French Leasebacks: Buying Off-Plan
The property investment opportunity presented by buying apartments in development complexes in France, with an explanation of the benefits and disadvantages of the leaseback plan...
Leasebacks are real estate developments sold "off plan" (before they are built) that come with a full management contract for 9 to 11 years that guarantees an annual rental income of typically 4 to 5.5 percent of the price of the property not including tax.
They are rented out short-term as fully furnished and serviced apartments and studios. Some programs offer the purchase a few weeks usage per year although this option may be expensive in lieu of the rent that could be earned. It also binds the purchaser to return to the same place every year for many years.
The developments are multi-unit resort or student housing and are located in areas the French government wants to develop. As an incentive to this end, the investor can reclaim the 19.6 percent VAT paid on the property after construction is complete. For some leaseback programs, the developer will accept payment net of VAT and reclaim the VAT themselves. The process to reclaim the VAT on the sale is administrative and can take three to six months. It's recommended to use the French accountant appointed to the development. This accountant will usually offer a service package including VAT reclamation and the purchasers annual VAT tax declaration for the VAT received on rental income.
Advantages of Leasebacks
- The yield of 4 to 5.5 percent net of all costs represents a better return on investment than many conventional properties
- Return on investment can be increased by using a mortgage to finance a leaseback investment. There are also tax advantages and deductions that apply when using a French mortgage to finance property
- Many programs allow the purchaser to use the leaseback property at a discount
- The 9 to 11 year guaranteed rental return with full management is ideal for the out of country investor
Disadvantages of Leasebacks
As the entire building is managed by the same company, a buyer is counting on that company to stay in business as long as they have the property. Check the company credentials before purchase or buy from a credible sales agent who has done this. Before agreeing to finance any leaseback property, French banks will investigate the management company so one can feel reasonably confident about the company if banks are willing to lend money to investors for the project.
Resale of a serviced, furnished leaseback apartment in a resort complex or student area is not as straightforward as the resale of a conventional apartment. The buyer population may not be as large
Selling a Leaseback
Leasebacks are structured as a long term investment. If an owner chooses to sell early there are some tax considerations to note:
- In France, the capital gains tax on any secondary real estate property is reduced for every year of ownership ending up at zero after 15 years.
- If an owner holds the property for at least 20 years, they keep all the VAT refunded. If a property is sold before this period, the French Government must be repaid 5 percent of the refund amount for every year under the 20 year period. This debt can be passed on to the buyer in some cases.
Financing a Leaseback
The paperwork and requirements to obtain a mortgage are fairly simple. It involves a multi-page application, plus a health questionnaire for the required life insurance. French banks do not use a credit bureau so expect to provide copies of personal financial papers such as pay slips (or company accounts if self-employed), taxes and bank account statements. While the applications are often in English, be prepared for the mortgage offer and all correspondence to be in French.
A critical consideration for French banks is the applicants "debt ratio". Monthly debt payments including the new mortgage cannot be more than one-third of regular monthly income. There are various rules to define what a debt is and what income is. Some banks will take into account future rental income if the apartment is being purchased for rental. The bank will not count income if it believes it will not continue throughout the duration of the loan, or any recent (therefore unproven) or unpredictable sources of income.
It is recommended to get pre-approved for borrowing before reserving a leaseback. Some mortgage brokers and banks will provide this service by telephone or internet, often free of charge.
Obligatory Life Insurance
Every bank in France will require that a life insurance policy is taken out specifically for the mortgage. The policy must be with a French life insurer for the exact amount of the mortgage and for the entire duration of the mortgage. The bank is the beneficiary. Once the mortgage is repaid, the policy can be cancelled. Life insurance for mortgages becomes very expensive for any mortgage that terminates after the applicant reaches the age of 75. Ideally a mortgage should finish by this date.
Depending on the amount borrowed, a blood test may be required and if borrowing above as set price, a full medical exam including urine test and ECG (electrocardiogram) is needed. There are free insurance medical centres throughout France able to process this quickly; it is also possible to have examinations done in another country however payment will have to be made upfront and be reimbursed later.
Financing can be obtained for up to 25 years at variable or fixed interest rates. The interest rate will depend on which leaseback program has been chosen (not every bank finances every program), the buyer's financial profile, the duration of the loan and the amount put down.
French banks will finance a maximum of 80 percent of the value of the property, with better interest rates being offered for 70 percent financing. Some banks will finance up to 100 percent however this is always combined with a required deposit into a French savings plan of at least 10 percent of the purchase price.
A buyer will need to open a French bank account from which mortgage payments can be debited. This can be done in person or from a distance if the buyer is unable to travel to France. It's recommended to select a bank able to provide service in English and accept to execute banking transactions by telephone, fax and email instruction.
The first payment towards a leaseback purchase is the 5 percent deposit to hold a reservation. This is sent to the notaire'sbank account at the time of reservation and counts towards the final closing costs. This is often the point at which the buyer pays the leaseback sales agent a commission. (A notaire is an official sanctioned by the French government to carry out transactions such as real estate sales according to law.)
The next payment is at completion of the sale, again to the notaire's bank account. The buyer will pay a down payment of 20 to 30 percent of the purchase price plus completion costs depending on how the mortgage is set up. The completion costs are approximately 5 percent of the purchase price and consist of title registry and taxes and the fee for the notaire. These fees are set by the French government.
Between the down payment and the mortgage, the developer is now assured that the funds for purchase are in place. The sale is complete and the buyer officially become the owner of the property under construction.
The bank will hold mortgage funds until the developer calls for the next stage payments. A typical stage payment schedule is:
- Reservation – 5% due
- Completion of foundation – 30% due
- Completion of walls – 30% due
- Waterproofing and air sealing – 20%
- Ready for use – 15% due to arrive at 100% payment
A buyer can ask the bank to pay the developer directly as invoices are received. The bank will only charge interest on funds released. Further, almost all French banks will allow deferment of repayment of a mortgage until construction is complete and rental income starts. If this option is desired, a buyer should request it early in the mortgage process as it cannot be added once the offer has been issued.