Lease Back Property Purchase in France

Guaranteed Rental Income – Peace of Mind – Capital Growth potential

What is ‘leaseback’?

"Leaseback" is a scheme whereby you purchase a fully furnished house or apartment and then grant a company (usually the developer or major rental management company) the right to use it for, normally, short-term tourist lettings. This is usually for a fixed period of 9 years or 11 years.

In return you receive a guaranteed income for the duration of the contract and major tax allowances from the French government both to purchase and to set against the income

The details of the schemes vary but, typically, the contract will state that the company pays all of the expenses in relation to the property - rates, water & electricity charges, community fees, repairs and replacements etc. They will also be required to return the property to you in good condition.

The contract will also usually provide for you to occupy the property yourself free of charge for a period of, say, 2 to 4 weeks per year. If you do not want to do so you can allow others to occupy the property on your behalf or, usually, surrender your right in return for a higher guaranteed income from the company.

Only approved companies can offer leaseback schemes and those that do are usually subsidiaries of major French companies of size and status. The guarantee from them is, therefore, valuable.

This is NOT timeshare. The freehold property is yours from day one. It is registered in your name in the French land registry. You are merely allowing a management company to let your property for most, or all, of the year in return for a guaranteed income.

At the end of the 9 or 11 years the property is yours to do with as you please. You can continue to let it by renewing your contract with the company, use it yourself, or sell it.

Why has leaseback developed?

The French have more tourists than any other country in the world (even ahead of Spain now!). The French themselves also are major holidaymakers in their own country.

The French government has for many years now acted to ensure there is sufficient good quality tourist accommodation available. In order to do so, and to protect their enormous tourist industry, they established the concept of Residence de Tourisme, which is what the leaseback developments are, and to give incentives to those prepared to invest in them.

Why think of leaseback?

·	The government allows you to buy the property free of VAT. VAT is currently 19.6% on new property. This is a major saving. You save over £16,000 on a £100,000 property.   (And now - if you sell the property before 20 years are elapsed now you do not have to refund part of the unpaid VAT – 20 years less years owned divided by 20. E.g. if you owned the property for 15 years and then sold, you would refund 5/20, that is 25% of the VAT – in this example £5000. Earlier laws have been changed so that you do not pay back the VAT balance). VAT on resale developments is c.5% - 9% depending on the cost of renovation
·	The guaranteed net return will, typically, be 4% -5%. This is after deduction of all the expenses of running the property.   There are generous tax allowances on this income This return can, in effect, be free of French income tax; this is because the interest paid on a mortgage, and the calculated ‘depreciation’ of the asset (5% p.a.on 80% of the purchase price), and local rates, are allowed to be offset against the income.   This income is often index linked Many schemes use the INSEE Index of Construction Costs to index link the income
·	You can make personal use of the property. Whilst many invest to maximise return or often you can use the property yourself for your holidays, with a reduced return. Additional time can often be rented back from the company at a discount.
	Capital appreciation potential is high Leasebacks are available in high demand tourist locations, where there is likely to be considerable property appreciation over the next 10 years. And now selling after 15 years attracts NO Capital Gains Tax in France   Where is lease back available?    Leaseback is only available in a limited number of areas at any one time including Paris, Normandy, Brittany, the Alps, Languedoc Roussillon & the Monaco area. Demand often exceeds supply.    Who is lease back right for?   Those who want a hassle free buy to let property investment - a guaranteed index linked income generating property investment in an era of predicted long-term low inflation and low interest rates   Those who wish to find an alternative investment as a potential pension   For those who wish to use a holiday home for just a few weeks per year and secure rental income for the rest of the year.   For those who want to buy a property with a mortgage to leverage his/her investment to the full, because interest on the mortgage is an allowance against rental income. (Mortgages up to 80% LTV are available)   Those who choose to invest in property for capital growth with income - in an area with the prospect of good growth in property values over the next 10 years.    Simple Example: You buy an apartment in a new leaseback development                                                                                                    £ List price including furniture & VAT:                                            95,680                                                                                                                              The costs of acquisition will be c. 5%**                                    c. 5000 (legal fees, notaries fees, land registry, mortgage registration, etc) (** for renovations may be higher)                                                                                    Your total gross investment will be                                    c. 100,680 The VAT is refunded ((*19.6% for new build - after 4 –6 months)            15,680                                 Your total net investment will be                                            85,000   Mortgage Costs: You place a deposit of c.30%* & pay acquisition costs (£5000):     £33680 (*of the gross price inc VAT £95680) After 4-6 months you get back the VAT                                    £15,680  So your net cash outlay will be                                                £18,000   You raise a mortgage of c.70% (£67000- of the gross price).   Mortgage repayments, over 15 yrs, will be      c. £400 p.m./ £4800 p.a. [Based on 3.5% - no rate increases or decreases allowed for. These payments can be reduced, by taking the mortgage over 20 years, or increased, by taking a 10 yr term]   Income: (Income - for this example we have taken 4% with use and 5% with no use)   You take ‘own use’ of 2 - 4 weeks per year: Your minimum guaranteed income is say 4%*      - £320 p.m./ £3840 p.a. OR You take no ‘own use’: Your minimum guaranteed income is say 5%*      - £400 p.m./ £4800 p.a. [*of the net cost of £80K]   ·         View any difference between your income and mortgage payment as a contribution to your pension – the key difference is that you are buying the asset - your apartment – directly, rather than putting the money into a stock market fund. ·         If you want you can balance guaranteed income with outgoings by varying mortgage amount & term. ·         Note this example does not take into account growing income from indexation   Your income has generous tax allowances set against it:   Mortgage Interest Charges: this example:             - £133 p. m. =  £1600 p.a. [This is an average figure; interest payments will be high in the earlier years and lower in the later years of the mortgage term]   Asset Value Offset (80% of the net property cost over 20yrs): This example 80% of £80000 = £64,000 Έ 20.. . ..  =  £3200 p.a.   Rates (Tax Fonciere) & Accountant . say £400 p.a.   Total Tax Allowances £5200 p.a.   ·         With tax allowances higher than income, the income will be tax-free. ·         The unused tax allowances are carried over for the next 5 tax years. ·         It is possible to utilise this carry-over to have tax-free income for almost the whole term of a 15 year 70% mortgage (at the rates used).   Capital Investment Gearing Taking the 5% income option (and NOT allowing for growing income), nominally you would have bought your property, worth £95,680, for only £24,000 (£18,000 plus £6,000 Rates & Accounts); and for only £38,400 with the 4% option. If the property value increases by say 5% p.a. it will be worth c.£199,000.   2007 _______________________________________________________________________