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French Leaseback Chateau Program…

Become King (Or Queen) Of Your Own Castle And Earn A Guaranteed Return Of 10% Per Year For 15 Years

Kathleen and I spent a few weeks in France recently for a combined vacation/research trip. The vacation was in Champagne, where we visited several champagne houses from the very big and famous (like Tattinger) to the small, charming, and unheard-of.

The French government is in the process of expanding this special and important region, allowing additional terrain to qualify for the production of champagne-worthy grapes. As many as 40 additional villages may be able to begin growing grapes for the production of wine formally categorized as “champagne” starting in 2015. As Champagne grapes are the most valuable in the world, any new land allocated for their production will become worth as much as 1 million euro per hectare overnight.

The first grapes for champagne from the new areas will be harvested in 2019, meaning we’ll see the first bottles of champagne produced from the new vineyards on store shelves in 2021.

I’m not recommending running out and trying to speculate on villages and then which specific pieces of land that might be reclassified to allow for growing “Champagne” grapes.

However, I do have a recommendation from another region of France that is as romantic but far more turn-key. After Champagne, we traveled to Limousin, in the middle of the country, where we toured an interesting chateau resort project.

While I’m sure you’ve heard of Champagne, you may never have heard of Limousin. This is a far less touristed part of this country. It’s mostly farmland that one passes through to get from the north of France to the south and the coast. However, I’d say Limousin is under-appreciated. This unsung part of France has beautiful countryside as well as some special, classic, and historic chateaux.

One of these, Chateau Cazine, has been purchased by a U.K. developer and is being transformed from a modest hotel with an excellent restaurant to a full-fledged destination resort with a spa, a golf course, and that same excellent restaurant.

The heart of the property is a “petit chateau” whose foundation dates back to the 12th century. This picture-postcard-perfect and very historic structure is being renovated into the new resort’s luxury spa center and is expected to be an important draw.

However, the main event is the main chateau, imposing and grand, built in 1898, and every bit the picture of French chateau life. This building has been renovated already and is up and running as a boutique hotel with 18 deluxe rooms and the fine dining restaurant.

In addition to the main chateau and the petit chateau, the property includes several other large stone outbuildings, many of which are currently being converted into a collection of rental apartments. This work is expected to be completed in the next 12 to 18 months.

Other of the outbuildings will also be renovated and some new structures will be built to create additional studio, one-bedroom, two-bedroom, and even three-bedroom apartments, all of which will be operated as rental units. In all, when the project is completely built out, the property will include about 140 rental units.

All of that is colorful, charming, romantic, and interesting, but, you may be wondering, where’s the investment opportunity?

The investment opportunity is in the rental units, which are being developed and which will be managed and operated as part of the French leaseback program. This affords investors in the units two key benefits:

 

  • First, France’s 19.6% value-added tax (VAT) normally charged on new construction is waived for all leaseback purchases.
  • Second, your purchase comes with a minimum nine-year lease contract with the hotel management company, meaning nine years of turn-key rental management and guaranteed yields. This, of course, is the primary benefit–the reliable annual return for the lifetime of the leaseback agreement.

 

The French government initiated these “leaseback” programs (which include benefits not only for the investor, but for the developer, as well) more than 30 years ago to help incentivize investment in the development of additional inventory for this country’s short-term rental industry. As France is one of the most visited countries in the world and has been for decades, the demand for short-term rentals and hotel rooms is tremendous and expanding. More than 80 million people visit France each year, and they all need places to sleep.

I’ve reported on French leaseback offers in the past. Typical for these offers are guaranteed annual returns of 3% to 6%. Generally, the return is guaranteed over a 9- or 11-year lease agreement with the hotel management company and indexed to construction inflation. This developer is doing things a bit differently, and, in fact, different leaseback terms are in place for different phases of the project. The most recently released phase is the one I want to bring to your attention.

The newest building in the project is to include one-bedroom and studio units with a leaseback return of 10% per year for 15 years. In the meantime, during the construction period before the leaseback term begins, the developer will pay you 5% a year until the building is completed.

Why is this developer offering a 10% return when other French leasebacks offer from 3% to 6%? First, the 10% isn’t a net figure. Owners will participate in future refurbishment costs equally with the developer. This amount isn’t expected to be huge, but it will cut into your 10% yield every five years (the typical period between refurbishment efforts for a hotel). You’ll also have to pay a small annual management fee and some insurance. Factoring all of that into the equation, you should expect to net around 9% per year over the 15 years of the leaseback agreement.

At the end of 15 years, you’ll have two options. You could continue to own the property, keep it in the rental pool, and receive a 50/50 split of net room revenue going forward. Or you could sell the property back to the developer for 150% of the original purchase price. You have to give proper notification if you want to execute this strategy, but this option gives you an easy potential exit for a guaranteed return.

A third option would be to put the property up for sale on the open market. It’s possible that you could resell the property for more than 150% of what you paid for it. You’d have to consider the market at the time to make your decision.

Factor in the 50% profit from the resale at the end of the 15-year leaseback term (assuming you exercise your buyback option), and your annualized returns push into the low double digits.

These one-bedroom and studio apartments can be bought either as complete units or as fractionals. Fractional units start at £9,500 for a 1/26th fraction (two weeks) and £18,500 for a 1/13th fraction for a one-bedroom unit. Studios are offered only as 1/13th fractions at £11,500.

The full unit price is £130,000 for a studio and £200,000 for a one-bedroom. The price includes furnishing for the hotel room.

Note that the pound sterling is up 2% in the last month against the U.S. dollar and is at a high for the last two years. If you’re investing with U.S. dollars, this means this investment is more expensive today than it would have been a month ago. However timing investments to currency rates is difficult, and I don’t recommend you try. This investment provides decent currency diversification if all your assets are in your home currency otherwise (assuming your home currency isn’t the British pound).

Also note that, while your guaranteed return is tied to your initial investment in pounds (as is the 150% buyback), should you decide to keep the unit and participate in the 50/50 net room revenue split after the guarantee period, your currency risk switches from the pound sterling to the euro, as the hotel operates in euro.

Given the level of returns and the standard of the project, this is the most interesting French leaseback program I’ve found in the 15 years I’ve been paying attention to and reporting on these opportunities.

The Chateau Cazine is an extraordinary property and is included in the Chateau and Hotel Collection. This is one way that guests looking for unique and interesting places to stay in France will find it. The chateau is being developed as a spa and golf resort, meaning those are two other ways potential guests will find it (when they search for spa or golf properties in France). This will also be an ideal venue for corporate events and weddings.

The local Limoges airport is served by Ryanair from London, Leeds, Kiverpool, East Midlands, and Bristol in the U.K. as well as a couple of low-cost French airlines. Low-cost airline access has opened up many real estate and tourist markets in Europe.

The developer owns the property outright and has no debt. Bundle that with the buyback option, the 15 years of guaranteed returns, and the fact that the hotel is already up and running and enjoying very good occupancy rates, and you’ve got an investment for which the overall risk is nicely mitigated.

Furthermore, you are not likely to find another leaseback property anywhere in France offering this level of return.

For more details, you can get in touch with the developer here.

Lief Simon

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