The Property Banks French Leaseback System Questions & Answers
1) Are you official estate agents
registered to sell properties in France and Europe?
We are a fully registered UK company mandated by many developers and
management companies to advise investors about their products. We
have 40 years combined experience with the French market and many
other European countries.
2) What services do you provide and what are your fees?
We assist you in selecting a property and are available for any
assistance you may need up to the acquisition and beyond.
Funding the purchase and reselling are other areas where we can
help. The Leaseback Company pays our fee; we make no charge on our
clients.
3) What’s to stop me buying a Leaseback direct?
Nothing at all, except:
a) The prices we quote are the same as you will be quoted by the
developers but you will then have to deal direct in French or other
language, with no English translation. We provide friendly and
helpful advice throughout the purchase process and will even assist
you in retrieving your deposit if you decide to cancel the purchase
within the legal time frame.
b) We are a well-established company with an in-depth knowledge of
the French and European property markets. We can offer you our
first-hand advice and we only select properties that are sound
investments.
4) How long has the scheme existed?
Over 20 years.
5) Is it established indefinitely?
No. It’s a window of opportunity the French government are leaving
open until they feel they have reached saturation point for this
style of residence. Then they will close the window.
6)Can I buy as many as I want, even if I am not French and living
outside of Europe?
Yes.
7) What are my guarantees that the building will be completed? What
happens if the developer goes bankrupt?
This scheme is backed by the French government and for a builder to
begin construction, completion must be guaranteed by a bank. This
means that whatever happens, the bank will finance the construction
and deliver the property to its owner. Mortgage banks will also
require this "intrinsic guarantee" or they would not approve the
loan. In addition to this, when you buy "off plan" in France, under
French law you have the benefit of five different guarantees:
- The 2 year guarantee: this covers all defects affecting the
functioning of items of equipment separable from the building, for
example windows, doors, boilers etc.
- 1 year "perfect completion guarantee": this covers all defects
that are reported on the day of hand-over and those which become
apparent during the first twelve months (the management company will
appoint a bailiff to check this on your behalf on the day of
hand-over).
- 10 year guarantee: this is the builder's guarantee which starts at
hand-over and lasts for 10 years. It covers structural defects.
- 1 year sound insulation guarantee
- 1 month guarantee against obvious defects: this starts at the date
the keys are handed over. When the house or apartment is completed,
you will receive a document called “attestation d’achèvement de
travaux” (works completion certificate) from the vendor. You will be
invited to attend an “état des lieux” (literally “state of the
premises”) with the vendor and if you do not attend a bailiff will
be mandated to represent you represent you. If you, or the bailiff
representing you, are satisfied the property is ready for
occupation, the vendor will hand over the keys.
8) What are the guaranteed return/occupancy options for these
properties?
You have no guarantee of how occupied your property will be, but
it’s not your problem. You are guaranteed a fixed income, usually
between 2 and 6% per annum - depending on location and the type of
property – and this income is guaranteed whether the Leaseback
company successfully sublets your property or not. You have a
legally binding contract to that effect. Your personal occupancy
will depend on what you choose at the outset.
9) Is the income we receive net of all charges?
Yes. The Leaseback company pays all management costs, repairs,
maintenance charges, taxe d’habitation, electricity, water etc.
10) Are there any other charges we are liable for on a
monthly/annual basis?
Only the “Taxe Foncière” (land tax) and some may charge joint
ownership charges (generally 10 to 25 Euro per sq. m. per annum -
always best to check on this point). The Taxe Foncière is payable at
the end of each year (in arrears), typically, for a 100,000 Euro
property, expect to pay around 300 Euro per annum. You are exempt
for the first two years if it’s a new build.
11) The R.O.I - can you tell me how this is calculated, i.e. % of
purchase price? Also how is it paid - in arrears, annually, monthly?
The Return on Investment (R.O.I.) is calculated on the ex-VAT price
(which is normal since you are not paying the VAT) of the property.
The total value of the property does not always include the car park
and furniture; this depends on the management company so is also
worth checking. Some companies pay this quarterly, others annually,
always in arrears.
12) Is the Leaseback offering the highest R.O.I. the best
investment?
Not necessarily. You must not forget that this is a real estate
investment that one-day you may want to sell. Usual Real Estate
rules apply: position, position, position. Bearing in mind that,
ideally, you will be holding on to your investment for a few years,
it is worth looking for properties in “up and coming” or
“undiscovered” areas where you are likely to find lower prices,
higher yield and excellent potential for capital gains a few years
down the road. This is made easier by the fact that these are just
the areas where developers are building new leaseback programmes and
land is still reasonably priced.
13) Is the "Indice du coût de la construction", to which the R.O.I.
is indexed generally in line with inflation?
Roughly speaking yes, but only cost of labour and building materials
is used in the calculation. At today’s rate this would be about 4%
per annum, however should inflation rise, some Leaseback companies
do impose a cap on this value and this should be checked before
signature.
14) Leaseback sounds very similar to “timeshare”, is it?
Not at all. There are certain similarities in the way they are
managed, i.e: you can swap weeks with other residences managed by
the same company, but there all semblance ends. The fundamental
difference is that as a Leaseback owner YOU OWN 100% FREEHOLD
PROPERTY FROM DAY ONE (even during the lease period).
15) Leaseback sounds a bit like “leasehold”, is it?
Not at all. Leasehold is hardly existent in France. 99.99% of
properties are FREEHOLD.
All properties proposed by us are freehold.
16) Is the Management Company entitled to automatically renew the
lease after the allotted period (e.g. 9 years)?
Usually yes, unless a clause is inserted in the contract that
specifically states otherwise. Incidentally, the lease is not always
9 years, Leaseback companies choose the duration they want and we
know of one company that imposes a 15-year lease, and another that
automatically obliges you to sign on for a further 9 year lease
without option to do otherwise - so this is important to check.
Whatever the case, either party will have to give six month’s notice
if they wish to terminate the lease at the end of the lease term.
The management company does not have to accept and may charge you a
penalty unless a specific clause has been inserted into the title
deed allowing you to withdraw at the end of the first lease term.
This is French law and is designed to protect both yourself and the
leaseback company.
17) What happens to the guaranteed income when the mortgage is paid
off, if I sign on for another lease for example.
It’s 100% yours.
18) Are there any restrictions to living permanently in the property
after the expiration of the lease?
Not usually, but worth checking.
19) a) Are the properties delivered furnished?
b) At the end of the lease are we the owners of the furniture?
c) Can we change the furniture if we want, or make interior
alterations to our property?
a) Yes. Including cutlery, crockery and bed linen and bath towels.
b) Yes.
c) Only at the end of the lease.
20) What finance do the leaseback companies offer?
None. It’s up to you to apply to a bank for a loan and we can assist
you with this.
21) What mortgage can I expect to obtain from a French bank?
As a non-French resident banks usually offer you a 70% mortgage.
However, if they like your financial profile they can be pushed to
provide 80% of the property & furniture cost on the VAT included
price.
22) Am I obliged to open a French bank account?
Only if you take out a French mortgage.
23) Why does the government give back the VAT?
To encourage investment in this type of scheme. The French
authorities are investing heavily in one of France’s fastest growing
economic sectors: tourism. These developments are generally built in
areas where there is little or no other industry. They provide a
large number of jobs in the construction and services sectors and
bring an increase in value to predominantly rural land. In addition
to this, the tourists who come to stay during the lease period spend
their money, and everything they buy has 19.6% VAT on it!
So over nine years or more, the government does very nicely out of
the deal.
24) When do I get the VAT back?
This depends on the leaseback company. They each have their own
rules. Some major companies don’t even charge, they absorb the cost
and apply for the refund themselves, so when you sign the transfer
deed you only pay the ex VAT price. But the general rule is about
three months after completion and delivery. This point should be
verified before signing a contract - some leaseback companies will
refund the proportion of VAT paid three months after each stage
payment.
25) Do I have to apply myself to get the VAT back?
No, the leaseback company normally mandates an accounting firm to do
this for you. You will probably also be asked to sign a mandate with
this accounting firm so that they can help you with your future
fiscal obligations (5.5%VAT on your rental income) and the Leaseback
company will pay you your net income with the 5.5% already deducted.
It is worth noting that all the companies will quote net rental
income, so there are no surprises.
26) What’s the 20-year rule regarding VAT?
The government reimburses you the VAT on the basis you remain owner
for 20 years and if you sell before they will ask for a pro rata
proportion of the sum back.
27) Are all Leasebacks new build? What happens about the VAT refund
and the Notary fees if they are not?
Some Leasebacks are refurbished buildings. You still recuperate the
VAT but at a lower level (19.6% of the cost of refurbishment and not
of the TOTAL property Price). In some cases this may put the
acquisition fees up to 8% although the government quite often
applies reduced rates (2.5%) to these transactions as well.
28) So what’s the advantage in buying a refurbished Leaseback?
None, unless it is so well positioned that the potential long-term
capital gain outweighs the initial extra costs supported in year one
when compared with a similar new build Leaseback.
29) Must I pay French Income Tax?
With Leaseback you come under a very advantageous tax regime and
will be able to deduct all the various costs (transaction fees,
interest payments, property devaluation etc.) and the fiscal experts
within the leaseback company will structure the deal to avoid paying
as much tax as possible. Also, it is worth knowing that you will
obtain additional tax benefits if you take out a mortgage with a
French bank.
30) Would I be liable for Capital Gains Tax?
Yes if you sell before 15 years. As a non-French resident living in
the EEC you pay 16% of the net profit when you sell (25% for
residents).
However, you can deduct your acquisition costs (Notary fee), selling
costs (agency fee), loan interest and the cost of any major
improvements made to the property. There is an erosion of monetary
value facture applied to allow for inflation, which reduces the
figure further. Finally, after the first five years, each year you
hold the property there is 10% reduction of CGT liability. Therefore
if you hold it for 15 years, you will be totally exempt of CGT.
31) This scheme sounds too good to be true, what’s the catch?
No catch. This is a genuine opportunity sponsored by the French
government, who simply want to increase the number of beds available
for its N°1 industry: tourism.
32) What happens if the Leaseback company goes broke?
First of all, most of the Leaseback companies are huge, managing
over a 100 programmes in many cases and we’ve never known one to go
bankrupt. However, they are required by law to have professional
indemnity insurance that looks out for your interest.
33) Presumably, most furnishings and fittings would have to be
replaced before the end of nine years - who is responsible for this?
Your apartment should be left to you in a reasonable condition which
takes into account that it is no longer new and therefore a
reasonable amount of "fair wear and tear" would be considered normal
in a court of law. However, most Leaseback companies want to impress
you with their management so that you will consider signing up with
them for a new lease. Also, they will not be able to rent a property
out if the furniture has become "tatty". Therefore it is in their
interest to keep your apartment in good shape and often they will
replace shabby furniture during the lease period at their own cost.
34) At the end of the Leaseback arrangement, who is responsible for
any shared facilities around a property or resort?
You - and all the other owners. You will pay monthly “charges”
(audited) to cover this, in the same way you would on day one if you
bought a property that isn’t a leaseback.
35) Is it possible to insist that the property will be only let to
non-smokers?
Legally, no, but you could request it.