Leaseback faq

Leaseback

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Many people dream of owning a holiday home or investment property abroad, but are concerned by a whole host of potential ownership difficulties. There is however an established scheme in France which allows for both the purchase of a holiday home, and which also provides a guaranteed income year on year.

 

The leaseback scheme, or Residence de Tourisme, was established in France in 1976. It is a Government backed scheme designed to increase available tourist accommodation in France with a view to increasing income from tourism. It is open to non-residents and is becoming increasingly popular in the UK as either a pure investment with a guaranteed income, as a holiday home option, or indeed both

 

The scheme works by purchasing a freehold property. You become the legal owner. The property is then leased back to the developer or a management company. Under the leaseback scheme the government also refunds to you the VAT normally charged on a new build properties (currently 19.6%)

 

The owner is then guaranteed a rental income throughout the period of the lease. The net return to the owner varies between developments but is typically between 3.5 to 4%. This compares very favourably with a typical 20 year fixed rate mortgage of around 3.75%, and variable rate mortgages which are lower. It can be seen how the rental income can be used in respect of the mortgage payments. Loans of between 75% and 85% are available depending upon circumstances. The rental yield is also index linked annually to construction costs, which means the rental income currently increases by approximately 2.5%

 

As in the UK there are tax allowances in respect of mortgage payments which can be offset against income. The lease typically lasts for between 9 and 11 years, after which the management company has the option to either renew, or the property can be sold, or rented out and held privately by the owner

 

The purchaser/owner can also enjoy periods of usage free of charge through the year, depending upon the terms of the lease. These terms normally allows for between 4 and 6 weeks free usage each year. The management company is responsible for all the maintenance of the property including the maintenance of furnishings which are often included in the purchase price. The developer is also responsible for insuring the building and its contents. It also pays for some of the property taxes and all the utility costs

 

Naturally it is important to appreciate the potential pitfalls. Consideration should be given to the options available on completion of the lease. The risks of the developer or Management Company going into liquidation can be reduced by dealing with large well established companies with a proven track record. Remember that whatever happens you retain ownership of the property. It is also important to understand the differences between UK and French mortgages and legal structures

 

However Leaseback offers the combination of purchasing a new select property, linked to a guaranteed rental income providing greater certainty in financial planning matters. It provides for an exciting investment opportunity that can also be enjoyed for periods throughout the year, or loaned to family and friends. In addition French property prices continue to appreciate by over 10% per annum, and there is therefore scope for capital growth

 

Potential problems can be overcome by careful planning and appropriate advice and Affordable Homes in the Sun can assist in all areas from the selection of the right property and developer to sound financial advice

 

Summary of why leaseback is an exciting proposition:

 

• VAT refunded at 19.6%
• A guaranteed rental income which is index linked.
• Tax allowances e.g. payment, repairs, maintenance, management expenses etc. which can be offset against income.
• Maintenance and management paid for and arranged by developer/management company.
• Fixed rate mortgages of currently around 3.75% over 20 years.
• Variable rates currently much lower
• Mortgages typically available with 20% deposit
• No French Capital Gains Tax after 15 years of ownership
• Potential capital growth, currently averaging 11% per annum.
• Agreed periods of free usage.
• The property is sold fully fitted and furnished
• No requirement to be a French citizen
 

It is also important to understand the potential problems with leaseback

 

• Consider options available on completion of lease
• What happens should the management company goes into liquidation
• Any penalties incurred by selling the property early
• Terms of renewal or cancellation of the lease. The management company can renew the lease if they so wish.
• Any hidden charges levied by the management company
• Appreciation of difference between UK and French law and mortgages
• If you sell before the end of the lease, a proportion of the VAT might be payable
• Any early sale will be with the remainder of the lease in place (although this might suit some)

 

 

 

Leaseback FAQ’s
 

Are French Leasebacks the same as Timeshares?

No, not at all. Timeshares mean that you simply get to use a property during set periods of the year. Unlike a French leaseback, with timeshares you are not the owner because once the term comes to an end, you are left with nothing. When you purchase a Leaseback property, you are the actual freehold owner of the property. You simply agree to rent it out to a particular tenant (a management company) for a period of usually 9 years. After the leaseback agreement ends, the property is yours to do with as you wish. The only similarity with timeshares is that during the lease, you can only use the property during specific timeframes agreed with the management company.

Are leaseback properties always new builds?

Generally, most leaseback schemes involve newly built apartments, although some major renovations or refurbishments can be included in the scheme. The scheme allows a full VAT refund if the development is brand new and you will also benefit from reduced notary fees.
 

What happens when the Leaseback period comes to an end?

You are free to live in the property or sell it on. If you do not wish to sell or live in your property, then you need to give the management company first choice on renewing the lease. Generally the easiest and most common decision is to sign a new commercial lease with the management company as the benefits of the scheme will still outweigh the inconvenience of letting it yourself.
 

Is my rental income guaranteed?

The rental income is guaranteed throughout the period and is usually paid quarterly in arrears. The rental companies who pay the rent are usually large holiday companies with substantial numbers of clients and property portfolios (for example Center Parcs).
These rentals are indexed to construction costs (the INSEE Index of Construction Costs) which means that every year as construction costs increase, your rental income increase as well. Your return is evaluated each year. The worst case scenario is that you always get your original guaranteed return.
 

What happens if I want more than my allocated weeks?

If you want extra weeks, above and beyond the number which has been allocated to you, then the majority of management companies offer these to you at discounted rates. In the case of one developer they offer you a 12 week ‘ Nomad Card’ which allows you to stay in any of their 30+ resorts for a maximum cost of 50 euros per week ( Excl July and August)
How much are the notary fees?

The notary fees are the same as in a classic purchase. If your leaseback purchase is a new build as are the majority on our site, then your notary fees will be around 2.5% - older resale properties (which are rarer in leasebacks) are around 7.5%
 

Would I make more money by buying a property outright and letting it myself?

Leasebacks are really a long term investment, to be seen as a means of earning you an extra income in the years to come. You could make more money by buying a property to rent out but you would not have the income guaranteed (particularly during those periods with low occupancy) and you would be responsible for all costs (including maintenance, changeover, laundry, cleaning, gardening, advertising, etc) as well as being responsible for such things as dealing with any emergencies that may arise. If you wished to use the services of a management company, they can take up to a half of
Your rental income in their fees. You would also not receive your VAT back or have other benefits such as furniture replaced etc.
 

Is the lease always for nine years ?

No, although nine years is the most common period, the leaseback companies can ask for any period from nine years (the minimum) upwards. Another common length for a lease is 11 years.
 

Could the management company become bankrupt ?

All leaseback companies are required by law to have professional indemnity insurance in order to protect you. Affordable Homes in the Sun minimises any risk by only using companies with a long established reputations


 

Affordable Homes in the Sun – November 2010.