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France: Leaseback

Overview

Leaseback (propriété allégée or leaseback) schemes (also known as ‘tourism residencies’) are a French innovation which has since been adopted in other countries and are designed for those seeking a holiday home for a few weeks each year. There has recently been a considerable increase in leaseback purchases and a corresponding increase in development schemes to meet demand, but prospective buyers should be aware of the disadvantages and possible problems of the scheme as well as the advantages that are promoted by developers.

Properties sold under a leaseback scheme are always located in popular resort areas, e.g. golf, ski or coastal resorts, where self-catering accommodation is in high demand, and are either new or totally rebuilt properties. Leaseback schemes are available in many parts of France, including the Alps and Pyrénées, Brittany, Côte d’Azur and the Atlantic coast, Normandy and Paris. Most estate agents – foreign as well as French – can provide details of properties available on a leaseback basis.

A leaseback scheme allows you to buy a new property at less than its true cost, e.g. 30 per cent less than the list price. In return for the discount the property must be leased back to the developer, usually for 9 to 11 years, so that he can let it as self-catering holiday accommodation. The buyer (in effect) becomes the landlord and qualifies for a refund of the VAT (19.6 per cent) that was included in the purchase price, although it can take up to five months for the refund to be made. In addition, the developer usually (but not always) ‘guarantees’ the buyer a fixed annual return (usually around 2 or 3 per cent of the property’s value, adjusted annually for inflation according to the Index of Construction Costs published by INSEE), irrespective of his actual rental income, so that the buyer is effectively given a discount (e.g. 25 or 30 per cent) off the purchase price. The buyer owns the freehold of the property and the full price is shown in the title deed. During the period of the lease, the developer therefore takes all the risks associated with letting and you have a guaranteed income.

The buyer is also given the right to occupy the property for a period each year, usually between two and four weeks, spread over high, medium and low seasons. These weeks can usually be let to provide income or possibly even exchanged with accommodation in another resort (as with a timeshare scheme). The developer furnishes (usually with a standard furnishing ‘pack’) and manages the property and pays all the maintenance and bills (e.g. for utilities) during the term of the lease (even when the owner is in occupation).

What happens when the lease expires depends on the agreement you make with the developer: in some cases, the property is yours – unless you wish to extend the agreement, which you can usually do for a further three, six or nine years and with a longer usage period (e.g. eight weeks per year); in other cases, the lease must be renewed indefinitely.

Unless you’re happy with a ‘permanent leaseback’, ensure that you will have full and vacant possession at the end of the initial lease period, as with some leaseback agreements you NEVER actually own the property.

Note also that, if you sell a property within 20 years of purchase, you must pay a proportion of the VAT you saved to the government. Owners are also responsible for paying property taxes and income tax on the rent they receive from the developer.

Although the leaseback scheme is generally problem-free, you should beware of developers offering high annual returns (e.g. 6 or 7 per cent), as there’s no guarantee that these will be maintained in the long term or, indeed, achieved at all.

You should also check the penalties for opting out of the scheme should you wish or need to, as these can be high (the developer may have a right to claim ‘commercial compensation’), and whether the developer has the right to renew the leaseback period automatically, as he is permitted to by law. The developer may also charge management fees, and you should check what these are and what they cover. Finally, check what happens to the property if the developer goes bankrupt.

A similar concept to leaseback is offered by Burgundy Cruisers: ownership of a canal boat with four weeks’ use each season and the opportunity to earn income from letting it through France Afloat during the rest of the season. Boats cost around €200,000. Details can be found on the France Afloat website (www.franceafloat.com).

© Survival Books Limited 2005

“Buying a Home in France 2006” 6th Edition, David Hampshire.

Reproduced with the permission of Survival Books Limited.

Further information on this topic can be found in “Buying a Home in France 2006” 6th edition, by David Hampshire.

For extensive, annually updated information about buying a property in France, you can purchase this book at www.survivalbooks.net

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