French Leaseback Property Scheme Explained

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The French leaseback scheme was introduced by the French government in 1986 in order to increase the number of properties on the rental market for the tourism sector and boost employment in the industry. France is currently, and has been for several years, the country which receives the largest number of tourists in the world - some 75 million in 2004.

The leaseback scheme has since been extended to cover other sectors, and it is now possible to purchase leaseback properties which will be rented to students or business tourists, and more recently, homes and medical homes for senior citizens (chambres medicalisées).

The concept of leaseback is quite simple. You purchase a property outright and from day one the property belongs to you in full. You rent it to a management company for an agreed period of time, usually between 9 and 11 years, in exchange for a guaranteed rent and possibly a number of weeks of occupancy for yourself depending on the property.

Leaseback includes two main types of properties: the ZRR (Zone de Revitalisation Rurale) where the property is rented “murs nus” (without furniture) and it is up to the management company to furnish it, and the “loueur meuble” where you purchase the furniture at the same time as the property and you rent the property furnished.

Leasebacks are very popular with French people as, in addition to the VAT refund, they generally benefit from tax incentives.

In order to qualify for a leaseback, a property programme must meet certain construction standards and criteria set by the government. The management company must then offer certain services: a reception and a choice of at least two of the following: breakfast, laundry, housekeeping services.

THE LEASEBACK IS NOT A TIME SHARE, unlike a time share, when you purchase a leaseback you OWN the property in full from day one.

VAT (TVA in French) refund

As an incentive for people to purchase and rent their property, and therefore increase the number of self-catering properties available nationwide, the French government will refund the VAT paid on a property. This is 19.6% on all new properties. The VAT refund is lower on refurbished properties and the amount refunded depends on the amount of refurbishment required.

This means that for a new property purchased for €119,600, a refund of €19,600 will be made within six months of the purchase. In some cases the builder will even advance this amount to you and the property will in fact only cost you €100,000.

This VAT refund is based on a 20 year rental plan. If you decide to stop renting your property before the 20 years are up, you will be asked to refund 1/20 of the VAT amount per year you are not renting. For instance, if you purchase a property and receive a refund on the VAT of €20,000, then decide to stop renting it out after 15 years, you will be asked to repay €5,000 to the government - 5 years X €1,000 (1/20 of the VAT refunded originally).

Long term guaranteed rental income

The French leaseback scheme guarantees the property owner a long term rental income, usually paid every quarter, for a first lease period of between 9 and 11 years.
This lease is renewable on expiry.

The rent paid is indexed to the cost of construction to a limit of normally around 2% or 75% of the index, meaning than your rent will be revised upwards every 1, 2 or 3 years.

The rent paid is usually calculated based on the property price excluding VAT, and the rent earned should be shown excluding VAT.

Both the price of the property and the rental income from any given property are fixed in advance. Agents claiming higher rental yield will not in fact get you any more than anyone else for the same development.

The lease offered is a commercial lease. This means that in the event that you end the lease before its full term, you will be asked to pay compensation to the management company for their loss of revenue. At the end of the original lease term, it is usually renewed under the same terms, with rent starting at the level it was at the end of the previous term, and still indexed as above. It is usually possible for you not to renew the lease at the end of any lease term, provided that you give sufficient notice. Such terms should be reviewed with your notaire prior to purchase.

It is possible for you to sell the property at any time, even if it is leased to a management company. In this case you would however have to sell the property as a leaseback property under the current lease conditions.

Hassle free rental

The French leaseback offers hassle free rental for the property owner. It is the management company which is responsible for upkeep of the property, its furniture and the communal areas such as the gardens, pool, gym etc.
It is also up to the management company to find short term tenants like holiday makers or others, and the level of occupancy will not affect your rental income.

Weeks of occupancy in your property

The motive for purchasing a property in France varies from pure investment to holiday home.

The French leaseback scheme offers a choice between pure property investment or a mix of investment and leisure.

Along with a guaranteed rental income, most of the developments dealing with tourists offer the owner a period of occupancy which varies from one development to another. For instance, as well as rent you may get three weeks’ occupancy per year – for example one during the high season, two during the medium season.

Occupancy is usually booked a few months in advance and in many cases if you do not intend to use some of your weeks you can ask the management company to use them and repay you part of the rent collected.

For further information on leaseback properties in France please contact us

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