Leaseback Scheme
Here you will find everything you need to know about the increasingly popular French Leaseback scheme.
Buy to let Investment
A leaseback is a buy-to-let investment property in France:
- With a guaranteed rental income,
- 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,
- Full 19.6% VAT refund,
- A choice of holiday accommodation all over France as part of the package.
The leaseback scheme (LMNP or Loueur en Meublé Non Professionel - 1) is a French tax status where a specific type of property - 2 is purchased under certain conditions - 3 so that there will be no income tax to pay on the rental income from the property.
The tax incentives - 4 benefiting French residents - 5 are exactly the same for foreign investors - because the allowances apply to the rental income generated by the property itself.
It is quite easy to see how this government sponsored scheme can benefit investors as well as French society. Twenty years ago, there was a severe shortage of quality holiday accommodation to meet increasing demand from foreign and French tourists alike (as a rule, French families spend their holidays in France - and holiday-makers requirements were changing too. With millions of baby-boomers approaching pensionable age in the next 40 years, it became quite urgent to think up a solution, and as the saying went in those days: "En France on n'a pas de pétrole mais on a des idées! (In France, there's no oil, but we do have good ideas!"), and so the "leaseback system" came into existence...
This ingenious scheme not only supports the tourist and construction industries, it provides employment in all areas of service providing; hotel services, management, accounting, banking, restaurants and leisure activities, commerce and so on. Couple that with major tax allowances - 6 designed to encourage people to invest in these properties without too much financial strain - 7, tie it up into a pension scheme - 8 and you have a true winner!
Some of the most exquisitely beautiful and picturesque areas of France, where it would have been impossible to find suitable lodgings for a family only a few years ago, now offer a wide variety of quality accommodation with top class facilities.
In cities where it was extremely difficult to find short term rentals for business travellers or individuals who for various reasons don’t wish to stay in a hotel, the demand for this type of housing well exceeded the supply and, again, “leaseback” provided the solution.
What exactly is a leaseback property?
Any property that is furnished and let out on a temporary basis and provides hotel type services such as managed reception, breakfast and laundry facilities. This can apply equally to a room in a private home as to new flat style developments, or a project which has involved extensive renovation to bring it up to the current standards of security and comfort. These last two types of properties are the ones we will be presenting on this web site.
Leaseback properties therefore include:
• Furnished rooms or apartments in one’s own home or elsewhere (this generally only applies to French owners and will not of course provide a guaranteed return)
• Accommodation in a dedicated tourist - 10 or business - 11 residence
•Student lodgings - 12 Homes for senior citizens - 13
All properties sold under the leaseback scheme, new build or otherwise, must present the usual guarantees required by the French government - 14 in terms of quality of construction (isolation, electrical equipment, safety etc.) and the financial guarantee for completion - 15.
Under the “leaseback” arrangement, when you purchase a property you immediately enter into a rental agreement or lease with a management company - 16 (gestionnaire) who undertakes to pay you a guaranteed return on your investment, calculated in terms of a percentage of the value of the property, known as the “yield” - 17.
This is a commercial lease - 18, which conforms to the laws governing such leases in France. You will effectively be running a small business in France and you will be handing over your property to a company that will run it for you. The initial term of the lease is usually between 9 - 11 years and unless one of the parties wishes to withdraw - 19, will normally be renewed for a further 9 years after that.
You are the owner of a freehold - 20 property which you can sell at any time under the proviso that the new buyer honours the lease agreement. In other words, you need to find another investor like yourself – and the developer or management company usually has a sales office for this purpose. It is quite rare that a leaseback comes up for re-sale and there are several good reasons - 21 for this.
Purchase Leaseback
To enter the leaseback scheme you choose a property according to your personal criteria. These are usually: budget, location and size, level of guaranteed rental income (return on investment), and whether or not you require personal use - 22.
When you have made your choice, to reserve a property you will usually need to lodge a 5% deposit of the total amount of your purchase (including VAT but excluding furnishings) into the escrow account of the Notary (Notaire) who is in charge of the programme.
After the notary has received proof of transfer of the funds (this must be within 72 hours of “placing an option”, which we do for you by phone), you have a firm reservation. Contracts will then have to be signed by both parties within a specific timeframe depending on the company. In addition to the sales contract, you will also be signing a draft of the “Leaseback” agreement and choosing how much return or usage you would like, depending on what the management company offers. The more personal use you require, the lower the rental income. After the developer has signed the contracts and returned them to you, there is a seven day “cooling off” period in which you can simply change you mind and your deposit will be immediately refunded ( this is a legal right).
After this, the sale will now go through subject to your obtaining a mortgage - 24. You will be asked to prove that you have applied for financing and under what terms, and only when you application has been accepted will the notary proceed to draw up the title deed - 25 (acte authentique). If your mortgage is refused then your deposit will be returned to you.
You should expect to sign the title deed approximately three – eight months later. You do not need to be present on the day of signature; this can be done by proxy - 26.
Thereafter the notary will make regular calls for funds to your bank (or to you if you have not taken out a loan) according to a pre-established payment schedule leading up to completion. This is typically connected to the different stages of completion - 27 and the exact timing will have been specified in your reservation contract. The notary’s fees - 28 (or transaction costs) amount to approximately 2.5% (usually a little less) of the total cost of the property including VAT. In addition to this, if you take out a mortgage in
How does the system work exactly?
After handover, your property will be run like a hotel and the management company will pay most, if not all, costs and expenses - 31 including insurance and “council tax”. Exactly which costs are included or excluded will be clarified before signature. However, one universal cost applicable in all cases is the “taxe foncière” (French landowners tax). You will be exempted from this for the first two years on a new build, then typically could expect to pay about one month’s rental income per annum. The “taxe foncière” is among the expenses that can be offset against your rental income, rendering it tax free.
The guaranteed rental income mostly varies between 2.5% and 5% per annum depending on location, personal use and the type of property. This is calculated on the ex VAT value of the property, sometimes including furniture and parking space, sometimes not, varying from property to property. This rental income is indexed to the variation of the “Indice du coût de la construction” - 33, which is calculated annually by the INSEE,
Your rental income is subject to 5.5% VAT, but you will have been quoted the net income after VAT (net yield). The developer will appoint a chartered accountant to file your French VAT returns, usually the same that applied for the original VAT refund on the property. Your accountant will be your ally for years to come and will ensure your French tax returns are made out so that all your property-related expenses are offset against your rental income, including his own fee, which generally amounts to 300 – 400 euros per annum.
As an added bonus, several of the major management companies operate programmes all over France, and often they will let you choose your personal use in another residence that they manage elsewhere in
Under the leaseback arrangement, you pay no rates, taxe d’habitation - 36 (council tax), cleaning, electricity or maintenance fees or minor repairs - 37…everything is covered by the management company except for the taxe foncière - 38. When you use your property, your furnished apartment will be ready for you and equipped with all household amenities. After you leave, the property will be cleaned by room service for the next arrival.
Last amended February 2008
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