A Leaseback can be forever
June 12, 2007
This email exchange was published in my blog on Coast and Country, but I am posting it here because it raises a lot of important points about sales and leasebacks in France.
Many thousands of people have been sold a leaseback property in France thinking that they can take over the property themselves at the end of the lease. In most cases this is certainly not possible.
Importantly, in French law a person or company who is leasing a property is entitled to compensation for loss of business and profits if the lease is terminated by the owner (you the person who has purchased the leaseback property) or not renewed. This is inherent in French law and does not have to be stated on any agreement or lease (and never is, I have not seen any leaseback agreement where this is explained).
So many thousands of people who have bought a property through a leaseback scheme are very likely to be disappointed when the lease comes to an end and they hoped to be able to use the property for retirement - also the lease option will blight the reseale value and therefore the capital gains which may have been hoped for, or the free occupation of their property.
Leasebacks are designed for French taxpayers who will gain tax benefits for investing in properties designated for specific commercial areas such as tourism or low-cost housing.
Leaseback sales can be a good investment as they can give guaranteed returns and are (in France) tax deductable. They should be considered as a bond, giving a fixed return and tax benefits, not a super wheeze to get a free house (there aint no such thing).
==
Hello Tony,
I am thinking of buying a property in the south of France as I have a son who studies in Sophia Antipolis and I think he may want to stay there longer than after finishing business school.
I would like to purchase the property initially as a investment and later on to give to my son for him to keep, sell, upgrade or whatever he deems fit. Would it be better to get a leaseback property or an apartment and then have it rented out? I don’t live anywhere near France or Europe so looking after the property would be difficult for me.
What would you suggest?
Regards, MCL
==
Hi MCL
This seems a simple question, but in fact it opens a lot of very important points and needs several answers. I will try to outline some of these but if you would like to email me to give me more details I can tailor a more personal response.
A leaseback is not really something you should buy if you are planning to use it yourself - I know a lot are sold as a good way to have a self financing holiday home - but this is not what the plans are designed for and many people have bought leasebacks unaware of severe limitations there may be in French law which are not shown on the agreements and leases.
Buying investment property in France is certainly a good idea, but like all investments, you need knowledge or expert guidance.
Inheritance laws in France are precise and cannot be overruled by a will.
It may be wise to buy a property in a company specially designed for this, a SCI, and give you son shares, you can transfer more shares over time without incurring any (or much) tax. There are annual options for donations like this free of tax in France - if you simply give your son a property there will be tax due.
Buying an apartment and then renting it needs local management. Depending on where you are buying we may be able to help and advise. We have a lot of expertise around Cannes and Sophia Antipolis.
Do get in touch with me directly, with more information, budget, timing etc and I can give more relevant advice
Tony
buying investment property, coast and country, Diary, french law, inheritance laws in france, laws in france, Leasebacks, leasebacks in france, leaseback property, local management, property in the south of france, south of france
Comment by David Burton
Hi MCL,
I have been reading your various blogs with interest, particularly the lease back issues. I have looked into Fractional Ownership in France, which is my preferred option, without any results, appart from some flats in Paris which I am not interested in and wonder if this concept has developed very far in France. Any comments / advice would be welcome.
rgds, David.
Comment by Tony
Hello David
It is true that there are very few fractional offers in France yet - I am planning to get site set up to facilitate introductions and services for people wanting to get together and then to buy houses for the groups.
We have the expertise an understanding of the legal and financial models and can help groups safely structure their companies to buy the right properties in a correct and secure manner - I hope to get the support to get this site running very soon
Keep reading the blogs to find out when this happens
best wishes
Tony
Comment by Jan
Please send more information on leaseback and fractional ownership in France.
Regards
Comment by JOHN WARD
Hi tony,
Have been reading your thoughts on leasebacks with interest.I cant agree with your comment “It is not something you should buy if you intend to use it yourself”.
I have two leasebacks in the south of france one has 6 weeks usage (three weeks in high season) the other, four weeks (two weeks in high season)They also pay 4.2% and 4.3% as a yeild.
They are in fantastic locations which i used to visit about four times a year before buying these leasebacks.If you add the average cost (four hundred pounds) to the yeild it makes it a great return as i will be happy to hold these for the next 11 years when my mortgage finishes.
I take your point on the lease issues and i was well aware of it prior to purchase in 2002 but due to the points mentioned Re: holidays,thought it was a risk worth taking.
on your point Re.Lease non renewal i have heard from two sources that they cannot penalise you anymore than one years rent.Have you heard this?.
Comment by Tony
Hello John
Thank you for writing and I am delighted you are happy with your investment.
Your mail is important as it raises points I will try to clarify - I assume you bought your leaseback investments a couple, or more, years ago - interest rates and property prices were much lower then and the return you are getting is, I assume, based on the investment you made at the time.
I do not say leasebacks are bad, they are usually a sound low-risk investment, but the real benefit is designed for high rate French tax payers who can in fact finance the property from money that would otherwise have been paid as income tax.
There are a couple of points which need to be expanded -
If you make use of a leaseback property for a few weeks yourself, this will reduce the return you get on your capital plus you are taking a benefit which is taxable - so the rent you would have paid for using you own property must be declared as income.
The rumor you have heard about compensation being limited to a year is false - compensation for cancelling a lease (or not renewing) is not limited and can be enforced for all commercial losses sustained if the lease is not renewed. This can be very large, for example, consider a restaurant - over ten years this can represent a massive investment in getting a reputation and clients - this can be worth millions - to cancel a lease on the property would cost millions in compensation. There is no limit.
The same logic applies to a vacation complex, a leaseback property in a highly desirable location has a premium value, cancel the lease, or a refusal of renewal could have very substantial compensation costs.
The corollary is that if they do not wish to renew, this implies the property is overvalued - this is lose, lose situation for an investor expecting a capital gain or for their personal possession.
The simple fact is that French tax payers investing in a leaseback “pray” for the managment company to renew and to maintain thier initial investment return. Others, expect a miracle, the managment company to throw away a profitable asset.
I am very keen to hear all feedback about leasebacks, successful re-sales etc - I am not knocking them, they are a good thing for buyers and for France, but many sellers of Leasebacks are very “economical” with the truth.
Best wishes
Tony
Comment by Khadine
Dear All:
I agree with John in regards to the many benefits of leaseback and its multiple uses.
I’m wondering if Tony is an attorney or tax advisor in France or an specialist in leaseback or property investment in France.
Some of the comments Tony raises here are very debatable and I wanted to hear more about his source of information.
I work with the French market and specialize in selling Leaseback. I am adding my comments as a promise to one of my clients who was confussed after reading this blog.
My interest is to gather facts and clear out some of my client’s concerns who have read this information.
There is lots to be learned and French Law is quite tricky to interpret, so I will not try do so.
I also wanted to post the new advantage the French government has given to Leaseback investors: Starting on January 2006, investors no longer will be required to give a pro-rata of their VAT discount back if they sell before 20 years.
I’m attaching a very good link on Tax issues around Leaseback: Independent link I found in google but from good source.
http://www.frenchentree.com/fe-legal/DisplayArticle.asp?ID=22324
In reference to buying with SCI, my humble believe is that we need be very carefull when we advise private investors to buy through it, as this is not the right fix for everybody.
Best regards
Khadine
Comment by Tony
Khadine,
Yes, I am a specialist in leaseback and property investment in France, I am licensed and registered and I have not sold a single leaseback although I have advised and been consulted on hundreds of sales.
I have not sold any as, in every case I have been involved in, the potential buyer has not understood the implications and restrictions involved in the purchase.
Leasebacks are an excellent investment if you are a French tax payer at higher levels of tax - for non French residents, for a short period, from 2001 to 2004 when money was cheap, in some cases they could have been a good investment .
What I am constantly warning about is the bad way these investments are presented by non qualified (and non resident) sales people as a way to get a free vacation or retirement home - this is balderdash.
Anyone buying a leaseback in France will be registered for value Added tax - this is how the tax rebate is given, recent legislation allows for a simplificataion of the passing over of tax credit on a leaseback purchase, to aq VAT (TVA) registered person.
A SCI is a structure suited to some property purchases, a usefruit may be another way of buying, or determining the marriage/parnership contract - all are critical for tax relief of inheritance and need expert advice.
Pprofessional advice from a qualified and insured expert is something I always recommend relating to any investment in property in France (I always emphasise fully insured - if they ain’t insured don’t touch them with a bargepole).
What is your professional status Khadine? I understand you sell leasbacks (I don’t because in most cases they are not suitable for my client’s needs)
Tony
Comment by MJF
I found this blog extremely helpful. I was contemplating a leaseback property in the Alps Flaine or Samoens) but was uncertain about the resale side of things once the lease had expired. I will simply go for a freehold option now. Thanks
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