is being spread about, so here are some straight facts about ‘Leaseback’ in France.

Let’s start with what they say……

Statement: “The French government gives you 19.6 percent off the price of the property…”
Fact: NO, the French government gives you nothing on leaseback sales. The VAT tax incentive is a real discount off the market value of the property giving a VAT refund on the whole property from the French government. The current rate of VAT on all new property is 19.6%.(this refund represents a 16.4% discount of the market value normal selling price)” See above + on refurbishment leasebacks the rate of TVA is 5.5% and is applicable only to the percentage of the price that represents refurbishment.

Statement: “You choose the weeks you want to use yourself and….."
Fact: NO

Statement: “At the end of the lease period, the property will be returned to the owner in perfect condition., ……..”
Fact: NO

Statement: “The return is linked to the cost of living index……..”
Fact: NO

Statement:"Your property is fully managed and serviced by the property company who lease from you and you have no further costs or charges for the period of the leaseback……..”
Fact: NO

Now the straight facts….

The Principle of Leaseback

The leaseback scheme works on the principle that you buy freehold a property, be it an apartment, a chalet a cabin or a house. This you furnish and lease to either the developer or an accredited property management firm for a fixed number of years,  9, 10 or 11 are popular choices. This is a commercial lease*, which has certain repercussions in French law.

The furniture is usually sold to you in the form of a predefined furniture pack.

The management firm sublets the properties on a short term basis, offering other services such as cleaning and breakfasts that qualify  the letting business as being like hotel letting, hence making the rents charged by the management firm  subject to TVA (purchase tax).

The French government agrees in these cases to offset the TVA payable on the purchase of the  property  against that charged to the short let customers of the rental management firm. In most cases you pay the TVA on purchase and receive it back from the government within 5 months of  the purchase, in some cases the developer advances the TVA against the reimbursement by the buyer on the day he receives the money from the government.

If the property is new build (as in most cases) the TVA is 19.6%, if it is a refurbished property there is TVA of  5.5 % on the part of the price that represents refurbishment works.

The number of years needed to offset the total TVA  vary according to the price of the property, the rental, no of weeks per year rented out etc. This is usually 20 years.

Some schemes offer no guaranteed annual return and, except for a minimum 4 weeks that qualify the deal for offset TVA, the property is available for the owner’s use. Other schemes offer choices with returns varying according to how many weeks the owner takes for his own use - usually a minimum of 0 and a maximum of 6. The lease that the management firm and the buyer sign defines the periods during which the owner may choose his weeks and the length of notice that must be given., it also defines who pays what in terms of shared facilities charges, services etc.

Percentage changes in the annual returns are usually index linked to the INSEE Index of Construction Costs.

From end December to end December
1995
1996
1997
1998
1999
2000
2001
2002
Annual % change INSEE Construction Index
- 0.05
+ 1.77
+ 2.39
+ 0.12
+1.01
+2.38
+3.57
+2.53

The buyer is responsible for the annual taxe foncier (buildings tax), often a portion of the shared facilities costs depending on the amount of weeks that you use the property and any building or repair costs that fall outside the guarantees of the builder and the responsibilities of the management company as defined in the rental and sales contracts.

As you are being paid  rent  on a French property, you need to fill in an  annual French tax return. How ever assuming that you have used a mortgage to finance the property there is usually no tax payable.

The tax return form is very simple and some of our developers offer the first year’s returns filled in and filed by an accountant free of charge, you can then copy this for the following years or employ an accountant to do this for you. We can recommend English speaking accountants to do your returns if you like.

You have bought freehold and hence are free to sell at any time. Any TVA outstanding must be paid and on the sale of the property, gains in value are subject to capital gains tax..  There are various allowances, depending on the number of spouses and children that you have and the number of years that you have owned the property. After 22 years of ownership there is no capital gains tax to pay.

By French law any non French resident must on the sale of  a property subject to capital gains tax provide a French tax paying guarantor to make good any under declarations etc that become apparent over the following years. A group of French banks have formed a company that will do this for properties sold by non French residents and they charge 1% of the sale price. This has recently been challenged in and deemed illegal by the European courts as long as the seller is and will be resident in an EEC country.

Often a year's notice must be given to not renew a lease; no notice and the lease is automatically renewed for a period of 9 or whatever years, as defined in the contract.

With some leaseback schemes you obtain full use and vacant possession of the property at the end of the lease period, with others the lease must be renewed as the property is destined in perpetuity to be a 'hotel letting' unit. This is made clear in the lease and buying contracts.

Because the lease is a 'commercial ' lease, the management firm have a right, that can not be negated by any clause in the lease, to commercial compensation should you end the lease. Hence the safest investment is that made in units destined to be hotel letting units in perpetuity. Schemes where at the end of the initial lease the property becomes yours for all year use should be looked at carefully, the viability and track record of the management firm need to be carefully checked. Do not be carried away by paper promises of higher end resale values!

As of the moment sales of leaseback properties in France are steadily increasing. The TVA (purchase tax) clawback and the guaranteed returns of between 4 and 6.5 per cent + anticipation of a steady climb in property prices have made these offers seem very tempting.

There is a proliferation of leaseback offers from developers to sate this demand.

However if we look at the history of leaseback schemes in France, we do not see a smooth highway but more of a pot holed country lane.

Some years ago, MAEVA, an offshoot of Club Mediterranean, was selling leaseback properties, some of them with a guaranteed yield of 6%. When Pierre et Vacances bought out Maeva, on one development offering 6%, they felt they could only offer a little over 4% and the owners had the choice of accepting or selling.

The first demonstrates that the ‘guaranteed’ return is only as good as the guarantors, the rental management firm. A rental management firm of size, stature and good track record is of great importance. Search for a yield that is reasonable, rather than a spectacular but unsustainable rate.

A certain renovation leaseback scheme in Paris offered just over 6%, but a close inspection of the paperwork showed that not all the renovation needed to bring the properties up to letting standard was included in the base price. The difference was payable by the purchasers, hence knocking the real return down to just under 4%.

The shows the importance of reading all the documents carefully and being fully aware of that which you are buying.

In short:-

1. Location

If the scheme is in a good location ( Paris, southern France, ski areas etc.) for tourism, the scheme is going to work well for the management firm and for you.

2. Confidence

Choose a developer and management firm with good track records.

3. Be Realistic

Disregard high hopes and inflated promises, as, if these can not be upheld, they will cost you money. Some leaseback development schemes have one off companies managing their properties, if their promised returns are higher than their rec'd rents, they are going to go bust and you are not going to see your 'guaranteed' return.

4. Finance

These schemes work best if you borrow in euros to buy, rates at the moment are low and some mortgage providers are offering mortgages + bridging loans for the TVA (purchase tax).

5. Check the paperwork

Invest in the competence of an Anglophone french lawyer to examine, translate and explain the contract and lease documents. As a percentage of the total cost, you are adding on peanuts.

Please note, we sell a lot of leaseback properties, and believe they are a good investment. However we like our clients to buy in full knowlege of what they are getting.

If you would like more information or have any questions please contact our leaseback desk

Rob Thorne of the French Property Company Ltd