French LEASEBACKS IMPORTANT INFO

Discussion in 'French Property' started by DC, Aug 4, 2007.

  1. DC

    DC New Member

    This week, I had a very enlightening conversation which I wish to share with people.

    Many Leasebacks are sold to overseas people . The way in which they are sold may be not be as they were actually are.

    What do I implie.

    These properties you can never live in - the buildings are licensed residence de tourism.

    There could be repercussions in the further in the future with resales, as this are not like normal Free hold properties. This is starting to come to the light and could have major repurcussions for people who brought into Leasebacks at the end of the 9 or 11 year tenure. They may not be able to be sold and the management company may demand another 9 or 11 years rental.

    There are different tax and legal rules for the French, but for overseas clients. A time bomb is potentially ticking. ie. they may have brought something they can not get out of, they may have renew the contracts for a further 9 or 11 years, and if they opt out and sell, if they can then they could be liable to pay back some of the tax they were offered in the first instance. Basically a nightmare situation is potentially brewing.

    I have been different opinions from different people deriding this *they make they living out of this eg. Lawyers etc that were pretty rude, but I have a good insight that this information is stable and correct.

    If you are not in the leaseback market, in my opinion do not enter, if you are in, maybe look at what you have brought seriously and look at your consequences, your time bomb will maybe start on renewal or if you try to sell on and then you have to pay back taxes etc.

    All is not what it seems with LEASEBACK. - the illusion is shattered.

    Kindest Regards Darren
     
  2. CaroleBay

    CaroleBay Senior Member

    How very true Darren ....

    So many people are attracted by the return of TVA (Vat) and the rental income without the hassle of managing the lets. Plus of course there's the added bonus of having a few weeks holiday accomodation....

    Another observation ....... At the start the properties look fantastic, but after a few months of various holiday makers having used the accomodation they can start to look tired. After a few years, very much so.

    At the end of the lease, some people will decide to sell, but with a lot of similar properties for sale in the holiday complex, the market can be drenched and this can have an adverse effect on the selling price.

    In some cases the leasebacks are bought back by the management company, and then sold on to another management, who either re-builds or refurbishes, and once again there is another chance to buy a new leaseback investment property.

    Of course there are some good management companies. The banks who lend mortgage finance on leasebacks often have a list of the leaseback complexes that are preferred - if they're not on the list they will not lend finance.

    Whatever .... think carefully .... a salesman is there to make a sale.

    Kind Regards
    Carole Bayliss
    mortgagefrance
     
  3. DC

    DC New Member

    Interesting article

    John howells did a two page document on leasebacks.
    Advantages - 3
    Disadvantages - 9

    Be very careful with this investment. It looks good on the surface, but the shark is below the waters.

    regards dc
     
  4. Jax

    Jax New Member

    Darren where can we find the document by John Howells to have a read?

    Jackie
     
  5. DC

    DC New Member

    Jackie, I dont know if I can release as it is paid for information. I would need to ask. regards Darren
    The long and short of it, is leasebacks can be quite damaging to your wealth and health if you invest. They are not properties that you can simply live in or resell, they are licenced tourist premises, and the implications are that if the management company want to renew the contract they can do if you like it or not, and there are other horrors or potential downsides, not really spoken about.
     
  6. Jax

    Jax New Member

    Thanks Darren

    When you say paid for.. for do you mean?
    Have you commissioned the information or is it on a paid for site?
    Can anyone pay for the information

    Thanks

    Jackie
     
  7. geordie

    geordie New Member

    John Howells used to have all their reports on their website but it is being updated. If you want it just ask them, they normally quite willing to give helpful background information and I'm sure they would provide as it makes sense in terms of marketing.

    I undertake due diligence on behalf of investors and always advise people to stay clear of French leasebacks for some of the reasons above and concerns over their commercial viability and possibility of selling them for a decent profit. The VAT is factored into the prices so there is no real savings anyway.

    There is absolutely no need to fall for these types of gimmicks. If you do your homework and find a good investment then you should achieve a decent yield and be reward with good capital appreciation .

    Geordie
     
  8. Lynda Saxton

    Lynda Saxton New Member

    Leasebacks

    Hi,
    Well well well, finally someone has the sense to realise that if it sounds too good to be true it usually is, most leaseback schemes are NOT a good investment no matter where they are.
    The French property market is one of the most stable and safe in Europe, the checks and balances of buying normal property ie: second homes,homes for rental and permanent residences, are excellent, all done by Notaires
    President Sarkozy is enacting tax breaks for home buyers, which will send property prices rising at a very good rate as more French people will become eligable to buy property, now is a good time to buy, next year I think prices will be considerably higher in all regions of France, its a great place to buy.
     
  9. geordie

    geordie New Member

    exactly, but capital appreciation is falling though and will probably be below 5% this year. Big piece on France in the Irish Sunday Times this weekend.
     
  10. Lynda Saxton

    Lynda Saxton New Member

    Hi geordie,
    where do I get a copy of that article from the Irish Times on Sunday?could someone send it to me by e-mail huffsinfrance@wanadoo.fr Thanks, invest in France.
     
  11. geordie

    geordie New Member

    It's coming up this following Sunday 19th Aug. It's not that easy getting the Irish articles from the general Times website, but if you're lucky I'll scan it in and send it to you....
     
  12. CaroleBay

    CaroleBay Senior Member

    I've been searching for an on-line copy - but with no luck.
    I too would appreciate a copy, or a pointer as to where to find the article.

    Ooops - can't give you my e-mail address
    Thanks in advance ....
    Carole Bayliss
    mortgagefrance
     
  13. geordie

    geordie New Member

    You can find it yet as it's not out until Sunday 19th August......
     
  14. PaddyG

    PaddyG New Member

    I have read the article and it caused me some concern as I have reserved a leaseback property in the Languedoc through VEF. Their view is that if you buy into a quality development that is well managed you should have no problem re-selling. (Yes, they would say that) But frankly I don't want to have to worry about maintenance of a house or a pool which is hundreds of miles away and I wouldn't want to be bothered finding tenants for when I don't want to use the place or any damage they might do, arranging cleaning, repairs etc.
    I see it as a lazy persons property investment with lower capital growth that some of the more wacky areas but considerably less risky. VEF also say that the majority of lease-back buyers are French and if I decided to sell after a few years it would most likely be bought by a French buyer.
     
  15. Lynda Saxton

    Lynda Saxton New Member

    pros and cons of leaseback

    Hi Paddy,
    Dont believe all you hear, leasebacks can very very difficult to unload, and only 30% of French people buy their own property the majority rent. There is no problem with buying a regular property as a rental, even if you are many hundreds of miles away, as there are numerous management companies who for a fee take care of the entire property, including finding renters, cleaning , gardening and all the needed maintenance, and if and when you decide to sell it, it goes on the market in the usual manner without any strings attached.
    With leasebacks you are not free to do with as you wish, when you wish unlike the ownership of a regular property. Think carefully, it is not a question of being lazy, you just need to know how to do it the alternative way, with no strings attached.
     
  16. DC

    DC New Member

    Here is for everyone. Past, present and future.

    Leaseback
    By Adrian Leeds : Parler Francaise Magazine
    In John Howell's French Leaseback Report (John Howell & Co., LawOverseas......loading), published on French Property Insider at French Property Insider - - ), he notes the three good points and nine bad points to investing in the French Leaseback.

    THE GOOD POINTS

    1. The discount that you receive by not having to pay the TVA.
    2. The fact that your rental income is coming from a hotel operation rather than from the individual tourists and that it is contractually guaranteed.
    3. The fact that someone else is doing all of the hard work. You do not have to appoint managing agents. You do not have to find tenants. You do not have to collect the money. You do not have to arrange for any necessary repairs.

    THE BAD POINTS

    Unfortunately, Leasebacks have a number of bad points. These mean that the leaseback is not right for every investor.
    Generally, Leasebacks are best for the lazy or the inexperienced and unsophisticated investor. There is nothing wrong with being lazy. Some people will value the simplicity of the deal. Usually, however, you will make more money both in terms of rental income and capital growth from an apartment that you own yourself and rent out in the normal way.

    Anyone thinking of buying a leaseback property must be comfortable with the bad points:

    1. The guaranteed rental return is not as generous as it appears. The percentage is based on the amount that you have paid and not on the full value. If you spent 200,000 Euro on a unit that would, if you had been buying a non-leaseback property, have cost you Euro 240,000 including TVA. A 5% return on your 200,000 Euro would only be a 4.1% return on the full value of the property. If you had bought a good general investment property for letting directly to tourists we would expect you to have generated at least 6% net rental income and, in central Paris, probably more.

    2. The amount of time for which you can use the property yourself is never generous. Your 5% deal might have permitted you to use the property for two weeks. If you had been renting out your own property in the normal way you would probably only have rented it for about 25 weeks in the south of France or 35 weeks in Paris. This would have allowed you either 17 or 27 weeks use for you, your family and friends. That is a great perk. If you do not want to take advantage of it, it can also give you the opportunity of trying to rent out those spare weeks (probably quite cheaply) and so increasing your normal yield. Remember that this personal use is not only a great fringe benefit but it is also usually tax deductible, both in your home country and in France. Remember, you are not on holiday. You are inspecting your property and doing essential maintenance and redecoration. So your traveling expenses and incidental expenses should be capable of being claimed back from any tax that you might owe on the income generated by the property -- or any other investment properties in your portfolio.

    3. You are tied in for a minimum of nine years. But it is worse than this. At the end of the initial nine (or ten or eleven) year period your hotel tenant will have the right to request a renewal of the lease for a further nine years. Most leaseback companies now routinely request renewals, so you are in effect tied in for eighteen years. At the end of the eighteen years they have the right to request a further renewal for a further nine years. You can refuse that request, but if you do you will have to pay the hotel company compensation as French law views this situation as one where the hotel company has built up a valuable business in your premises. You cannot contract out of this situation. French law does not quantify the compensation payable but, in Italy (where they have a very similar program), the compensation is fixed at 21 months rental. If your rental is 5% of the value of the property this compensation is 8.75% of the value of your property, which is a great deal of money.

    4. The leaseback contracts are quite complicated and so your legal expenses for buying a leaseback property will be a little higher than they would be if you were buying a simple apartment.

    5. If you pull out of the leaseback program within 20 years you will have to repay a part of the TVA discount that you received at the outset.

    6. If the development ceases to qualify as a Residence de Tourisme at any time within the 20 year period (for example, because other people have pulled out reducing the numbers below the minimum permitted) you will also have to repay part of the TVA.

    7. The property may well be licensed as a hotel and not as an apartment. This would mean that even at the end of your 27 years, you would not be able to live in the apartment full time.

    8. When you come to sell your property the exit route is much more complicated. If you own your own apartment that is not part of a Residence de Tourisme then you can sell at any time. Here you cannot sell for the first nine years. After then you will probably be, in effect, limited to only selling to an investor and not to someone who wants to live in the property or to use it for their own exclusive holiday use. This is because the property is a hotel bedroom, not a private apartment. It is also because the property may still be let to the hotel company and be burdened by the possibility of having to pay them compensation if you want to break the lease at the next renewal date.

    9. Because you are limited in your choice of buyers you may well receive less for the property than you would receive for a similar
    apartment not in a leaseback program. They are buying a property generating a fixed rental income. Today, with low inflation rates and low interest rates, 5 or 6% looks quite reasonable but if we were in an era of interest rates of 10 or 12% the proposition would look a lot less attractive. The leaseback property has some features in common with a fixed interest bond where, if prevailing interest rates are lower than the interest rate fixed in the bond, the price of the bond goes up and if prevailing interest rates are higher it goes down.



    If you want an alternative in France we can offer this to you. Leasebacks for foreign clients are not a good investment.
     
  17. PaddyG

    PaddyG New Member

    Hi Linda, thanks for the advice, I have also seen the reply from goldbergglobal, which is very helpful. The 3 positives they note are very positive for me plus the development has lots of facilities which the family will enjoy. I recently sold an apartment in France because we got bored going there while the leaseback allows the use of a variety of other developments and they are clearly upmarket in terms of quality. The option I have chosen gives me 6-8 weeks usage, depending on the time of year.
    Not being able to resell is a worry, however. The developer assures me that this is not a problem and I would recover the VAT rebate as long as the purchaser signed up to the scheme but I now have a useful set of questions to put to my lawyer. Thanks all.
     
  18. geordie

    geordie New Member

    Hi PaddyG,

    As Linda says you shouldn't be concerned about maintenance or finding tenants because there are plenty of good management companies who will do this for you typically for 10% of the rent, so if you have bought well and secured a good level of finance the property should still wash its face. I would always offer the management company an extra percentage or two in order to ensure they look after your property more than the others on the books and ensure void periods are as small as possible.

    As I said earlier the tax benefit is normally factored into the price of leasebacks so you don't receive a real discount. It is the developers that get the main benefits not the investors. Be careful what your agents and agents on this forum say because they have an ulterior motive i.e. to sell leasebacks. The majority of leasebacks are aimed and sold to foreign investors and this one of the reasons the scheme was set up.

    When undertaking due diligence before buying an overseas investment buyers should be thinking about how they are going to sell property, this is one of my main concerns regarding leasebacks, particularly those aimed at tourist markets. If you look at this from the point of your own development, at the end of the leaseback period most of the properties in the development will be coming onto the market at the same time, so this oversupply could have a negative affect on prices. Then look at the national picture, with so many leaseback properties possibly coming onto the French market in about ten years time, such a large amount of property for sale could have a similarly negative affect on prices. You should either think about selling early and taking a hit on the penalties, before a flood of properties in the development come onto the market, hopefully by then you should have had significant capital appreciation, so don't be concerned with paying them in order to secure a profit. Otherwise think about keeping the property longer than the leaseback period, until supply in the development has hopefully been reduce - obviously you will need a management company to look after the property during this period.

    Good luck,

    Geordie
     
  19. PaddyG

    PaddyG New Member

    Hi Geordie
    It is apparent that the Overseas Property market is brim full of agents and consultants all trying to make a living in one sector or another. There are therefore hidden agendas and conflicts of interest all over the place. I'm getting "don't buy a leaseback, come to me I'll get you a better deal". So where to get reliable independent advice? The author of part of the article from empire.ie is a consultant who seems to operate in a different end of the market. This forum is at least an opportunity to share views and experiences but everyone has different priorities.
    Leaseback ticks a lot of boxes for me but what I have ascertained is that if more than 40% of the development falls out of the leaseback scheme then you will have a problem as the resort will lose its status, equally worrying is there is no obligation on the part of the developer to renew the lease after 9 years so if the development is not making money and the developer doesn't renew it could be very difficult to sell.
    No property purchase is risk free but if it's a quality development in a good location and the necessary bonds and warranties are in place and the developer has a track record then the risks are minimised.
    I am sure you are right that the VAT benefit is not real, I know I could get considerably more for my money by buying independently and Linda's right that it's not hard to get someone to look after it but I'm getting a 5.4% guaranteed return, some of which I'm taking as time and minimum hassle so if I can get comfortable with the lock-in concern I'm minded to go ahead but there are other issues on the lease agreement that I'm not happy with at the moment so a way to go yet.
    Cheers
     
  20. CaroleBay

    CaroleBay Senior Member

    Hi PaddyG

    As I said previously there are some good leaseback developments and management companies.

    It's not a guarantee for what may happen in the future, but some of the French banks that do accept leaseback properties for mortgage finance have preferred lists.

    Whether you are intending to buy with cash or mortgage finance, it is well worth a small effort to find out up front.

    Carole Bayliss
    mortgagefrance
     
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