French Mortgages for Buy and Leaseback Investment

Buy and leaseback French Property Investment mortgages are available to fund the purchase of a new buy and leaseback property from a developer back-to-back with a guaranteed rental contract (the leaseback) from a management company. The guaranteed rental income yield is between 2.5% and 6%, depending on the scheme. You are the beneficial owner of the property freehold, so leaseback investments also offer the possibility of capital gain at the end of the rental contract(s). When evaluating the net income yield don't forget to make an appropriate allowance for all the costs of purchase and ownership: The UK Financial Times estimates that the real yield may be reduced by at least 1% per year when these costs are included.

The buy and leasback scheme was introduced by the French government in the mid-1970s to increase the stock and improve the quality of tourist accommodation. Tourism is one of France’s main industries and the buy and leaseback scheme was designed to ensure a continued income stream for the French economy. The buy and leasback scheme has also been extended to student and city centre accommodation. The Value Added Tax (VAT) on new build, currently 19.6%, can be reclaimed from the French government. buy and leaseback projects are located in areas where the French government wants to encourage development. The project usually takes the form of studios and apartments within a “Résidence de Tourisme” or chalets and villas set within a “Parc” or “Domaine”. The rental company (usually a large company managing many buildings) must by law provide four services: a reception area, cleaning of the common parts and the individual properties, linen for renters and a breakfast service.

buy and leaseback developments are also encouraged in ZRR zones. Under the “Loi Demessine”, VAT can be reclaimed on newly built “Residences de Tourisme”, reduced income tax is due on rental income and owners have the right of limited occupation (maximum 8 weeks per year) at reduced rates.

A buy and leaseback is intended to be a long-term investment, held for at least 15 years, and can usually be financed by a French mortgage on the basis of projected rental income.

Advantages of French Buy and Leaseback Investment Property.

The buy and leaseback property is sold decorated and fully furnished, including a fitted kitchen, dishwasher, cooking hob etc, so you don’t have to take responsibility for anything.

The management company pays for maintenance of the property and the furniture, including replacing breakages.

The management company takes responsibility for marketing the property, maintaining it, handling changeovers, and paying you rental whether it finds customers or not. They also pay the running costs, such as insurance, water, waste disposal and electricity.

There are no management charges to pay.

The buy and leasback rental income will be index-linked, usually to the INSEE Cost of Construction Index, although the exact calculation depends on the small print; some reviews are 3-yearly and capped at ¾ of the fluctuation in the index.

In some buy and leasback developments, owners can use their own or a similar property for a certain number of weeks per year. Some companies offer discounted rentals on other properties which they manage.

The return on investment can be increased by taking out a mortgage, as the interest charges can be offset against rental income to reduce tax.

Disadvantages of French Buy and Leaseback Investment Property.

Market choice: French leaseback properties are most frequently bought by French residents, who also enjoy other tax advantages. The best developments are usually sold within hours of launch. The leaseback which reach foreign investors may have been turned down by French investors.

Quality and solvency of the management company: The individual owner has no choice in the selection or running of the company. The management company can sell out to another company if it chooses. Management companies are required by law to have professional indemnity insurance against bankruptcy.

End of the Scheme: The French government has the right to withdraw the scheme at any time.

Mortgage interest rate: The interest rate charged on a leaseback purchase may be higher than on an ordinary property transaction because it is harder for the bank to sell a leaseback property on the open market in the event of foreclosure.

Management company renewal: The choice of whether to renew the lease after 9 years is at the management company’s discretion. Not only do they have the right to renew even if you are not happy with their performance, they also have the right not to renew, which would leave you with no guaranteed rental income, just the outgoings such as your mortgage.

The owner still has outgoings: After the first two years, owners of French property are liable for Taxe Fonciere annually whoever is using the property and French Accountants have to be retained to deal with the VAT return. Owners sometimes have to pay for the Frais des co-propriétés, the freeholders’ responsibility for the upkeep of the common parts.

Selling the property during the lease period: The market for sales of leaseback property during the period of the lease is not the same as the open market, because the buyer would have to take over the remainder of the lease. Some schemes limit the number of units which can be for sale at any one time.

Selling the property after the lease period: All units in the holiday resort will finish their rental contract at the same time, so there could be an over-supply of identical properties for sale. The number of buyers looking to buy within a resort may also be limited.

Repaying the VAT: Sales of property purchased under a leaseback agreement within 20 years require the seller to reimburse a proportion of the VAT (1/20 per year, so half if the property is sold after 10 years).

Glossary of Buy and Leaseback terms

acte authentique de vente - The conveyance deed.

BIC Benefice Industrial & Commercial -The tax regime for leaseback income

Contrat de Reservation - Reservation contract, also called “contrat préliminaire” or preliminary contract. The contract must indicate the size, number of rooms, price and delivery date. The seller undertakes to supply the property as described in outline and the buyer gives a dépôt de garantie, reservation deposit, generally 2-5%.

INSEE Institut National de la Statistique et des Études Économiques - France’s National Institute for Statistics and Economic Studies.

Kit fiscal - A pre-printed package of tax forms for a buyer to complete and return to the developer to reclaim the VAT on a leaseback purchase.

LMNP Loueur en Meublé Non Professionnel - Non-professional landlord who earns less than €23,000 per annum or half of their revenue in rental income. LMNP are assessed under the Micro-BIC tax regime: turnover is reduced by 72% or €305 whichever is the greater; tax is due on the remaining 28%. Expenses (such as mortgage interest) can be offset against revenue.

LMP  Loueur en Meublé Professionnel - Professional landlord who earns over 23 000 euros /year or over 50% income from rental. The tax payer can offset any losses on rental against total income and any gain resulting from the sale of the property will be taxed as business capital gains.

Loi Demessine - Tax incentive introduced by Michelle Demessine, former Secretary of State for Tourism in France, reducing tax due on rental income derived from an apartment in a tourist development that has been leased back to a management company for a minimum of 9 years.

Lot - A lot consists of your private parts (the apartment, cellar, storage area and parking) together with your share of the common parts.

Règlement de Copropriété - A lease between a management company and each owner covering the arrangements (including responsibility for maintenance and payment) for the common parts (eg entrance, elevators) of a property development.

SH Surface habitable - Living space excludes cellar, cupboards, balcony, staircase

Vente en état future d’achèvement (VEFA) - Off-plan sale.  Ownership of the land passes to the buyer on execution of the acte authentique de vente, but ownership of the property (and corresponding payment) only passes as construction advances.

ZRR Zone de Revitalisation Rurale - A rural area where economic development is stimulated by fiscal incentives.