French Leaseback properties: changes for 2010

Eligibility leases with rents that incorporate a minority variable rate.

Investments in tourist residences are based on a “triangular” theory:

Put simply, “I” acquires a property from “D” and then signs a commercial lease with “O” who then pays the rent to “I”. Rent is at this point guaranteed, that is to say “fixed”. ie. A property worth €200,000 at a flat rate of 4% rent per annum will therefore be paying rent of €8,000 per annum.

In order to avoid pitfalls, some property managers felt it would be more realistic to use “sliding scales” (variable rates). This usage of variable rates would mean that, for example, managers could guarantee a flat rate of 2.5% over a 9-year period and then at the end of each year, they could pay back a percentage of the residence’s or manager’s turnover to the investors. In this case, there are elements of both “fixed” and “variable” rates.

BEFORE: This “mixed” rent incorporating the two types posed taxation problems in leasebacks located in the ZRR, Zone de Revitalisation Rurale or “countryside under re-development”. The tax would depend on each tax office’s interpretation of the make-up of fixed incomes, so the investor would lose his tax advantage.

NOW: It is no longer an issue as the line is “if the income is erring on the side of fixed rates, then there is no need for independent interpretation.” It means that the tax deduction will not be affected any more within the ZRR.

Changes to commercial lease systems for 2010.

Up until the end of 2009, in the event that the management company could not fulfil its contractual obligations, property investors were required by law to sign a commercial lease with a new management company otherwise they would lose their tax advantages such as the VAT rebate on New Build properties . Now, with the law changes made for 2010, potential investors can avoid tying themselves to a new precarious lease with another management company. Investors can avoid the commercial lease altogether and grant a management mandate to a professional manager. For example, an experienced manager specialising in hotel management or in holiday centres, or if the owners decide to run the whole operation themselves without the involvement of middle-men (although it might be very complicated to do so due to the number of owners in those types of residences who usually have 100 apartments).

There are 2 conditions to this new law:
1)    The so-called “self-management” of the residency must involve at least 50% of it.
2)    The “self-management” of the residence is possible after 1 year only if the owners could not agree on another management company. In practice, this period of 12 months isn’t ideal for residences in difficulties, “It would be necessary to allow investors, who are already without rent, to find a solution to their money woes more quickly,” according to Yannick Aure, the Head of Exhore, (Exploitation d’Hotels et de Résidences).

Yannick, himself a specialist in hotel management, has proposed a management mandate to investors who agree a re-sale price of the lease for a token sum  will receive  the commercial funds of their property in line with a judicial proxy.

At Sextant Properties, we hand-pick the French leaseback developments, making sure that the management companies are sound and will be able to fulfil the rental contracts they sign with the buyers.

Posted on February 1st, 2010 | Permanent link | No Comments »

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