NEW LEASE OF LIFE
Buying a leaseback property can be an attractive option for those keen to invest in a holiday home in France. Loïc Raboteau looks at the pros and cons
Loïc Raboteau examines the pros and cons of the French leaseback scheme
Leaseback properties have been in the French property industry for many years and were introduced by the French government to encourage investment in tourist destinations throughout France, with the aim of increasing the supply of quality accommodation available.
A leaseback property transaction is the purchase of a freehold furnished property in a tourism building (résidence de tourisme classée), which is leased to a management company in return for annual rental income. It is designed for those seeking a holiday home for a few weeks each year or for investment and estate planning purposes. Leaseback properties are usually located in popular areas such as ski and coastal resorts, where self-catering accommodation is in particularly high demand.
Leaseback properties should not be confused with timeshare. The buyer owns the freehold of the property and the full price is shown in the title deed. The purchaser of a leaseback property will be required to sign a commercial lease agreement ( bail commercial) with a management company at the time of the signature of the deed of purchase ( acte de vente). The commercial lease agreement is a private commercial agreement in which the property owner agrees to lease his/ her property to a management company for a minimum term of nine years in return for the payment of an annual rent (rental income plus several weeks of personal usage). The management company will rent the property to tourists throughout the duration of the lease agreement.
The main advantage is that buyers are entitled to a refund of the 20% VAT paid on the purchase price, provided that the rental income is also subject to VAT (10%) and that the project meets certain conditions imposed by the French tax administration (stipulating the tourism classification of the residence). In most leaseback property transactions offered by leading property developers, the buyer will finance the purchase net of VAT, which represents a considerable incentive.
The owner is entitled to occupy the property for a set period each year. This is usually between two and six weeks, spread over high, medium and low seasons which should be clearly stipulated in the contract. In some cases there is the possibility of exchanging these weeks with accommodation in another resort. Often you can negotiate the number of weeks of personal use you have, but this will usually reduce the rental income you will receive.
As the owner of a leaseback property, you will receive annual rental income from the management company, usually between 2-5%. This is subject to VAT and may be revised according to rental indexes published by INSEE.
The management company is usually responsible for the maintenance cost and running charges (except for major repairs). Owners sometimes have to pay a contribution. The lease agreement must state clearly what the maintenance costs will cover and if these will be deducted from the annual rent.
Leaseback property owners are subject
to the status of Non-Professional Lessor of Furnished Property – loueur en meublé non professionnel (LMNP). The total income is taxed under the BIC category ( bénéfices industriels et commerciaux, in other words profits from industrial and commercial assets) and annual charges ( taxe foncière, accountant’s fees, property depreciation, syndic’s fees, insurance premiums, maintenance charges) can be deducted from the same revenue. This tax system significantly reduces or even cancels the owner’s tax liability. In most leaseback property purchases, an accountancy firm will be proposed by the seller to reclaim the VAT of the purchase price on your behalf and carry out the purchaser’s annual tax declarations. Their annual fees amount to around €500.
During the commercial lease it is possible that the management company may, as a tenant, request a reduction in rent. This is usually a direct result of an initial overestimation of the rent, poor performance or a crisis affecting the operation of the residence. It is therefore important to choose the right location when investing in a leaseback property to minimise the risk.
Purchasers assume sometimes that because leasebacks have been given tax incentives by the French government, the rental incomes are also guaranteed by the French government. They are not. The management company has the contractual obligation to pay you the rental income in accordance with the lease agreement. It is therefore important to check the management company’s track record in managing leaseback properties.
French commercial leases allow the management company to renew the lease agreement. If you do not wish to renew you must notify the management company at least six months before the end of the term of the contract. However, if you do not renew, the management company is entitled to claim an eviction compensation in accordance with the French commercial code. This penalty for non-renewal must be clearly determined in the contract.
Please note that the French General Tax Code imposes a duration of 20 years for commercial lease contracts to recoup the VAT in full. 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 duration of 20 years. If the lease contract was terminated before this time, then a part of the VAT would need to be re-paid to the French authorities pro-rata. This works out at being 1/20th per year. If, for example, at the end of an 11-year lease, the owner decides not to renew, then he/she will have to pay back 9/20th of the VAT reimbursed initially (this corresponds to the remaining nine years). A leaseback property can however be sold during the terms of the lease and, providing the new owner takes on the commercial contract and continues to use it as a leaseback, the seller should not have to pay back the VAT. Loïc Raboteau is an international legal adviser and director at Francophile Legal Consulting francophile-law.com
The Résidence Alexane leaseback development in Samoëns offers one- to four-bedroom apartments, which benefit from facilities including a spa, fitness centre and swimming pool ( mgmfrenchproperties.com)