French Leaseback Property Explained
For a listing of French leaseback properties for sale please click here.
The French Leaseback concept
The French leaseback scheme was introduced by the French government in 1986 in order to increase the number of properties on the rental market for the tourism sector and to boost employment in the industry. France is currently, and has been for several years, the country which receives the largest number of tourists in the world - some 75 million visitors in 2004.
The leaseback scheme has since been extended to cover other sectors and it is now possible to purchase leaseback properties that will be rented to students or business tourists, and, more recently, homes and medical homes for senior citizens (chambres medicalisées).
The concept of leaseback is quite simple. You purchase a property outright and from day one the property belongs to you in full. You rent it to a management company for an
agreed period of time, usually between 9 and 11 years, in exchange for a guaranteed rent and possibly a number of weeks of occupancy for yourself, depending on the property.
Leaseback includes two main types of properties: the ZRR (Zone de Revitalisation Rurale) where the property is rented “murs nus” (without furniture) and it is up to the management company to furnish it, or the “loueur meuble” where you purchase the furniture at the same time as the property and you rent the property furnished.
Leasebacks are very popular with French people as, in addition to the VAT refund, they generally benefit from tax incentives.
In order to qualify for a leaseback, a property programme must meet certain construction standards and criteria set by the government. The management company must then offer
certain services: a reception and a choice of at least two of the following: breakfast, laundry or housekeeping services.
THE LEASEBACK IS NOT A TIME SHARE - unlike a time share, when you purchase a leaseback, you OWN the property in full from day one.
VAT refund on French leasebacks
VAT (TVA in French) refund on the leaseback properties.
As an incentive for people to purchase and rent their property, and therefore increase the number of self-catering properties available nationwide, the French government will refund the VAT paid on a property. This is 19.6% on all new properties. The VAT refund is lower on refurbished properties and the amount refunded depends on the amount of refurbishment required.
This means that for a new property purchased for €119,600, a refund of €19,600 will be made within six months of the purchase. In some cases, the builder will even advance this amount to you and the property will in fact only cost you €100,000.
This VAT refund is based on a 20 year rental plan. If you decide to stop renting your property before the 20 years are up, then you will be asked to refund 1/20th of the VAT amount per year you are not renting. For example, if you purchase a property and receive a refund on the VAT of €20,000, then decide to stop renting it out after 15 years, you will be asked to repay €5,000 to the government - 5 years X €1,000 (1/20th of the VAT refunded originally).
Please note that you can resell your leaseback without having to repay the VAT if you resell it with the lease, i.e. as a leaseback. It should also be noted that in the event where you resell the property before it is five years old, you will be asked to repay VAT on the actual sale of the building.
Rental and lease on leasebacks in France
Long Term Guaranteed Rental Income.
The French leaseback scheme guarantees the property owner a long term rental income, usually paid every quarter, for a first lease period of between 9 and 11 years.
This lease is renewable on expiry. However, it is up to the management company to renew the lease if they wish to do so. Generally, however, it makes business sense for a management company to renew at least two full leases.
The rent paid is indexed to the cost of construction to a limit of normally around 2% or 75% of the index, meaning that your rent will be revised upwards every 1, 2 or 3 years.
The rent paid is usually calculated based on the property price excluding VAT, and the rent earned should be shown excluding VAT.
Both the price of the property and the rental income from any given property are fixed inadvance. Agents that are claiming a higher rental yield will not in fact achieve you any more profit than anyone else for the same development and are simply displaying numbers in a different way.
The lease offered is a commercial lease. This means that in the event that you end the lease before its full term, you will be asked to pay compensation to the management company for their loss of revenue. At the end of the original lease term, it is usually renewed under the same terms, with rent starting at the same level that it was at the end of the previous term, and still indexed as above. It is usually possible for you to decide not to renew the lease at the end of any lease term, provided that you give sufficient notice. Such terms should be reviewed with your notaire prior to purchase.
It is possible for you to sell the property at any time, even if it is leased to a management company. In this case, however, you would have to sell the property as a leaseback property under the current lease conditions.
It should be noted that the guarantee is not offered by the government, but by the management company itself. It is therefore crucial to buy a property with a management company that has an exemplary track record. It makes a lot more financial sense to buy a property using an established management company that is offering realistic rent yield rather than buying with management companies that are offering higher rental yield than normal - a promise that they will certainly not be able to maintain.
Hassle-Free Rental
The French leaseback scheme offers hassle-free rental for the property owner. It is the management company that is wholly responsible for the upkeep of the property, its furniture and the communal areas such as the gardens, pool, gym etc.
It is also up to the management company to find short-term tenants like holiday makers or others - and the level of occupancy should not affect your rental income.
Occupancy in French leasebacks
Weeks Of Occupancy In Your Property
The motive for purchasing a property in France varies from making a straightforward financial investment to wanting to own a holiday home.
The French Leaseback Scheme offers a choice between pure property investment or a mix of investment and leisure.
Along with a guaranteed rental income, most of the developments dealing with tourists offer the owner a period of occupancy that varies from one development to another. For instance, as well as rent, your contract may stipulate that you receive three weeks’ occupancy per year – for example: one week during the high season, two weeks during the medium season.
Occupancy is usually booked a few months in advance. In many cases, if you do not intend to use some of your weeks, then you can ask the management company to try to use them and repay you part of the rent collected.
For a listing of French leaseback properties for sale please click here.