Leaseback
Build-up of property assets with freehold benefiting from a privileged situation, in city centre or highly-rated holiday resorts
- The principle of French Leaseback
- The guarantee of rental income
- The role of the Property Management Firm
- The costs involved during the lease period
- The VAT rebate
- Personal Use
- The end of the Lease Contract
A) The principle of French Leaseback
B) The guarantee of rental income
C) The role of the property management firm
D) The costs involved during the lease period
E) The VAT rebate
F) Personal use
G) The end of the lease contract
The leaseback scheme works on the principle that you acquire a newly built freehold property, fully furnished and lease it back to a management company, which then lets it to holidaymakers or executives on a business trip.
The properties are usually located in a tourist residence or a residence with Services which caters for short term lets and provide a variety of services usually to include reception, breakfast, laundry and linen services, cleaning. Most of the leasebacks offer high quality services and are ranked f
rom one to four stars - the higher rank the better the services offered in the resort, and the higher the guaranteed rental income is. Tourism residences are for seasonal letting (usually on a weekly basis) and offer a whole variety of extra services, such as a reception, breakfast, cleaning, bed linen, and also swimming pool, sauna, jacuzzi, hammam, sport room, tennis courts...
The Leaseback scheme has been in operation in France for over two decades and was introduced by the French government to enhance the tourist industry in different parts of France. Therefore, there are located in areas capable of attracting many tourists, whilst also addressing the need for quality city centre accommodation for both mature students and businessmen.
When leaseback schemes are sold, there is a pre-selected property management company to whom you "leaseback" your property for a period which usually ranges between 9 and 12 years. In return, you receive a guaranteed rental income ranging between 3% and 6 % per annum of your initial investment, depending on the property, whether you will be taking your holidays in it and where it is located
During the period you lease your property to the property management company, you have the peace of mind of owning property outright and benefiting from a guaranteed rental income, yet none of the worries related to letting out and maintaining the property. This is one of the reasons why the leaseback scheme is so popular and why there are not enough quality projects to meet demand.
A set furniture package is purchased by the owner. This one will not be given a choice of tiling or wallpaper as the properties are generally equipped and decorated to the same finish throughout the residence. The properties come equipped with fitted kitchens which depending on the development will include items such as hobs, extractor fans, sinks, cupboards, microwave, oven, dishwasher.
One final point is that leaseback is not timeshare. Whilst owners are leasing back their property and may only have use of it at specified times of the year, the owner is the Freeholder of the property at all times. One aspect of French apartment blocks which differs to apartments in the UK is that they are not leasehold.
One of the major attractions to investors is the rental income which is guaranteed by the property management company.
The rental income is nearly always calculated on the ex VAT price of the property, excluding notary and other fees.
So, if a property was priced at 119 600 Euros INC VAT, the ex VAT price of the property would be 100 000 Euros. If the property was being sold with a 5% yield, the annual rental income would be 5 000 Euros.
The rental income received represents on average a yield level ranging from 2.5 to 6% per year. Generally, the less the personal occupancy, the greater the yield.
Recently, there have been several cases of properties being advertised with much higher net yields than the property is really offering. Agents may do this to draw in more customers who have been attracted to the high looking yield initially. This is not a very honest way of dealing and if you see the same property but with a higher yield you should ask what the yield is based on.
For example, if there is 4180.60 Euros of rental income and the total ex VAT price of the property is 83 612 Euros this will give a yield of 5%. However, if the ex VAT price of the property includes 10 000 Euros for a parking space some developers will calculate the yield on the price of 73 612 which makes the yield look like it is 5.7%!
This price is net of French VAT at 5.5% but gross of other costs including taxe foncière, accountancy fees, income tax and so forth.
In fact, the income that you will receive is subject to French VAT at 5.5% and you will require an accountant to prepare your quarterly VAT declarations for you. Accountants will usually charge in the region of 200 ?300 ? per year for this service.
The rental income is normally paid to owners quarterly in arrears although this does differ from development to development and should be checked prior to reserving.
When the construction of the development is completed there is normally a short period consisting of a couple of months where no rental income is earned. This grace period allows the property management firm to set up inside the development and start advertising the properties to let. Where this is applicable it is written into the lease contract.
The rental income will also be index linked, often using the INSEE Cost of Construction Index as a reference.
How the rental income is indexed will vary from development to development but it is more often reviewed on a yearly to three yearly basis on the anniversary of the lease contract.
The review will either take into account the full amount of the fluctuation of the index or, will be capped at a certain percentage of the fluctuation (75% cap is becoming common).
The property management company is chosen before the development is made available for sale and the properties will then be sold on the condition of signing the commercial lease contract.
The lease contract is prepared in advance and will be made available to purchasers at the same time as the reservation contracts for signing.
The lease contract will contain such things as what the property is, how long the lease is to run and how much rental income they will pay you during the course of the lease period.
It will also set out any terms and conditions relating to the owners use of the property and also what charges the owner will be liable to pay if any.
In the majority of cases, the property management company will always pay for the general maintenance of the property and its furniture. This includes replacing any broken or worn out furniture with the same equivalent. The property management also pay the bills including electricity, water, gas etc.
Owners are also liable to pay for major repairs such as structural work, but it is worth pointing out that new properties do come with a 10 year guarantee which covers such work. Owner liability should be checked in the lease contract.
During the course of the lease contract, the property management company will let the property to tourists and people wishing to stay in the area and will look after the maintenance of the property.
Owners do not have to worry about finding tenants, handling change overs or ensuring that the property is well maintained.
The following is an outline of the costs involved during the lease period. It should be noted that they may vary from development to development and do not include income tax liabilities.
The « taxe foncière » is the land tax paid in France by owners. Averaging a cost of between 300 and 500 € per year for a studio or one bedroom apartment.
Accountant Fees: to prepare VAT declarations and keep accounts averaging a cost of between 300 - 500 Euros per year depending on the firm.
Frais de Syndic: these cover some of the insurance liabilities which are paid by property owners and costs vary from development to development.
Quote Part de frais des co-propriétés: Some property management firms will only pay part of the co-ownership charges and leave a part for the owner to pay. These are usually between 15 ? 20 ? per metre squared each year. Where this is applicable it is set out in the lease contract.
When you purchase a new build leaseback property, one of the main advantages is that you get the VAT back on the purchase price. Currently the VAT is at a rate of 19.6% on the acquisition price of new build property.
This normally takes up to 4-6 months to come through, but some developers will advance the VAT for the government and reclaim it back directly.
Typically, each development where the VAT is to be claimed back will chosen an accountancy firm to look after this aspect of the purchase. It is worth stating at this point that is very important to use an accountancy firm as this is a complex process and if the procedures are not respected then you will not qualify for the VAT rebate.
The main reason in giving the VAT rebate is that VAT is earned by the French authorities during the period that the property is let out. This is on an understanding that the property will be let out to tourists for a period of 20 years. If the lease contract was terminated or the property sold before this time, then a part of the VAT would need to be re-paid the French authorities pro-rata. This works out at being 1/20th per year.
On refurbished property or renovated properties, the 19.6% VAT rebate is not normally applicable but some still do have a VAT rebate element.
Depending on the development you can usually use your property for a certain number of weeks per year for holidays in exchange for a lesser yield. This can be between 2 and 6 weeks. These weeks are normally to be taken in specified periods which are often set out in the lease contract. It is important that owners understand when they can use the property and what the restrictions are, especially if they have children and can only travel in school holidays.
Some developments will offer owners discounted use, usually ranging between 10 and 25%. Occasionally, some management companies will also offer owners a discount on other properties that they manage.
At the end of the lease contract it is the aim of many owners to renew for at least the same period of time as to be in a position to keep the full VAT refund and to avoid capital gains tax liability (can be applicable if the property is sold before 15 years).
Some owners may wish to renegotiate the terms of the lease to maybe include more personal occupation etc. in which case it is generally advisable to begin negotiations at least 6 months to a year before the actual lease contract expires.
The French Commercial Law actually states that the head tenant can claim an indemnity if they are evicted from the property at the end of the lease contract. The law actually permits for the tenant to have a right to renew the property when the lease comes to its term. Some management companies will provide owners with a letter stating that they will not ask for these fees as to reassure the owner.
In the case where eviction indemnity was to be paid should the owner not wish to renew the lease, French agents expect or have experienced eviction fees of approximately 6 months to 1 years worth of rental income earned by the owner of the property. This is a relatively small amount when capital appreciation and the VAT rebate is taken into consideration.
In any case, the owner is the freeholder of the property at all times, and if after the lease contract is terminated they can do as they wish with the property.
If the owner of the property wished to sell it during the lease period this can be done and the new owner would have to honour the remainder of the lease.
If the property was being sold after the lease period then it can be sold as a normal property through a local estate agent.