French leasebacks

Beware the snags behind the legal and tax breaks

British and Irish property investors have flocked over the Channel in recent years to take advantage of a generous tax break available on French holiday homes.

French sale and leaseback schemes – in which you purchase a property and then hand it over to a management agent who rents it out on your behalf – qualify for a VAT rebate of 19.6 per cent of the purchase price.

The VAT rebate and other benefits are great but only on schemes that work well. The quality of the rental management company, location and indeed the developer need to be looked at closely in order to avoid problems with obtaining mortgages or receiving income.

The tax refund on certain properties was introduced by the French government in the 1970s to attract more privately-owned rental accommodation in tourist hotspots.

As these schemes have soared in popularity a number of smaller management companies have sprung up to absorb excess demand from investors. Not all of them have proved reliable.

Some of the worst scheme providers have failed to deliver their promised rental yields, sometimes leaving the property owners to cover large mortgage payments from their own pocket. Other developments have been delayed or have been left to fall into disrepair.

Thankfully, these types of issues are rare. There are very few clients coming back saying that the company has not paid the rent.

Some of the largest and most experienced providers such as Pierre et Vacances, Odalys, Transmontagne and Lagrange run very successful schemes all over France, which typically pay a steady annual income of 4-5 per cent after costs and offer capital growth opportunities, as well as the added bonus of a few holiday weeks for owners.

But it is nevertheless important to make thorough checks on the financial viability of any scheme-provider, as problems do occur.

A quick browse through forums on websites throws up a number of disgruntled property owners who are still waiting for rental income more than a year after making their purchases.

Banks may refuse to lend on properties that are not run by one of their preferred developers. Banks won’t finance some developments if they are run by smaller leaseback developers.

Banks can also be cautious if the prospects for reselling the property in future do not look good. They need to know that the property will hold its value. Some properties may be treated like hotel rooms and if, say, the furniture is damaged, the value could diminish.

Barclays, which lends on sale and leaseback properties in France, says it does not really take rental yields into account when calculating mortgages as they are not always guaranteed.

The bank also performs a detailed analysis of the financial position of the management company to glean how experienced it is and the scale of its operation.

The types of schemes that typically risk running into difficulties are those in less desirable areas, which are run by inexperienced management companies.

The guaranteed rental income is only as good as the company making it.

Typically schemes in prime areas such as the south of France, popular ski resorts such as Méribel and Courchevel and Paris and other large cities are the best. Agents are cautious on schemes based in lower Alpine ski resorts, which may suffer scarce snow because of global warming, and those in rural areas of middle France.

The most important boxes for a property to tick are a good location, which will be popular with tourists, and a management company that has a strong track record of meeting its commitments.

If you have a scheme in a remote area of France run by a small company, then after one season’s bad weather the company could go bust. If this happens, then your rental guarantee will evaporate and, to make matters worse, the tax authorities could try to claw back the VAT you saved.

Large companies such as Pierre et Vacances, which manages around 250 resorts, can cross-reference their properties, so if one does not have full occupancy, they can top up the rent from another resort. But if your property is being run by a small leaseback company that has been set up to manage one building or one resort then if things go wrong you are more likely to get hit straight away.

The best schemes tend to be those that are built and managed by the same firm. If the company knows it has to manage the property for 20 years it may well build it better.

Smaller developers may outsource the management of the scheme to a specialist management company when it has been completed.

Another signal that might arouse caution is when the management company offers a higher-than-average “guaranteed” rental yield.

Agents say that providers of schemes in less desirable resorts might offer higher yields to lure investors in. These rents are not actually guaranteed – and it could be the case that the more ambitious the target the less likely the company will be able to meet it. France french law solicitor avocat notaire Attorney Paris real-estate inheritance tax lawyer

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