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French leasebacks - legal update
The year 2010 brought some relief to investors in one of the 70 French leaseback resorts that are in financial turmoil. To attempt to break the deadlock, 3 provisions were enacted in the Finance Act 2010. Here is a summary of the main changes.
Investment in French leaseback schemes entitles owners to recoup VAT on the
purchase price. The tax benefit is given to owners in exchange for a commitment
to rent their property to a management company for at least 20 years. In case of
non-compliance, investors must return their tax benefit. Until now, investors had
a twelve months 'grace' period to find another manager, failing which they
became liable to repay VAT, in one go, to the French taxman. Under the 2010
Finance Act, investors are allowed to spread repayment over three years. This
facility applies when leases are broken for a period exceeding twelve months as a
result of the management company's liquidation, or at the initiative of owners for
breach of contract (default of payment of rent by the management company).
Regrettably, these new measures come too late and will obviously be of very
little relief to foreign investors. Many of them have already lost years of rent and
are now forced to accept lesser rental income from unknown leaseback
2. 2. Eligibility to VAT recoupment of leases that offer a variable rate.
Investment in French leasebacks is based on a menage a trois: the developer,
investor and manager. Essentially, individuals acquire a home from a developer
and conclude a commercial lease with a management company who pays rent.
Until now, rents were 'guaranteed', that is to say fixed. For example, for a
purchase of 100,000 Euros, the management company pays a rent of 4%, which
corresponds to an annual rent of 4,000 Euros. To avoid unpleasant surprises and
take greater account of market conditions, leaseback companies now tend to
introduce a sliding scale in their leases. Instead of a fixed or guaranteed rent of
4% for nine years, operators often guarantee a minimum basis of say 2.5% for
nine years and pay back each year a given percentage of their income. Payment
of rent becomes "mixed", i.e. composed of a fixed and a variable part. In the past,
such "mixed" rent composed of a fixed and a variable element posed a tax
problem. There was a risk of re-qualification of such income as industrial and
commercial profits, which took away the tax advantage to the owner. This risk
disappears as from 2010.
3. 3. Owners can now sign a management proxy/mandate instead of signing
a commercial lease
The 2010 Budget Act introduces a new flexibility. In the past, where a
management company experienced difficulties, investors had no other option but
to sign a new commercial lease with another operator. Under the new regulations,
investors are no longer obliged to sign a commercial lease with a new leaseback
company. They can, without jeopardizing their tax advantages, give a
management mandate to professional, such as a specialist hotel management
company for example, unless they prefer to manage the resort themselves.
This new possibility is subject to two conditions. On one hand, the "selfmanagement"
the other hand, this self-management is only allowed where no other
management company has been retained after a period of one year.
The above measures are insufficient. Most leaseback owners, especially foreign
investors, need to find a solution much faster. This alternative might nevertheless
be of interest to investors who had contracted with Résidhotel. Some of these
investors, who have already been dealing with two leaseback companies
(including the Quietude Group and subsidiaries…)
leases with a third management company, if they continue to opt for a
commercial lease! The possibility to give a management proxy instead of signing
a lease could represent an attractive option for them. The fact that, unlike with a
commercial lease, no compensation is due to the manager in case of non-renewal
by owners, makes this new possibility even more attractive to investors.