French Leaseback Problems ?

i have a few queries on these French Leaseback schemes :

What rights has the Management Company leasing the property got at the end of the term, Have they got a right to renew ?

Do you own the property outright at the end of the Lease Term ?

Can you or a prospective purchaser live in the property all year round or is it limited by being in a Tourist Designated Area where you can only spend upto 6 months a year ?

If you or a prospective purchaser does choose to live in the property will a maintenance charge apply for the common areas ?

If this maintainence charge does apply will it be levied by the same company who had the lease ?

What is to stop an onerous maintenance charge being applied ? (i.e you own on property in an estate of 99 others that are leased by the Management company they can charge you whatever they like)

What rights has the Management Company leasing the property got at the end of the term, Have they got a right to renew ?

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AFAIK, the management company has first refusal in the event of you deciding to lease your property again (rather than live it yourself) at the end of the initial term.

Do you own the property outright at the end of the Lease Term ?

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You own it outright from the beginning. The lease term is simply the period for which agree to lease the property to the management company.

Can you or a prospective purchaser live in the property all year round or is it limited by being in a Tourist Designated Area where you can only spend up to 6 months a year ?

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I assume you mean after the initial lease term (without which it's not a leaseback property). AFAIK, you can live in a property for as long as you like following the expiry of the initial lease term (subject to French residency requirements, etc).

If you or a prospective purchaser does choose to live in the property will a maintenance charge apply for the common areas ?

If this maintenance charge does apply will it be levied by the same company who had the lease ?

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It's likely that a maintenance charge, similar to those in any property block in any country, would apply. Don't know who would have management control if ownership within the block was split between private owners and the holiday company. Can't see a holiday company being interested in an apartment block if it didn't have some control over the standard and maintenance of the common areas.

What is to stop an onerous maintenance charge being applied ? (i.e you own on property in an estate of 99 others that are leased by the Management company they can charge you whatever they like)

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In a word - nothing. But this is the chance you take in any property block anywhere and highlights the importance of checking out the bona fides of the holiday company in advance of signing your lease agreement.

You have, like a lot of us, thought things through to the point at which the guarantees end and the real risk begins. And I'm afraid nobody seems to be able to offer any solid comfort in that regard.

As far as I can see on this website the leesee in a comercial lease in France has a rigth to renew the lease, if you fail to renew the lease you have to pay a penalty.

The amount of this penalty is unkown and I have not seen it mentioned on any leaseback websites

Hi Pinvestor

Unlike many that purchase leasebacks you have correctly identified that the lease is a commercial lease rather than a residential lease.

With all French commercial leases, the tenant has certain rights. If you renew the lease after the initial term then it should be offered at a fair market value to the existing tenant first. If you don't offer the lease to the current tenant then he/she/it is entitled to compensation equivalent to the loss of business caused. Any clause placed in the lease which attempts to undermine the rights of the tenant is overridden by French law.

I also agonised long and hard over this issue. I sought legal advice and was told that even though the law exists and is clear, there appeared to be no evidence of a case being taken to force the owner of a leaseback to pay compensation to the tenant. The law was created more for commercial type enterprises e.g. shops, offices and its application to leasebacks is a bit ambiguous. If a case was taken by the tenant e.g. management company then it would do their profile and the profile of the 'Residence de Tourisme' type schemes no good and could damage the future viability of this type of partnership.

However, there are cases where the management companies have sought compensation from individual owners - and in some cases the owners paid compensation. This amounted to a few months rent. Again the legal advice I got suggested that this compensation should not be paid.

Regards,
Paidi

What about the reverse situation?

For those who buy these properties strictly as an investment and are anxious to extend the lease, how likely is it that a a management/holiday company will NOT want to renew?

How rentable would these properties be in that circumstance?

Holiday units (which the majority of these units are ) can only be let as holiday units therefore a local couple for example cannot let the unit for a full 12 month period !!

similarlily they wont want to buy it as they cannot live in it !

so your only option is a management company to run the whole resort and let it to tourists

Hi Biggles

>> 'How rentable would these properties be in that circumstance?'

Similar to any other property investment it all depends on where and what you buy. I personally tend to go for urban developments where there is a larger volume of potential renters e.g. tourists, business people, students, etc. However, if you invest in rural tourist areas then your potential market is restricted to tourists. Careful research prior to investing will minimise future risks.

>> 'For those who buy these properties strictly as an investment and are anxious to extend the lease, how likely is it that a a management/holiday company will NOT want to renew?'

I would think it is unlikely and have not heard of a case where it has happened. However, for apart-hotel style developments then I'm sure there must be a point at which the management company would decide (if they were to 'lose' any further units) that it would be uneconomical to continue managing the complex.

Regards,
Paidi

Please also bear in mind that many of these properties are aimed at holiday rentals.
As a consequence of this :

(1) Many of them are too small to live in on a full-time or long-term basis. In some cases medium or long-term occupation may be prohibited.

(2) The facilities where they are located may be seasonal. So they may be deserted and empty in the off-season.

The above caveats won't apply to all, but will probably be reflected in the price.

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Carrigalee, Eurodilbert

Thanks for the replies. It supports what I thought myself - that all leasebacks are not the same and that careful consideration is required.

leaseback caveat

When you enter into a leaseback agreement with the management company, be sure to include a written instruction that the lease is not automatically renewable.

The default condition for this is that it is...so after 9 years, you could find yourself locked into another 9 year lease, at basically whatever terms the managemnet company want, but more importantly, it will make it harder to sell.

However, as has already been pointed out here, there exists plenty of good will in the residences du tourisme, and I've certainly never heard of a buyer being tied into a second lease he didn't want, and I'd be surprised if it did happen, but it's a small bit of paper work for large peace of mind.

Re: leaseback caveat

In depth discussion of French leaseback .

French Leasebacks

Hi Paidi,

I note that you go for urban leasebacks targeted at larger potential volumes of tenants rather than seasonal rural tourist properties. I'd be interested in your opinion of [broken link removed] which is a Parisian development targeted at business travellers. Thanks.

All the best.

Eamon.

RE: Paris Leasebacks

Hi Eamon

I know nothing about the development except what I read in the SBP. There are currently a number of leaseback deals available in Paris. They are in various locations and offer varying returns. For me 4% is very low irrespective of the location. Also, I believe there is very limited personal use. Many other leaseback developments that offer a return as low as this would offer up to 4-6 weeks of personal use. If the rental return is this low then you may need to see substantial capital appreciation in order to make it a worth while investment.

Have a look at some of the other Paris developments before deciding. We have looked at the details for most of them and I would think that there may be better deals around (depending on what you're looking for). But then again "one man's meat is another's poison"!

Regards,
Paidi

..

The return is low so much would depend on the capacity for capital appreciation. It's difficult to see how a (small) hotel room would have an appreciable value outside the very limited confines of the whole aparthotel concept but I may be missing something.

Incidentally, I got a flier on this development in the post this morning which said that the 4% payable is renewed every 3 years with just 50% of the Indee(?) increase being passed on to the owner. So not only do you get your appreciable increase late, you then only get half of it.

Re: ..

I agree with Biggles that not alone is the yield low but that the yearly increase appears limited to half the rate of construction inflation.

To put this investment in perspective - there is currently a Residence Médicalisée for elderly people offering LMP buyers a guaranteed return of 6.31% and is 35 minutes (by train) outside of Paris. There is an option for the operator to buy back the unit at the end of the lease.

Regards,
Paidi

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Carriglee

To your knowledge, what proportion of the construction inflation is normally passed on in the case of leasebacks and how often over the lifetime of the lease is it looked at?

Thanks in advance.

RE: Rental increases

Hi Biggles

Up to recently the rents increased annually on most (if not all) leaseback developments by the full rate of construction inflation (either averaged over the year or taken from a specific point in each year). However, due to a recent sharp increase in the rate of construction inflation many management companies are now offering a reduced rate of rental increases. I have seen figures of about 65% on a number of recent developments. Most people forget to ask this question when comparing developments.

Regards,
Paidi

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Thanks for that Carriglee. You're certainly well informed.

I've been contemplating leasebacks for about a year now - by which I really mean I've been trying to spot a catch.

I feel I'm almost at the point at which I'm going to proceed but still feel that some properties are invariably inflated in price to absorb the guaranteed rental income. The trick I suppose is to know which ones.

I was thinking of the Languedoc-Rous region - cheaper than cote d'azur and further south.

RE: Languedoc region

Hi Biggles

When you go through the pain barrier it is amazing how quickly you learn!

Yes, I would agree that prices in the Languedoc region seem a lot better than the Cote d'Azur and Paris. From experience I think they can be up to 1000 euro per m2 cheaper. If you don't require the unit for personal use then sometimes you need to be careful with location i.e. some developments have been fairly remote and would be completely dependent on tourists. I reviewed details of a nice development recently which was offering 5.5% and was located close to Nîmes, Montpellier and the sea. I'm not sure if you have come across that one?

Regards,
Paidi

Re: RE: Languedoc region

Hi Carriglee

Thanks for the encouragement.

Yes, I think I know the one you're referring to. My initial thought was that it fell between two stools by being neither a beach nor a big urban location (although it's not a million miles from either) and I have difficulty seeing how it would be the resort of choice in the area for either business or holiday traveller.

Also, it wasn't clear whether the management company was one of the more established ones.

I'd be intersted in your view though.

B