CHIP --
Corporate Housing in Paris

Better Than a Leaseback
By Adrian Leeds

We finally found it -- an alternative to the French Leaseback that maintains the assets of the Leaseback and converts the liabilities to assets for the investor who wants a hassle free investment in the city of Paris. Not sanctioned by the French Government, but offered by a private company who has developed the concept over the last five years, purchasing an apartment in Paris is now relatively hassle-free, comes with a guaranteed return on your investment and affords you an easy exit plan.

We call it "Corporate Housing in Paris -- the FPI Leaseback Solution."

In John Howell's French Leaseback Report (John Howell & Co., http://www.LawOverseas.com), published on French Property Insider at http://www.frenchpropertyinsider.com/members/content/leasbackreport.pdf (you will need your username and password to download the pdf file), he notes the three good points and nine bad points to investing in the French Leaseback.

Point by point, let us compare the two investment programs:

THE GOOD POINTS

The three main benefits of buying leaseback property are:

1. The discount that you receive by not having to pay the TVA.

2. The fact that your rental income is coming from a hotel operation rather than from the individual tourists and that it is contractually guaranteed.

3. The fact that someone else is doing all of the hard work. You do not have to appoint managing agents. You do not have to find tenants. You do not have to collect the money. You do not have to arrange for any necessary repairs.

By comparison, Corporate Housing in Paris (CHIP) comes close to matching these Leaseback benefits:

1. The property you purchase via CHIP is not new construction. These are properties in particular parts of central Paris (specifically arrondissements 8, northern 16th and western 17th) in buildings of good standing that will appeal to the corporate housing market. The taxes associated with the purchase are identical to the taxes and Notaire fees associated with any resale property purchase. As with any other purchase you would make, allow for approximately 7% to 8% of the purchase price

2. Your rental income is guaranteed by CHIP, a professional run licensed rental agency that is contractually guaranteed.

3. Exactly as with a Leaseback, someone else is doing all the hard work. You do not have to appoint managing agents. You do not have to find tenants. You do not have to collect the money. You do not have to arrange for any necessary repairs.

THE BAD POINTS

Unfortunately, Leasebacks have a number of bad points. These mean that the leaseback is not right for every investor.

Generally, Leasebacks are best for the lazy or the inexperienced and unsophisticated investor. There is nothing wrong with being lazy. Some people will value the simplicity of the deal. Usually, however, you will make more money both in terms of rental income and capital growth from an apartment that you own yourself and rent out in the normal way.

Anyone thinking of buying a leaseback property must be comfortable with the bad points:

1. The guaranteed rental return is not as generous as it appears. The percentage is based on the amount that you have paid and not on the full value. If you spent 200,000 Euro on a unit that would, if you had been buying a non-leaseback property, have cost you Euro 240,000 including TVA. A 5% return on your 200,000 Euro would only be a 4.1% return on the full value of the property. If you had bought a good general investment property for letting directly to tourists we would expect you to have generated at least 6% net rental income and, in central Paris, probably more.

CHIP: Each property will yield a different return, however, you can expect a CHIP property to return approximately 4.5% including the expense of the Notaire fees and taxes.

2. The amount of time for which you can use the property yourself is never generous. Your 5% deal might have permitted you to use the property for two weeks. If you had been renting out your own property in the normal way you would probably only have rented it for about 25 weeks in the south of France or 35 weeks in Paris. This would have allowed you either 17 or 27 weeks use for you, your family and friends. That is a great perk. If you do not want to take advantage of it, it can also give you the opportunity of trying to rent out those spare weeks (probably quite cheaply) and so increasing your normal yield. Remember that this personal use is not only a great fringe benefit but it is also usually tax deductible, both in your home country and in France. Remember, you are not on holiday. You are inspecting your property and doing essential maintenance and redecoration. So your traveling expenses and incidental expenses should be capable of being claimed back from any tax that you might owe on the income generated by the property -- or any other investment properties in your portfolio.

CHIP: There are several options. You can rent any property from the pool of apartments offered by the agency, including your own if available, at a discount of 25%. You lose nothing in your guaranteed return on investment. If you want long term usage of the property, it can be written in your contract, however, you will receive no rents during your usage, nor one month prior nor one month after and a fee of 200 euros will be imposed to cover maintenance. Your return on investment will be affected, naturally.

3. You are tied in for a minimum of nine years. But it is worse than this. At the end of the initial nine (or ten or eleven) year period your hotel tenant will have the right to request a renewal of the lease for a further nine years. Most leaseback companies now routinely request renewals, so you are in effect tied in for eighteen years. At the end of the eighteen years they have the right to request a further renewal for a further nine years. You can refuse that request, but if you do you will have to pay the hotel company compensation as French law views this situation as one where the hotel company has built up a valuable business in your premises. You cannot contract out of this situation. French law does not quantify the compensation payable but, in Italy (where they have a very similar program), the compensation is fixed at 21 months rental. If your rental is 5% of the value of the property this compensation is 8.75% of the value of your property, which is a great deal of money.

CHIP: You are obligated to sign a three year automatically renewable lease, but with written notice, the lease can be broken with six months notice at any time. The

4. The leaseback contracts are quite complicated and so your legal expenses for buying a leaseback property will be a little higher than they would be if you were buying a simple apartment.

CHIP: You should not incur any additional legal expense as the contracts are quite simple.

5. If you pull out of the leaseback program within 20 years you will have to repay a part of the TVA discount that you received at the outset.

CHIP: You may pull out at any time and there is nothing to refund.

6. If the development ceases to qualify as a Residence de Tourisme at any time within the 20 year period (for example, because other people have pulled out reducing the numbers below the minimum permitted) you will also have to repay part of the TVA.

CHIP: Not applicable at all.

7. The property may well be licensed as a hotel and not as an apartment. This would mean that even at the end of your 27 years, you would not be able to live in the apartment full time.

CHIP: The property was purchased as an apartment and will remain as an apartment. You may live in it at any time, part time, full time or otherwise.

8. When you come to sell your property the exit route is much more complicated. If you own your own apartment that is not part of a Residence de Tourisme then you can sell at any time. Here you cannot sell for the first nine years. After then you will probably be, in effect, limited to only selling to an investor and not to someone who wants to live in the property or to use it for their own exclusive holiday use. This is because the property is a hotel bedroom, not a private apartment. It is also because the property may still be let to the hotel company and be burdened by the possibility of having to pay them compensation if you want to break the lease at the next renewal date.

CHIP: You can cancel your lease and sell your apartment or propose it to another rental agency at any time, given the six month advance notice. It is free for you to do whatever you wish with it.

9. Because you are limited in your choice of buyers you may well receive less for the property than you would receive for a similar apartment not in a leaseback program. They are buying a property generating a fixed rental income. Today, with low inflation rates and low interest rates, 5 or 6% looks quite reasonable but if we were in an era of interest rates of 10 or 12% the proposition would look a lot less attractive. The leaseback property has some features in common with a fixed interest bond where, if prevailing interest rates are lower than the interest rate fixed in the bond, the price of the bond goes up and if prevailing interest rates are higher it goes down.

CHIP: There is no limit to your choice of buyers. In fact, because the property has been a successful rental property, you may have more buyers than you anticipated. You will dictate the price and therefore your capital gain.

So the simplicity and the contractual guarantee comes at a price. Over many years we have seen that our clients who buy a sensible apartment in a sensible place and rent it out reasonably efficiently make more money than they would make under the leaseback program. That is fine providing the enter into the program with their eyes open, putting the simplicity above higher returns in their scale of importance. It is not fine if they have not been told about these potential drawbacks by the agent selling the property.

CHIP: While the Corporate Housing in Paris program is a perfect alternative to the French Leaseback, it still does not completely replace ownership of an apartment you can call your own and call home that you have total jurisdiction over its rental offerings. Those we know who do take on the added effort to own and manage the rental of their own property can gain much more than 4.5% -- easily up to 10% under the right circumstances.

For more information about CHIP, download this comprehensive brochure and/or contact Adrian Leeds