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

Living France - - CONTENTS -

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.

PROS

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.

CONS

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)

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