What is the leaseback scheme?
The leaseback scheme is the result of a series of financial measures taken by the French government in the mid-nineteen eighties to help boost the tourism and construction industries and increase the availablility of short to medium-term accommodation, of which there is a chronic shortage in
In addition to tax-free rental income and to the very attractive VAT concession - a complete refund of the 19.6% VAT paid on your new-build property - your investment will provide:
- • A guaranteed, index-linked rental income in a strong European currency
- • Good capital growth potential,
- • None of the usual difficulties tied to owning property abroad,
- • A secure property investment easily achieved thanks to low French mortgage rates,
- • A firm foothold on the French property ladder,
- • In some cases, a choice of holiday accommodation all over France.
Freehold Property
What is a leaseback property?
A leaseback property is a freehold property that can be sold at any time like any other property, although it should preferably be viewed as a medium to long term investment. It will be purchased fully fitted and furnished and let out on a temporary basis. It will be part of a complex or development providing hotel type services such as cleaning and laundry facilities, managed reception and breakfast service.
All properties sold under the leaseback scheme must present the usual guarantees required by the French authorities in terms of quality of construction and the financial guarantee for completion.
At the time of purchase, the purchaser signs a commercial lease contract ( or "leaseback agreement") with a management company that undertakes to pay a certain rental income, guaranteed by the legally binding lease contract and calculated in terms of a percentage of the value of the property, known as the “yield”. This guaranteed rental income is indexed yearly and the yield generally varies between 3 and 5% per annum, depending on the type of property, its location and the amount of personal use required, if any.
The initial term of the lease always runs for 9 or 11 years and will usually be automatically renewed for a further 9 years after that - bringing the entire period to 18 or 20 years - which is often the duration of the mortgage used to finance the purchase.
How does a leaseback investment work on a financial level?
It is possible to purchase a leaseback property in cash and still benefit from the tax-free rental income; however, in most cases investors will purchase their property thanks to a repayment mortgage. To demonstrate how the figures work and to what degree the purchase finances itself, we have taken the example of a property priced at 100,000 € including 19.6% VAT.
Please note:
• The simulation below is based on a property costing 100 000 € including VAT or 83 612 € excluding VAT and offering a yield of 4.5% with an annual level of indexation of 2%. Initial rental income on year 1 would be 3 762 € net.
• Financing is calculated on the basis of an 80% LTV mortgage of the total price of the property including VAT (80 000 €) and a fixed interest rate of 5.65% plus insurance (these rates were valid in September 2008). Monthly repayments are 574 € per month for 240 months (20 years).
• These figures are indications only and will vary according to the price of the property, the yield, the level of indexation and the mortgage interest rate.
• This simulation does not take into account capital appreciation, its purpose is to demonstrate how this property purchase is subsidised by the rental income it generates.
How Leaseback Works
After handover, your property will be managed like a hotel and the leaseback company will take care of maintenance and cover most costs, including insurance.
As an added incentive, several of the major management companies operate programmes all over
Last amended July 2009
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