The Property Banks French Leaseback System Explained
The “Leaseback” scheme was introduced
by the French government two decades ago in an effort to increase
the quantity of quality holiday accommodation for an ever-increasing
number of visitors and tourists.
Leaseback offers investors a guaranteed return on investment, good
capital gains potential and a supplementary retirement income. Above
all, it allows you to become the owner of a holiday property in
France without any of the usual risk or hassles – and for a very
reasonable amount of money.
Leaseback offers a viable alternative to other more traditional
investments as more and more people are turning to bricks and mortar
for a secure medium to long-term investment and can, in many cases,
be close to self-financing.
The advantage of Leaseback is a combination of major tax breaks and
a guaranteed return on your investment. You become the owner of a
freehold property which you lease back to a management company who
will take care of the day to day running of your property for a
period usually ranging between 9 and 11 years. After this initial
period, the lease is nearly always automatically renewed unless
either party has indicated that they wish to withdraw. This must be
done at least 6 months before the date the lease ends. You can sell
the property at any time, even during the lease, the only condition
is that the purchaser will have to respect the current lease and of
course will enjoy the benefits such as the guaranteed income and
personal use. The length and terms of lease are to be checked before
purchasing a Leaseback.
Anyone can invest in a Leaseback and there are no restrictions for
non-residents buying a leaseback property, although French residents
will benefit from additional tax breaks. You will also benefit from
some of these if you take out a mortgage in France and this is well
worth looking into, especially as money can be borrowed very cheaply
in France.
When you purchase a Leaseback the French government will reimburse
the VAT (usually 19.6%), due on the cost of the property and the
furniture (if a new build, otherwise a lower rate). Some Leaseback
companies will even pay the VAT for you, meaning that you will
effectively purchase the property with close to 20 % discount. If
the state reimburses the VAT to you directly this usually occurs 3
-6 months after delivery. The developer will mandate an accountant
to deal with this for you for a small fee.
To enter the Leaseback scheme you choose a property according to
your personal criteria. These are usually: budget, location and
size, guaranteed rental income (return on investment), whether or
not you want personal use or are just looking for an investment,
without any personal use and whether you want to recuperate the
property after the minimum 9 year lease or whether you are happy to
re-knew the lease and carry on for another period of 9 years.
When you have made your choice, to reserve a property you pay a 5%
deposit (usually, but sometimes only 2%) of the total amount of your
purchase (including VAT) into the escrow account of the Notary (or
lawyer) who is in charge of the programme.
After the notary has received proof of transfer of the funds (must
be within 72 hours of making a firm reservation, which we do for you
by phone), you have a firm reservation. Contracts will then have to
be signed by both parties within a specific timeframe depending on
the company. In addition to the sales contract, you will also be
signing a leasing agreement (the “Leaseback” agreement) and choosing
how much return or usage you would like, depending on what the
management company offers. The more personal use you require, the
lower the rental income. After the developer has received the signed
contracts you still have a 7 day “cooling off” period in which you
can simply change you mind and your deposit will be immediately
refunded ( this is a legal right).
You should expect to sign the title deed (Acte de Vente)
approximately three - four months later. Your purchase is subject to
you obtaining a mortgage and if this is refused then your deposit
will be returned to you. You do not need to be present on the day of
signature; this can be done by proxy. Thereafter the Notary will
make regular calls for funds to your bank (or to you if you have not
taken out a loan) according to a pre-established payment schedule
leading up to completion. This is typically connected to the
different stages of completion and the exact timing will have been
specified in your reservation contract. The Notary’s fees amount to
approximately 2.5% (usually a little less) of the total cost of the
property including VAT. In addition to this, if you take out a
mortgage, you will be charged a further 2% (approx) of the total
mortgage amount - These fees are considerably lower than those you
would pay if you were buying “old” property (6 - 8%).
After handover, your property will be run like a hotel and the
management company will pay most, if not all, costs. Exactly which
costs are included or excluded needs clarification before signature.
However one universal cost applicable in all cases is la “taxe
foncière” (French landowners tax). The government gives exemption on
this for the first two years on a new build, then typically on a
100,000 Euro property one could expect to pay about 300 euro per
annum.
From day one, you are the owner of a 100% freehold property, which
you can sell at any time. The only proviso is that the new buyer
will have to honour the existing lease, which usually isn’t a
problem since they will then benefit from the same advantages as
you.
The guaranteed rental income mostly varies between 2.5% and 6% per
annum depending on location, personal use and the type of property.
This is calculated on the ex VAT value of the property , sometimes
including furniture and parking space, sometimes not, again this
varies from company to company. This income is also indexed to the “
Indice du coût de la construction” which is calculated annually by
the INSEE, France’s national office of statistics. This is a
percentage figure that is applied to your income each year to
protect against inflationary erosion. Some leaseback companies “cap”
this value to 2% per annum.
Some operators have programmes all over France, and often they will
let you choose your personal use in another residence that they
manage elsewhere in France.
Usually you pay no charges, taxe d’habitation, cleaning, electricity
or maintenance fees…everything is covered except for Taxe Foncière –
usually around 300 € per annum. If you use your property, you just
show up to your furnished apartment as you would in a hotel. When
you arrive it’s clean and then it is cleaned up after you.
To reserve, you need to sign:
A Reservation Contract – this is 90 % legalities, explaining who is
selling what, and who is buying what, at which price and under which
conditions. It includes a plan of the apartment and/or garage in
question, and their location in the building.
A Description sheet – this tells you exactly what is being built
(how many plugs in the bedroom, what type of heating, floor tiles,
furnishings, etc)
A Rental Agreement – what type of personal use or investment return
you have chosen.
The Property Bank, Last updated: 2/01/07
Important Note: The above information is supplied in good faith, and
is described as accurately as possible at the time of writing.
However, laws can and do change. We are not lawyers or tax advisors.
Therefore, we decline any legal responsibility for inaccuracies
cited.
We recommend you contact a competent legal/tax advisor before
entering into any written agreement.