An Introduction to French Leaseback – Guaranteed Rental Investment

Leaseback property has been around for 20 years in France. The scheme was first introduced by the French government to increase the quantity of quality holiday accommodation available in areas capable of attracting more tourists. 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 apartments which differs to apartments in the UK is that they are not leasehold. In fact, in France all the co-owners own a certain percentage of the copropriété (co-ownership) – the same as having a “share of the freehold” in the UK.

The discount: The French government offsets the payable VAT. The investor receives back the VAT on the property at the rate of 19.6 % on new build property. Some developers will advance the VAT for the government and reclaim it back directly when in other cases you will have to reclaim it directly.

The leaseback scheme offers a guaranteed rental income from a pre-selected property management company to whom you "leaseback" your property to for a period which usually ranges between 8 and 15 years. Different property management firms offer different rental incomes, but in general the less you use your property the higher your rental yield will be. The guaranteed rental income tends to range between 2.5% and 6% per annum depending on the property, whether you will be taking your holidays in it and where it is located. Most of the schemes offer you a personal allowance for a certain number of weeks per year for your personal holiday.

A recent French law change will have a profound effect on the re-sales of leaseback property. From now onwards - when you re-sell a leaseback property - you do not have to repay any of the 19.6% VAT that you originally saved.

The purchase of a property In France is a regulated process. Our team of experts are at hand to offer advice on how to proceed with purchasing in France, what to avoid and assistance in financing your purchase. Below is a brief outline on the basic procedures of buying in France.

Why Invest in France with the Leaseback scheme?

• Acquire your own furnished holiday home in France in a fantastic location.
• No Hassle with a fully managed and maintained property by a selected management company
• Lower initial deposit – hence making your investment work very hard for you.
• Guaranteed Rental from your property for 9 to 12 Years
• VAT Refund = 19.6% Discount
• Huge capital growth during the lease term
• Personal allowance to use as a holiday home
• 100% Freehold Property ownership
• Non-Taxable Rental Income

The Buying Process

A 5% deposit is usually necessary to reserve a property. This deposit is transferred to the French Notaries (similar to a UK lawyer) escrow account to secure the unit whilst contracts are being arranged. Proof of transfer must be faxed to within three working days to secure the property. You should start looking for a suitable mortgage before this stage (same as uk purchases) as your deposit and fees and non-refundable. Colour Capital can help with this and will put you in touch with our trusted partners. It is your responsibility if you can’t get a mortgage so you should be confident you are in a strong position to qualify as with all off plan purchases.

Once the reservation has been made, you will be issued with the exchange documentation/contracts which must be signed and sent back to Colour Capital. Once these have been received they are forwarded to the other parties (Developer, Property Management Company…).

For completion: once you have a mortgage offer, a copy is submitted to the notary who is then able to draft the final completion documents. The notary will send you a copy of the title deeds – projet d’acte when they are ready. Once the final Acte Authentique is signed, you are then the legal owner of the property. You are able to appoint a power of attorney in the UK via what is termed a “proxy” office. The power of attorney can sign the relevant documents on your behalf if required.

French Mortgages and Payment

French banks offer a range of mortgage products some of which are suitable to foreign investors and interest rates are much lower than those in the UK. We can help you arrange a mortgage. We work with an English speaking team based in Nantes. They are the first French mortgage broker and are our trusted partners who will offer you the best independent financial advice.

French lenders take into account different criteria when calculating if they will lend and advice should be sought regarding your borrowing power. Lenders will normally offer between 70 to 80% LTV – loan to value - for leaseback properties. This however depends on your specific financial situation. It is indispensable to open a French bank account to deposit your rental income and for your mortgage repayments direct debit.

Purchase Costs

When purchasing leaseback property there are a number of costs that are not included in the purchase price of the property including:

• Notary fees: purchasers should allow approx 3.5% of purchase price
• Mortgage registration fee: approx 2% of the purchase price (with VAT added to the purchase price).
• Proxy (Power of attorney) fees: if choosing to use a public notary in the UK cost around £100 per document
• Solicitor fees: between £500 to £1500 depending on the level of service
• Accountancy fees: to claim back the VAT (if not done by the developer for you) an accountant will normally charge around £200

The management and Maintenance of your Property

The property management company is chosen before the development and before sales commence. The lease contract specifies the term of the lease, the amount of rental income, any terms and conditions relating to the personal use of the property and the charges the owner will be liable to pay if any.

The property management company generally pays for the general maintenance of the property and any damage occurring to the furniture. The management company is also responsible for the utility bills.

Owners can be liable to pay for major repairs such as structural work but in France, properties come with a 10 year guarantee similar to NHBC.

Rental Income and Personal Use

The major appeal to the investors is the long term guaranteed rental income. It is calculated on the ex VAT price of the property. For example for a property worth £100,000 ex VAT and the property was being sold with a 5% yield, the annual rental income would be £5,000.

The rental income will also be indexed to the cost of life in France, the INSEE index. The way 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. Any reference to personal use, whether it is free weeks or a discount on selected resorts, will be included in the lease contract.

Costs Involved during the Lease Period

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.

Taxe Fonciere: This is a Land tax paid in France by owners once a year in October. The cost for a £150,000 is on average £500 per annum.

Syndic de coproprietes: This is similar to the service charge in the uk and covers any maintenance of common areas in the development. The costs vary from one development to another and are sometimes nothing.

Quote Part de frais des co-propriétés: Some property management firms will only pay part the co-ownership charges and leave a part for the owner to pay. These charges are usually around £10/sqm each year. Where this is applicable it is set out in the lease contract.

End of the Lease

At the end of the lease contract there are several options available. Many owners decide to renew and hence avoid any capital gains tax liability. Another option is to renegotiate the terms of the lease to include more personal allowance for example. Finally if the investor decides to sell it during the lease period it is possible the property has to be sold with the remaining of the lease.

Frequently asked Questions

How many Leaseback properties can I own? Are there restriction?
There is no restriction on the number of leaseback units you can buy. There is no need to be French or an EU resident to purchase a leaseback property through Colour Capital.

What are the costs?
The management company will pay all utility bills like water, electricity and service charges, and the costs of insurance, maintenance, repairs and furniture replacement. The management company is also responsible for most of the rates except the ‘Taxe Foncière’ which is always paid by the owner. There is one tax on property that the owner has to pay once a year in October: the Tax Foncière. The newly built properties are exempted for the two first years following the completion of the property. There are also the notary’s fees: in France the purchase process is a regulated process. The Notary fees vary between 2 and 4 % for the purchase of a new property whereas it is usually between 6-8% for a resale property.

Who is responsible for paying the bills during the Leaseback period?
The management company that is responsible for the maintenance of the property is also responsible for paying utility bills. The owner might be responsible for a fraction of the cost if he used the property.

How long are the leases?
The leases are generally between 9 and 11 years.

What type of Mortgage finance is available?
Leaseback property purchases are normally financed on a repayment mortgage basis rather than interest-only over either 15 or 20 years. As an approved non-resident you could expect to qualify for 60% - 80% LTV. This is still a very high loan to value proposal.

Can Colour Capital assist me with Finance?
It is one of our core services. We are associated with the first mortgage broker in France. Our partner’s team of 6 Mortgage brokers is based in Nantes, France and is English speaking. They can find the best financial products available among the French banks and are totally independent.

What happens if I decide to sell the property before the end of the Leaseback period?
You have a right sell the property at any time but a leaseback property works best as a long term investment. If you decided to resell your property before the end of the lease you would have to sell with the remainder of the lease term still applicable.

What are the other fees in a purchase?
All fees to take title of the property will amount to approximately 4 to 5.5% of the purchase price of a newly built property.

Is my rental income guaranteed?
Yes, your rental income is guaranteed during the lease period and is usually paid quarterly in arrears. The rental companies who pay the rent are usually large holiday companies who work with major international tour operators. These rental returns are index-linked to construction costs (the INSEE Index of Construction Costs, www.insee.fr). It means that as construction costs increase, your rental income should increase also.

What happens at the end of the Lease?
The lease will not be automatically renewed at the end of the lease unless it is explicitly written on the contract. According to French law, either you choose to sell the property, or live in it. Most common practice is to renew the lease with the same management company, as you still don’t have the hassles to let your property yourself.

How does the rental guarantee work for these properties?
You are guaranteed a fixed income as specified in the sales contract. The rental income is guaranteed whether the management company successfully sub let your property or not.

Is the lease automatically renewed after the allotted period?
No, unless a clause is inserted in the contract that specifically states that the management company is entitled to renew the lease. Incidentally, the lease is not always 9 years. Leaseback companies choose the duration they want.

Must I pay French Income Tax?
Usually, no. The leaseback company structure the acquisition so that there is no income tax liability.

How about the Capital Gains Tax?
A non-resident you pays 16% of the net profit on resell against 25% for permanent French residents.
The investor can deduct the acquisition cost - Notary fee, selling cost – agency fee, and the cost of any major improvements made to the property. There is an erosion of monitory value facture applied to allow for inflation, which reduces the figure further. Finally, after the first two years, each year you hold the property there is 5% reduction of CGT liability. Therefore at some point in the future you will be totally exempt of CGT.

Is the Leaseback similar to “timeshare”?
Not at all. The fundamental difference is that, as a leaseback owner you own 100% of the freehold from day 1 and even during the lease period.

When and how do I get the VAT back?
This is sometimes all done by the developer and you won’t ever have to pay the VAT. It also depends on the leaseback company. They each have their own rules. By and large, it takes around six months to get a full refund if it’s down to you to claim it back. This point can be verified before signing a contract. The leaseback company can sometimes do it for the investor, but do verify this point.

Why does the French government refund the VAT?
To encourage property development and tourism of this type in specific areas. They encourage buildings to be constructed often in areas of high unemployment. These developments often create hundreds of new jobs. As the management company pays social charges and taxes – The government gets its investment back through the tax system. This is a genuine opportunity sponsored by the French government, who simply want to increase the number of beds available for its N°1 industry: Tourism. There is no catch, it is a win win relationship.

What happens to the guaranteed income when the mortgage is paid off?
100% yours

What happens if the leaseback company goes bankrupt?
First of all most of the leaseback companies are huge, managing over a 100 properties in many cases. We’ve never known one to go bankrupt. However, they are required by law to have professional indemnity insurance which looks out for your interest if this were to ever happen.