Sunday Business Post 10.08

LEASE BACK OPERATORS FEEL THE PRESSURE
(12 October 2008)

One of the incentives in lease back is that the French government refunds VAT of up to 19.6 per cent on the property price. But therein lies much of the problem with how this scheme is perceived. The French government involvement in returning the VAT means that the scheme is often seen by purchasers as a 'safe bet', and one which is vetted and guaranteed.

However, the French government has absolutely nothing to do with the scheme, after a project has been vetted and passed as a qualifying residence de tourisme product. Consequently it has not, to date, shown any great inclination to bail out privately run management companies that have run into trouble.

In fairness to most agents selling leaseback product, it was not generally promoted as a government-backed scheme, although the perception that it had such backing was often not fully corrected.

Once the property has been purchased the only contract is with the developer for the building of the property and the management company to run it for the duration of the agreement.

If a management company goes into liquidation, investors have virtually no protection from a legal standpoint, as most contracts protect the management companies rather than their clients.

For investors, not receiving their rental income can be just the beginning of their problems.

When a leaseback operator becomes insolvent its former clients will be obliged to pay back, pro-rata, the VAT that was initially waived by the French government, since the properties no longer come under the auspices of the lease back scheme.

This is often the final straw for owners who have not received rental for months and have seen their variable rate mortgage repayments balloon in the past year.

Last month another well-known leaseback operator very publicly admitted the crisis in which it finds itself.

The president of Maisons de Biarritz, Michel Dupey, sent a letter to his company's clients on September 18 stating: "As you might already be aware, Maisons de Biarritz is in the middle of a very difficult financial situation. This is partly due to the enormous crises in the financial and real estate area, which is gravely affecting our real estate development/sales and as a matter of fact, is today, putting the future of the whole group in serious danger."

The letter continues: "We are in the process of reviewing a survival plan for the hotel residential part, in which revenues are steadily growing and for which the upcoming future is looking more than healthy. We continue meeting potential investors willing to invest into the future of Maisons de Biarritz Vacances.

"As you know we have not been able to effectuate the payment of your rentals due, even though we informed you in a previous letter that as of September 15 all this would be settled. As of today, we are not in the position to give you any better news as our meetings with potential investors are still in progress and no final information is available at this point."

The letter concludes: "In the meantime we are investigating other solutions which possibly will enable us to fulfill our rental obligations in early October 2008."

Despite the contents of the letter, the Maison de Biarritz website is still carrying details of properties for sale.

Among the agents for Maison de Biarritz in Ireland was France First, which promoted Charles de Gaulle Roissy, a four-star development close to Charles de Gaulle airport, and Perle de la Cote d'Argent, between Bordeaux and Biarritz.

In 2005 another firm, Azur Assistance, promoted the Les Cottages du Lac development in Parentis, 45 minutes from Bordeaux. No one from France First was available for comment while Azur Assistance has not had an Irish office for some time.

The letter from Michel Dupey starkly outlines the environment in which leaseback management companies are currently operating and consequently why many leaseback owners are not now receiving rental payments.

So how do you avoid running into such problems? Leo O'Brien of French-Homes-Direct.com says that, in general, it is better to avoid purchasing through companies offering both development and management services.

"Building properties is for a builder, and property management should be given to a professional property management firm, with a good selection of property in areas with historically strong rental demand in order to diversify the investor's risk," he said.

'Maisons de Biarritz is in the middle of a very difficult financial situation'

O'Brien added that as with any property investment, location is critical: "A management company with a lot of property in out-of-the-way or borderline tourist locations will definitely suffer in the longer term." Ciaran Mannion of OverseasProperties.com agreed that developers and agents should be separate entities. He said that buyers need to judge developments on a number of criteria, including confirmation of the developer's experience and reputation with banks of a high standing.

Mannion also said that purchasers should only proceed subject to the developer lodging a 'hypotheque' (insurance for completion of development), irrespective of the developer's financial ability to complete.

"The management company is also critical and buyers should only deal with management companies that maintain a tight grip on their residences, or companies who operate residences in urban locations with high through trade," he said.

Mannion added that purchasers should be aware of site location and areas with multiple airline access, and cited areas such as Paris, Geneva, Cannes, Montpellier and Biarritz as ones which should prove popular on an ongoing basis.

What options are open to clients who are not receiving rental income? O'Brien said that the creation of an association of owners with a common lawyer to take a case against the management company is usually the best way forward.

"In reality this is a contractual position, in that the purchasers would normally sign a separate agreement with the rental company," said Tom McGrath. "The remedies for the non-payment of rent would be the issuance of proceedings by the purchasers for the recovery thereof."

He added that as contracts vary from company to company, they would need to be assessed individually to see where the client stands.

In a situation where a management company has stopped paying rents, a vote of 80 per cent of the owners can be used to oust the management company but this is difficult to arrange.

For investors who are already badly out of pocket, the dilemma is whether pursuing their leaseback operator through the courts would simply involve throwing good money after bad.