LEASEBACK: lucrative investment or a regular financial catastrophe?

In a leaseback contract concerning your (future and/or secondary) house in France, you (the buyer) are letting your property back to the seller, aiming on a double profit: a tax benefit, and rental revenues.

This mechanism allows an investor to entirely recover the VAT on a commercial lease of 20 years minimum.  

The contract foresees annual rental revenues - between 3 and 5 % of the value of the property - deducting in general the corresponding management fees.

It furthermore grants an additional tax reduction, 20 % in 2011, to non-professionals letting of furnished houses, villas or flats.

In particular known in its form of "hotel-residences", the investor has to be of a particular wariness if his seller (or other companies part of the same group) accumulates the functions of builder, developer, tenant and administrator: an increasing number of projects of this type, in particular in the South of France, show the example!

Don’t be fooled by different names of your builder, developer, tenant etc…: they’re quite often part of the same group, or working together on other comparable “programs”.

At first, the "builder - seller" aims at a maximum sales price, for a minimum cost. Only developers fixing themselves a long-term management objective care about the quality of the construction, but quite some developers regrettably look for maximum sales profits only, neglecting the sustainability of their projects.

And failure is guaranteed if the quality (and/or the geographical choice of the project) are doubtful: The tenant-administrator does no longer respects his financial engagements over the years, confronting the owners with an inevitable situation: either to accept a reduction of their rental revenues while assuming increasing management fees, find another manager, or sell!

Once such a situation is existing, owners will also discover that the value of their property decreases as soon as they accept a new contract limiting the rental yield, that the manager risks to give up or turn bankrupt, that the possibility to sell becomes imaginary and puts his bank credits in serious danger, that VAT is due again (pro rata temporis) and that the other fiscal advantages evaporated.

As this situation becomes more and more frequent, the French legislator decided to allow the owners to immediately vote for the nomination of a new administrator.  This remedy proofs most effective in the early years of the exploitation.

But to simply avoid this type of catastrophes it is of course highly recommended to reserve your investments for professional administrator only, and to verify both the legal and the financial construction with outdoors advisors: The failure of the administrator implicates all fiscal advantages, and entails a considerable devaluation of your property.