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Everything you always wanted to know about France - from France |
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Leasbacks - read this letter carefully before you buyDear Tony, I have been an avid reader of your newsletters for a number of years. I started reading it when I was researching buying an apartment in France and found it extremely helpful. Bye far and away the best that I have seen on buying in France. By the way I hope you are fully recovered from your health problem. I have just read your current newsletter today and your comments on the resale of leaseback properties caused me some concern. I purchased a lease back apartment in 2003 with a leaseback agreement of 9 years. It is with one of the biggest rental companies in France and I intend selling it in the near future. I estimate that it has increased in value by approximately 30% since I bought it but your comments about buyers wanting a return of 7% in rental is quiet alarming. Also, your comments about the difficulties with selling a leaseback are very distressing. In my own case, I employed a French Lawyer fluent in English to vet the lease contract. He confirmed in a written report that I will be able to sell the property at the end of the lease period without any penalties and that there are no restrictions on whom I can sell to. All that is required is a written letter from me confirming that I do not wish to renew the leaseback agreement which is sent to the company six months prior to the date that the lease agreement ends. My understanding of the leaseback agreement is that it runs for 20 years, any TVA refunded or discounted from the purchase price must be repaid on a notional basis, i.e. there is a credit for each year that you have held the property. Capital Gains Tax is liable on any profit which is made and again liability is set out on a notional basis - after two years it is reduced by 10%; after 5 years 25%. In relation to CGT, I understand that any financial investment such as renovations may be used to offset CGT liability and interest paid on a mortage. While I understand that there are rights under French Law Decree 1953 in relation to tenants, (in this case a commercial tenant) I understand that this Clause is rarely if not ever used by companies who enter into leaseback agreements as it would have a detrimental effect on future sales. Quiet simply, if potential buyers of leaseback properties were made aware of property management companies invoking their rights under this law, sales of leasebacks would plummet if not cease altogether. It would not be good for business as potential purchasers would not buy into something which restricted their right to sell at the end of the leaseback agreement. If there are documented cases of this I would be very interested in the details. I am particularly interested in your comment that leasebacks are not a way of buying a property you can live in, or retire to after the initial lease period. I am wondering on what basis did you arrive at this conclusion? If what you say is correct, it means that anybody who buys a leaseback property can never use it for their own pleasure. This is quite disturbing from my point of view as I do intend to opt out of the leaseback agreement when it expires, (or sooner) sell the apartment and use the capital to buy a second home (not leaseback) which I can live in part of the year. Is this something one can do with a leaseback property. I would presume that any new buyer would have to see out the remainder of the leaseback agreement, in my case 11 years. I would be very interested in your comments/views as I have a healthy respect for your opinions in matters of French Law. Yours faithfully, Lee === Hello Lee Thank you for writing about this very important subject, there are a lot of points here and I will do my best to answer them. I must stress that this is my understanding of the situation regarding leaseback properties and it is not a legal opinion , nor is it likely to be relevant for every leaseback transaction or development, every situation must be carefully looked at individually. However the points I make could be used as the basis of questions you should ask your lawyers and the developers, get all replies in writing. The amount of months that a leaseback can be occupied varies according to the local regulations concerning the ZAC (zone) in which the development is sited. This can be 12 months or any number, going down to three months (this is the lowest zoning I have come across). Please note that some properties on an individual basis, can be sold on a leaseback basis or as principal residences. The leaseback bit is only to do with a commercial tenant offering certain services (breakfasts, welcome room, etc) which qualify his rental business as hotel letting and subject to TVA. At the end of the lease, having given notice of non renewal in line with terms and conditions of that lease, having paid /not paid compensation, the owner could live in, rent out or whatever. Individuals can drop out of the leaseback contract. A high up in France's second biggest leaseback chain - they build, develop and manage, like P&V - has told us that on their developments they would let the first few folks who wanted to not renew go without compensation, because of the bad publicity it would bring them to be seen demanding compensation. However once the number of non renewers got close to the 30% level on a development they would start demanding full commercial compensation, because, for them, any development (they build, develop and manage, like P&V) would become commercially non viable with with less than 70% of the properties under theuir control. It is important to remember that leasebacks are bought by French people as tax efficient annuities with weeks of use as a perk. For the majority of French owners, the issue or worry is that the tenant - gestionnaire- will not want to renew, and the thought of them, the owners, not renewing never occurs to them. Depending on the terms of the lease, the management compay often has the right to enforce the extension of the original 9 -10 -11 year lease. Regardless of the terms of the lease, the management company always has the right to full commercial compensation for non renewal of the lease. This right, recognising the 'propriete commerciale, inherent in any lease, is inherent in all French leases and is there for the protection of businesses against unscrupulous land lords. For example, (You rent a building, repair it, turn it into Paris's chicest and most popular restaurant, if at the end of your lease your landlord refuses to renew the lease, you would have the right to full commercial compensation - the cost and difference in costs of renting a similar establishment in the same area, the costs of establishing and hence the same level of trade as was possible in the old establishment, lost income etc etc) There is no fixed ceiling or formula for working out how much the compensation might be. One large management firm has told me, unofficially, that they would charge any non renewer the equivalent of one year's rent. I take your point that if this is the case that the leaseback business would collapse, but this has not happened although I am aware of friends who have had very unsatisfactory returns on their investments in this sort of operation for low-cost (hlm) housing under this scheme. The government has a vested interest in maintaining this incoming investment structure and there does not seem to be much bad publicity about this. If you plan to sell your leaseback investment during the first 9 years, you cannot expect any capital gains, in fact a loss is more likely, as a new investor will still expect to see the same return on their capital and there are the expenses to consider of sale and purchase. Also you will need to spend more to attract a buyer than the developer who has an stronger interest in selling similar new plans. This is the reason I have been quoting a return needed of 7% by a second buyer. Capital gains, for a European resident, are 16% - there is no reduction for the first 5 years, you pay the full amount, this then reduces by 10% a year until it is zero after 16 years - thsi has changed since 2003. For capital gains, you cannot now offset building costs and costs of improvements to the property, a few exceptions do apply such as major repairs, but the previous allowances no longer apply. The lawyer is correct - you can sell at any time, to anyone - there are no restrictions on you for this, you own the freehold, but, depending on the lease restrictions and contractual terms, the value of this will be affected by obligations, lease etc on the property and market forces. The price you get for the property will depend on the returns given by the investment considering the restrictions applicable. With the fixed return and the difficulty in marketing against the developers interests it is unlikely, in my opinion, there will be any capital gain. If you had the initial lease contract looked at by a lawyer, this would not specifically mention the fixed legal applications which may be applied or the zoning restrictions affecting the overall development. It is very unusual for a French specialist in any business to volunteer advise or help - the culture in France is that you have to specifically ask the right question. Leasebacks are simply an investment, they are secured by a freehold and give a guaranteed return. But they should not be regarded as a way of getting more than the 4% or 5% paid and there can be no way any potential capital gains, or losses, should ever be used as a reason to buy. I suggest they should be regarded in exactly the same way as fixed interest bonds in a prominent company. At the end of the term you should be able to get your money back, prior to that term you may not get the full value of your inestment. In many cases, for the tourist developments, you can arrange to use the property for some weeks each year, this will of course reduce the income and return on your investment and you may have to pay tax on the use you make of you own property as you are gaining a benefit Personally I consider it near to fraud that some agents sell leasebacks as a way to have a free holiday home with "guarantees" of capital gains and the possibility of a retirement home paid for by the income over 20 years. I suggest that the best way to consider a leaseback in France is simply as an investment, which is secured against a freehold, giving you a guaranteed return for a fixed period. If you are looking for a property for your own use then this is not the best option. If you are looking for good capital gains - then so are millions of other "investors" and this is not the way to do it. I must stress again that I am not a lawyer and that these notes are my understanding of the situation after several years of looking very hard at the various real-estate options in France. I have found a few independent legal professionals whose opinion I respect and to whom I would advise anyone considering a property investment to consult. Best wishes Tony === Hi Tony, Thank you for your prompt reply. Firstly, I accept fully and acknowledge that this is your personal opinion based on your own experience of the property market in France. I do have a French Lawyer and obviously he is the person I would seek advice from in a legal context. However, I have a healthy respect for your opinion in these matters, that is why I contacted you. My main reason for writing to you was to ask about my own situation and its pitfalls before going to my French lawyer about selling my apartment. My apartment is in Cannes - a one bed which I bought for 76,000 including notaries fees. The lease agreement is for nine years. I have the use of the apartment for 3 weeks or six off season weeks if I wish to. It was recently valued at 100,000 to 120,000 by an agent ( Similar leasebacks in the same area are being sold for 145,000, they sold out in two weeks) The leaseback company is Pierre & Vacances and rental return just about covers the running costs . This is my main question - If I sell the apartment when the 9 years are up it and repay the VAT and CGT to the French government , what is the status of the apartment when I sell it ? In other words is it still a leaseback even though the French Government have received back the VAT ? What is the new owner able to do with it? Can he/she live in it as a normal property because now all the VAT is repaid and the 9 year lease has expired ? In relation to the 20 years of the leaseback agreement which remains (but without an leaseback agreement in place) , P&V have no longer an agreement with the owner (me) so how can it still be classed as a leaseback property when the lease agreement has expired? If I sell it , I would have to pay the VAT back and CGT on the capital gain made. Currently, I estimate that if I sold at 100,000 I would have to repay the VAT approximately 5,000 and pay CGT tax at 16% on the gain made, gain is 100,000 less 76,000 = 24,000 * 16% = 3840 + 5000 = 8840 plus notaries fees 7000 to 8000, a total of 16,840 which would leave me with a profit of 7160. Is this correct or am I missing something ? As a footnote I agree fully with your views on leasebacks and I would personally never purchase one again or advise anyone who asked me about them to purchase one. Best regards, Lee === Hi Lee My information about Pierre et Vacances is that this development will always be classified and regulated as a tourism plan and deregulation with unrestricted use by the freeholder is most unlikely ever to be granted. I believe most of that company is owned by members of the French government so... It is the classification of the development which I understand has no time limit - not the lease - that is a concern. With restricted access for the owner there is not much else that can be done except let it through a management company. The lease backs that sold out in 2 weeks are I assume those sold by the developer - I have yet to find a good, strong re-seller market for leasebacks and would be most interested if you know of anyone who has resold theirs after a few years. If you sell after nine years. You will repay about half of the TVA you had returned to you originally - the new buyer can then reclaim this. To get out of the zoning I understand the majority of the freeholders must request this and repay all of the TVA. - this is most unlikely to happen and would be difficult for owners to organise You will pay 60% of the CGT calculated due. The apartment will still, probably, be in a zoned tourism development so no person can occupy for more than 6 months in any one year The management company PandV may demand a new lease = Your calculations, based on a sale price of 100,000 seem correct - you have to add the cost of marketing and selling, there are no agents fees in the developers figures, these are bundled in, so you need to allow 5% for agency fees- the unknown factor is the market value - I have investors interested in leaseback properties, but they are demanding a 7% return, so if you get 5% on 76,000 they are valuing this now at about 72,000 = I only see leaseback investments as a long term, low return, reasonably secure, investment only plan. There are some added advantages for a French resident top level tax payer - but, in my opinion absolutely none for a non resident and they are being sold very misleadingly. These are the comments I am making in an attempt to get people to ask the right questions. I really welcome your feedback on this Tony === Tony, Thank you for your further comments. You have clarified one aspect of the leaseback programme which I was unsure about. - that It is the complex which is designated as a " Residence de Tourisme " not the individual apartment so it is a leaseback ad infinitum!! Am I correct? Secondly, a majority of the leaseholders must opt for getting out of the leaseback scheme in the complex before it is re-designated and repay the VAT ? Thirdly, my lawyer informs me (written advice) that in the contract I signed with P&V they did not include or ask for penalty if I choose to sell after the years have expired and I should not ahve to pay. I do know that under the 1953 law (courtesy of your website) that they (P&V) can demand a fiscal penalty but this is not in the contract I signed and the lawyer says I will not have to pay a penalty . (Perhap this is not correct ?) Fourthly I am not sure what you mean re the 5% at 76,000 and it being valued at 72,000. Do you mean an investor would only see the market value of a property bought at 76,000 as now worth 72,000? The properties I referred to were situated in a sister complex to the one I am in and P& V were the sellers. The occupancy and rental returns were less favourable than the one I received. It is a good complex with a pool and easy access to beach ,shops, trains and buses and should be easy to sell. . Lastly, in your opinion, ( and I accept you are not a lawyer etc and it is only your opinion I am seeking) should I sell now and cut my losses or hold on for the full 9 years?? Thank you again for your comments and your very sound and informed advice. Regards, Lee === Lee Yes, for sure it is always the overall development which has been granted the special terms for leaseback development and all government tax concessions, not each individual property. As an investment, you should consider it a permanently outside of your control. Changing the statute, I do not think is as simple as getting the majority vote of the owners of the properties - as far as I can find out this has never happened in 30 years of these plans so it is an unknown area. It is not just the VAT at question here - if any of the owners are in the French tax system, then they have some income tax advantages of keeping in the scheme and are unlikely to cooperate. There are bound to be many penalties, expenses and difficulties of getting out of these schemes. Just because they do not mention an exit penalty this does not mean there is none - in French law I think this is already defined - you need to always assume you are guilty and have to prove innocence in France, so this is very much the case of caveat emptor which is the basic rule of all French property law. A new buyer is likely to be looking for a 7% return, so assuming you are receiving 5% of the 76000 you paid, this values the property at around 72000. You confirm that the sellers of the new leasebacks there are Pierre et Vacances - has any individual owner been able to sell their property ? Returns are dropping, but they are selling now for more so this is not surprising. You are asking me a difficult question - this is not advice - but - if it was me, I would try to get my original capital out of this and put it somewhere where I had full control. If I want no involvement at all then put it in UK government bonds - me personally, as I live here, I would invest in a straightforward freehold property in France . I would look seriously at fractional ownership and usefruct deals now being offered in France as these give me minimum management, good capital gains opportunities, direct control and influence and also have the good "fun factor" for vacations and my own use. I never keep anything as an investment for 9 years, not even a good bottle of wine, but then I do not have loads of investment capital to work with. I am not condemning leasebacks - they can have a place as part of an investment portfolio as a secure, minimal involvement, low interest investment for French tax payers living in France who are keen to support the French government initiatives for low cost housing, tourism, historic buildings and student accommodation. Happy to keep this dialog going, it is focusing my own thoughts and encouraging new research. Tony There are over 2,000 features and articles on this site about French life and living in France. You can search from the search box above. Do browse through our website and please use the advertising links, they help pay for the site. I do try to reply to all mail - Contact Me - most is about property or living in France. I publish comments in this newsletter which I believe are of interest and may help find answers for people wanting to come to France. I hope readers will go to the adverts which help support our overheads. |
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