Article : Leaseback Properties

Leaseback Properties – A General Overview

Leaseback properties are a concept unique to France. They are not a time-share: with a time-share you buy a set number of weeks over a set number of years but at the end of this period you do not own the property. The only thing Leaseback has in common with a timeshare is that you get a set number of occupancy weeks a year.

With a Leaseback scheme the purchaser is the Freeholder. The purchaser buys a house or flat (this is frequently, but not always, a new build property), then leases it back to the developer or accredited property management company, usually for a period of nine, ten or eleven years.

Leaseback is a way of buying a property as a holiday home or overseas investment property that covers a proportion, or in some cases, all of the mortgaged costs. Generally there is a guaranteed rental income for the term of the lease; the return can be typically 3-7% of the initial asking price. The developer or property management company is responsible for renting the property out over the period of the lease. After 16 years of ownership there is no capital gains tax to pay.

The French government refunds the buyer the 19.6% VAT, which was included in the asking price. The VAT is gradually paid back to the government on the basis that the tenants are charged 5.5% VAT. The government refund may be sold to a purchaser as a benefit, which of course it is; however, it is important to realise that this benefit comes with conditions. For example, as the Freeholder, you are entitled to sell your property at any time. If you sell the property before a 20 year period, you will have to refund the VAT back to the Government at a rate of 1/20 th of the VAT saved for each year remaining.

Leaseback schemes were originally introduced during the 1980’s as a purchasing option to help encourage new build development and to assist with the tourism industry. It has been popular with the French themselves but increasingly, foreign investors are starting to show interest.

There are several different schemes and the most popular with non-residents is the RTC (résidence de tourisme classée). This was created to develop more holiday accommodation in holiday hot spots to assist the tourist industry in these areas. A property in an RTC development must be furnished (in which a buyer has no say) and this must meet a minimum but usually high standard. Typically, the furniture is sold to the owner in a predefined furniture pack. A benefit of this type of development is that there may be other facilities, such as parking, swimming pool, golf course or similar.

It is important to realise that some schemes do not offer a guaranteed annual return. This is a result of the property being available for the owners use for a substantial amount of the time, and only given over to the management firm for a period long enough to qualify the scheme for offset VAT. Other schemes offer returns based on how many weeks the owner uses them, usually varying between 0 and 6 weeks.

Another factor buyers interested in a Leaseback scheme must keep in mind is what happens after the lease term is up: some schemes offer full vacant possession, whilst other contracts stipulate the lease must be renewed to the developer or property management company. Always ask the agent and make sure this is very clear before committing to a purchase.

It is a slight misconception that once the property has been purchased there will be no further costs or charges over the period of the leaseback. There will be mortgage repayments or mortgage protection payment if applicable. Each Leaseback contract will be different, and at the very least the purchaser will have to pay the annual Taxe Foncière (French property owners’ tax). There is usually no Taxe Foncière to pay on new builds for the first two years, but after that rates vary. For example, the Taxe Foncière on a new build two bedroom apartment could be roughly 300 euros. The developer or management company usually pays the other bills, but the buyer must look at the contract closely to see what is actually covered.

As the purchaser is receiving rent on a French property, an annual French tax return will need to be filled in and VAT returns filled.

A leaseback property could be a very good long term investment; however, it is very important that a purchaser always seek expert legal and financial advice. It is important to insure that the rules and restrictions for leaseback properties suit your unique circumstances.

This is only a general overview of leaseback schemes, as with any investment it is important to do your own research and to seek independent professional advice.