What does a 'Leaseback' property mean?
This unique scheme enables people to be able to afford to buy their dream holiday home or overseas investment property in France and to cover a proportion of the mortgage costs with a guaranteed rental income (typically 2-5%) from a large Holiday company who will rent out your property on your behalf for typically 9 years. No VAT is charged on Leaseback scheme properties which reverts to a saving of 19.6%.
The property would be fully maintained by the managing agent and all costs incurred paid for by them. As the owner you will also have peace of mind that your property is not left unattended for months at a time. Leaseback schemes also allow the owners to have use of the property for allocated weeks of the year.
The majority of people who own holiday homes in France, only actually live in them for a few weeks of the year. In addition, French inheritance laws mean that many properties are owned by many family members who cannot agree what to do with the property - this also leaves many properties empty. This is why the French government has introduced 'Residence de Tourisme', or 'Leaseback' schemes to try and increase the quantity of holiday accommodation available in tourist hot-spots in order to cater for more tourists.
Basically you get a holiday home you own, usually with use of it for several weeks of the year with a fixed rental income guaranteed for the rest of the year and a discount to market value of the property represented by a 19.6% VAT refund on the whole property from the French government. (All new property has VAT in the total price, this refund represents a 16.4% discount to market value).
How it works
Some new properties for sale in France have negotiated a 'Residence de Tourisme' status. This means that a purchaser can buy the freehold of the property with or without a mortgage and then lease it back to the developer or a rentals company for a pre-determined period (usually around 9 years) at a fixed rental. At the end of the lease period, the property will be returned to the owner in perfect condition. Most of these properties include pools which can be accessed free of charge. Other facilities that a development may have, such as a gym, may be charged for. During the 'off-season' periods, although the property can be used, the extra facilities may not be available.
Each property purchased in this way usually has options for the purchaser to make use of the property for a few weeks of the year at no cost. Each development has its own definition of Very High, High and Low season weeks and at the time of your purchase you would define how many of each weeks you wanted to keep for your own use, normally none to six weeks dependant upon each scheme.
The owner of each property has first choice of which weeks to spend at the property, and would be sent a form at the beginning of each year to request their preferred weeks.
In order for the rentals company to guarantee the rent for 9 years it is vital the development is in a high demand location with good facilities - the same attributes that tend to drive a good capital gain in a property.
Frequently Asked Questions:
What's the difference between a Leaseback scheme and a time-share?
When you purchase a time-share, all you are getting are specific periods of time which you can use within certain locations over a set number of years. Once the term comes to an end, you are left with nothing. With a Leaseback scheme, you are the actual freehold owner of the property and have simply entered into a 9-11 year or so lease agreement. After this agreement ends, the property is still yours to do with as you wish. The only thing in common with both schemes is that you only have specific times you can use the property during the 9 years.
What happens if I have to sell the property before the end of the Leaseback term?
It has been possible since 1st January 2006 to sell leaseback on at any time without repaying the VAT which was recovered on the purchase provided the leaseback arrangements stay in place which will almost always be the case. Thanks to article 257 bis of the French Tax Code, when the owner of a leaseback property sells his property to someone who will carry on this leaseback - almost always the case - the seller will not have to pay VAT back. This is also permitted in the first 5 years after completion of the building. The important change to the French Tax Code will bring a greater liquidity to the resale market for leasebacks.
Who will look after my property during the Leaseback period?
The management company manage all of the properties on the development and, because of the high standards required, all properties and their grounds are maintained in perfect order during the 9 year period.
Who is responsible for paying all the bills during the Leaseback period?
All the utility bills are paid for by the management company who are also responsible for the upkeep and general maintenance of the property during the term. The local 'Taxe foncière' (local rates) would be the responsibility of you, the owner. For a 2-bed apartment in the South of France this may be say €300 pa. No 'Taxe foncière' is due on new properties for the first 2 years after construction.
Why is there a discount on the purchase price?
The French government has given tax breaks to developers in order to encourage them to build 'Residence de Tourisme' developments. This discount or VAT refund is passed on to purchasers to act as an incentive to get them involved in the scheme. There is a great shortage of holiday accommodation in the summer and France earns a lot of its Gross National Product from tourism.
When I book my preferred week, will I be able to live in my own property?
As long as you have booked on time, you will usually be able to live in your own property. If you are late in booking, it may have to be another similar property.
What happens if I can't use all my allocated weeks?
Owners often arrange to sub-let the property, although you would have to do this privately. Some Leases restrict this.
What happens if I wish to use more than my allocated weeks?
Generally you would get a discounted rate on any extra weeks you required over and above those allocated to you.
With the lease with rental income option, is the income guaranteed?
The rental income is guaranteed throughout the period and is usually paid every 3 months in arrears. The rental companies who pay the rent are usually large holiday companies with substantial numbers of clients and assets.
What happens at the end of the Leaseback period?
The property is yours to do with as you so wish. You can sell it, rent it out privately, live in it or you can sometimes negotiate a new lease with the management company.
Would I get a higher rental return if I bought the property outright?
Generally yes, but there are three points to consider. Firstly, your annual rental income would not be guaranteed, secondly, should you wish to use a managing agent, you will find that they will charge up to 25% of all your rentals and thirdly, you would be responsible for all advertising costs, maintenance bills, pool cleaning, gardening, apartment cleaning, changeover costs and arrangements with the property between lets and dealing with emergencies associated with the property.