Leaseback Property

A snowHead

I am currently looking into buying a place in the French Alps and when looking into property sites I keep finding new and renovated property being sold on a leaseback basis.

Although this wouldn't suit me for a place to use on a regular basis it does appear to be a very reasonable and risk averse / hassle free investment. Especially if you wanted
to build a property portfolio over the longer term.

I am sure this has been talked about previously on Snowheads but I am wondering what the catch is other than Global Warming – specifically I would like to know:

1. Any Hidden Costs / Management Fees / Up front funds required due to the time lag between purchase and rental revenues.

2. Capital Gains Tax implications when selling the property i.e. calculated with a purchase price net of VAT?

3. French taxes payable by the owner rather than the management company in the lease period.

4. Claw back of the VAT in the event of selling the property.

5. UK Income Tax impact with regard to the guaranteed rental revenue in the lease period – is this taxed as income or is the amount in excess of the interest taxed as income?

6. What determines the guaranteed rental revenue? Is it fixed at a percentage of the value as at purchase or based on an index? i.e. will it rise as property prices rise?
i.e 4% yield now might be a 2% yield in 10 years if the price has doubled.

Thanks in advance.

A snowHead

Best put this topic in the chalets thread

Pretty sure you have to pay Capital gains tax on 2nd property in France if you sell. I think you have to pay CP if you sell on 1st house within so many years.

I would imagine it taxed as income .

Best get an AngloFrench expert on these matters.

Well, the person's real but it's just a made up name, see?

NorthWestFace,

1) Main drawback seems to be that at the end of the lease period (usually 9-11 years) the tenant (the management company) has a right to renew the lease. Under French law one cannot contract out of this obligation. It remains to be seen whether tenants will seek to enforce the right of renewal. It is open to the landlord to refuse to renew the lease but he/she must then pay compensation to the tenant based on the tenant's loss of business.

2) Rental yields vary from company to company and property to property. There is usually a complex formula determining the appropriate level of yield. Although yields are expressed to be guaranteed, it seems to me that the reality of the situation is that if the management company says that it is decreasing the amount of rent payable (for example, because it has been taken over) it may be difficult for the landlord to do very much about it. I understand that this has happened in relation to some developments in the past. There is some suggestion that rents are guaranteed by the French government. I'm not sure that this is right but I stand to be corrected. That said, most people agree that the leaseback scheme represents an easy and low risk option of renting out property. It is also worth noting that the quoted percentage yields usually drop significantly if you, the owner, choose to use the property. Something advertised as a 5% yield is likely to drop to 3%, or even lower, if the owner uses it for more than three weeks per year. Again, it is necessary to look at the terms of the particular leaseback agreement.

3) The rents are revised each year and increase according to the construction cost index (INSEE). What that translates to in terms of pounds shillings and pence I don't know.

4) Any VAT paid by the French government/developer on purchase is repayable on a pro rata basis should the property be re-sold within the first 20 years.

I suspect that leasebacks, like any other commercial arrangement, vary from scheme to scheme. A leaseback to a reputable developer is probably a low risk option and is certainly less hassle than renting on the open market. It`s not for everyone (including me) but I can certainly see the attractions.

I`d speak to a specialist lawyer before entering into a lease back: Stephen Smith or Howell & Co. I think their websites have something on leasebacks.

You need to Login to know who's really who.

No 1 is a bit of a shocker but considering how many French people would be impacted if this did happen I think the risk is probably low.

Thanks

brian

NorthWestFace,

1. Same as for any new build, you pay in stages as the building is completed. Rental income is usually paid quarterly or 6 monthly in arrears after the building is being rented.

2. If you hold onto the apartment for 5 years you will be exempt from French CGT (unless you have an unfeasibly massive rental income from about 20 apartments or so). You will however be liable for UK CGT (if you live in the UK).

3. You pay taxe fonciere (typically < €10 /sq. m), they pay taxe d'habitation (typically approx €25 /sq m.).

4. pay back pro-rata if you sell within 20 years, eg. if you sell after 15 years, you pay back a quarter of the discount.

5. I think you can claim tax relief on the interest as a business expense.

6. Varies. Usually increases with some obscure French cost of construction index but is capped so the actual increase is pretty negligible.

Incidentally the TVA rebate is approx. 16.4% for new builds but only 5.5% (I think) for renovations.

Help!!

Leaseback Property

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