What is it, how does it work, is it something for you?

Investors around the world are looking to French leaseback properties, or, as they are known in France, ‘Residences de Tourisme’. Leaseback properties offer a hands-off, stable investment with tax benefits and guaranteed rent, while providing the opportunity for personal use, too.

Leaseback is extremely popular with French investors who account for the majority of all purchasers of leaseback properties in France. French residents benefit from a range of tax advantages beyond the VAT rebate, hence the reason for their popularity but there are reasons why leaseback are increasingly popular among international investors as well as lifestyle buyers.

The most obvious perk for leaseback property investors is that VAT is rebated to the buyer. The other main bonus is that buyers are handed a contractual rental guarantee, which is calculated as an annual percentage of the purchase price (excl. VAT). The level of return will vary according to the management company and the proportion of time the apartment is allocated for personal use.

French Leaseback Property Scheme – what is it?

The concept of leaseback property purchase is simple: A purchaser buys the freehold of a property outright and then leases it back to a management company for renewable periods of up to 11 years. In return, the French government allows property owners to benefit from a 100% VAT concession, giving a saving of 19.6% (the current VAT rate on new-builds in France) on the initial property price.

Property owners also receive a guaranteed rental return, irrespective of occupancy, at a fixed annual amount, which often offsets the cost of their mortgage payments. The rental return is net of all community fees and operating costs, which are covered by the management company.

Under a leaseback arrangement, all operating costs – such as utility bills, repairs and maintenance – are covered by the management company on the property owner’s behalf. Contracts between apartment owners and their management companies must run for a minimum of nine years. After they expire, the contracts are rewritten on newly agreed terms.

An attraction of leaseback purchase to many investors is the ability to buy a dream holiday home within a development they could otherwise not afford. It is a freehold investment, while most or all associated costs are covered by the guaranteed rental income. Most leaseback properties are found in the best tourist locations, with pools, gyms and other facilities included.

Leasebacks are safe because the bank guarantees the construction. Investors get the title deed for a property even before it is built. If the developer is unable to meet his obligations, the bank will take over to make sure construction is completed.

A long-term investment

Leaseback properties are a good fit for investors who are willing and able to make a long-term investment commitment. A leaseback is not a quick-profit investment. Investors should not expect to sell after only a few years of ownership. But given that the investment is long-term, leaseback investors should be protected from a drop in real estate values during the course of the investment.

Modest, stable, hands-off returns

The Leaseback Agreement provides peace of mind for investors who are used to guaranteed annual returns of at least 2% after taxes. While such returns are not as spectacular as some higher-risk investment markets, investors can take comfort in a certain level of stability.

Investors need not worry about occupancy and are not exposed to short-term fluctuations in the tourist market. Nor do they need to worry about day-to-day management responsibilities. It is the management company’s responsibility to care of expenses, including insurance, maintenance fees, water, electricity, rubbish removal, etc.

Investors are comforted to know they have a hands-off investment and can sit back and wait for their capital investment to increase over the years, with few additional out-of-pocket expenses.

Leaseback schemes are ideal for

• Second-home owners who want a holiday home for occasional use, as well as a guaranteed rental income
• Long-term Investors who want to buy properties that produce a steady rental return and potential capital appreciation, with minimal hassle.

How it works

A purchaser of a leaseback property enters into a lease with a company that will rent out and manage the property. A leaseback property is a freehold ownership over property that is leased out through a specialist management company. They rent it out, they manage it for you and they give you an annual tax statement. It’s very simple – and you’re guaranteed a return.

The percentage of guaranteed rent is agreed upon in the lease contract, and that percentage is revised regularly, based on a national index. Some properties will be indexed annually, while others will be indexed every three years. The more often the property is indexed, the more the rental income will increase over the years. Traditionally, the rental income is capped so it can’t increase dramatically and will instead move in line with the national index.

In return for agreeing to the leaseback scheme, the investor receives a reimbursement from the government of the 19.6% VAT on any new-build property. Some developers advance the VAT refund to you and then receive the funds directly from the government. This would represent a 16.4% discount from the market price. In other instances, the VAT is repaid by the government within four to six months of the purchase of the property.

The VAT reimbursement is written off over a 20-year period. The income that you receive from your leaseback property is entirely tax-free. A leaseback property is governed by commercial law and a different type of a tax regime, whereby you can deduct all your expenses – including the interest that you pay on your mortgage – from your rental income, so you are not left with paying any tax on your rental income.

Thanks to a double taxation treaty between France and other European countries and the United States, investors would not pay any income tax at home on the income from his leaseback property, either. A traditional buy-to-let property, on the other hand, would require the investor to pay a certain amount of income tax on the property’s rental income.

The Leaseback Basics

• French leaseback properies are often located in growth-potential tourist areas in the most-visited country in the world
• Properties are sold furnished and are maintained in excellent condition by a management company during the lease term
• 100% VAT rebate
• Tax advantages: 2 years exemption from Taxe Foncière (Tax on Property)
• Notary fees vary between 2% and 4% for the purchase of a new property, whereas it is usually between 6% and 8% for a resale property
• Property is leased to a management company for a minimum nine years, which can be extended
• Investors receive index-linked, guaranteed annual return, depending on personal usage
• No running charges or maintenance costs

The VAT Rebate

When purchasing a new-build leaseback property, the French government allows property owners to benefit from a 100% VAT concession, giving a saving of 19.6% (the current rate of French VAT on new-builds)

This will either be advanced by the developer, in which case they will normally pay the last few staged payments, or the purchasers pay the full VAT-inclusive price and then claim it back from the French authorities.

The main reason for rebating the VAT 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 is terminated, or the property sold before this time, a part of the VAT would have to be repaid the French authorities on a pro-rata basis. This works out to 1/20th per year. As of January 2008, however, if you choose to sell your property with a renewed lease contract you will no longer be obligated to pay this.

On refurbished or renovated properties, the 19.6% VAT rebate is not normally applicable and the VAT that will be reimbursed, if any, varies according to the development. This should be established before purchasing.

Hassle-free Leaseback Period

When leaseback schemes are sold, there is a pre-selected property management company to which the owner leases back the property for a period normally ranging from 9 and 12 years (it can be longer). Remember: the VAT rebate is based on a 20-year leaseback period.

During this period, investors have the peace of mind of owning the property and benefiting from a guaranteed income, without the hassle of letting out and maintaining the property themselves.

Personal use

Depending on the development, investors can usually use their property for a certain number of weeks per year.

Personal use of the property is limited, because the property must be available to rent, As the management company has an obligation to pay a guaranteed return, it is in everybody’s interest to maximise yields.

Rental Income – “Guaranteed by Contract”

Rental income varies according to the property, whether you will be using it personally and where it is located. Different property management firms offer different rental incomes, but in general, the less the personal use, the higher the yield will be.

The rental income is nearly always calculated on the ex-VAT price of the property, excluding notary and other fees, and is normally paid to owners quarterly in arrears, although this differs between developments and should be checked prior to reserving.

When construction of the development is completed, there is normally a period of a couple of months during which no rental income is earned. This grace period allows the property management firm to set up and start to advertise the properties. Where this is applicable, it is written into the lease contract.

The rental income will also be index linked, often using the INSEE (French statistical institute) Cost of Construction Index as a reference.

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