PL20 – 25th February 2003.

Posted by admin in Property Letters | February 25th 2003

Dear All,

Vicky and I have been in Cannes over a week now, and have spent most of our time trying to speed up and finalise the signing and transfer of the apartments which we have already bought for people. The bureaucracy has taken longer than expected on many of them due to a variety of problems which will not occur again as everyone in the loop – ourselves, our agents, banks and notaries – have learned a great deal, and will not let those delays occur again. It will be smoother in future.

Where are we, and what have we got in our group now?

5 apartments are furnished and being rented as of now. We are very excited. Four of the five will have paying guests next week, delegates from the UK to the GSM annual congress. (Had these apartments been anywhere else on the Cote d’Azur, I think it’s fair to say that they would not have been booked in February – conferences are a big factor here, as is the climate). Of the 5, two were bought furnished and ready to go, and 3 have had to be renovated and completely furnished from scratch, and that has taught us a great deal about costings and time delays.
2 apartments are starting to be renovated now, and will be ready in about eight weeks.
5 apartments have been approved by the lending bank and the notaries, and transfer will be affected in the next two weeks. Three of them need building work, four require furnishing, and only one is ready to go.
4 apartments will be ready to transfer very shortly thereafter. The later ones have been much quicker, and have basically caught up with the earlier apartments.
2 apartments (possibly 3 or more) have been offered to us to manage and rent out with ours by some English owners. It is our intention to do as well for them as for any of us, and enjoy the advantages to all of us of increasing the size and variety of what we have to offer.

We have looked at quite a number of properties for sale in the last week, and continue to do so. Quite a few are simply deficient in one area or another, but those that we feel are well worth considering both as an investment and as an income generator I will detail at the end of this letter. I must say that we are finding it a little more difficult to find the right quality and price now.

Cannes in January, going into February is quite beautiful! (We have, probably like you, been watching the European weather reports – of deep snow, chill winds, and blizzards and freezing temperatures all over). Today we have a cold wind for the first time, but the sun is shining. Since we have been here it has been warm (about 13 degrees) and people are already on the beaches at the weekends basking in the afternoon warmth. The Croisette is getting busier by the day, and the gardens are looking spectacular as usual. We expected to see them looking wintry, but in fact that’s not the case – Vicky was so surprised to see tens of thousands of Cyclamens, Pansies and Primroses in marvelous bloom. It really is true that this little corner enjoys a very special micro-climate, protected from the rest of Europe by “les Alpes Maritimes”.

Our website – www.azur-online.com is increasingly worth going in to look at. Lao has been adding to it and now has four of the apartments photographed and on it and the fifth will be on this week or early next. They look great, and you get a very good idea of our “product” (and investment) from the photos on the web.
(For owners in La Brise, of whom we are four now, we were pleased to find on our arrival that the renovations to the building as a whole which had been promised have been done – entrance greatly smartened up and all stairways and halls painted.)

I am confident that every one of the apartments is worth more now than the sum of their purchase price and the cost of their renovations. Some have cost less and some more, but they are all a very good investment.
I also think that it is clear that the Euro is a good currency to be in – we have seen how it has performed against sterling and the US dollar over the 3 years of its existence. We have also seen what has happened to the stock markets in the same period, and I am happy to be in property, and extremely pleased to have found this lovely little corner of Europe to do it in.

Steve and Avril have had a very productive few months here, and I thank them for all they have done to blaze the trail for us, particularly with regard to organizing and overseeing the renovations to the three apartments that have needed it so far. It has at times been frustrating for them, and they have sometimes been let down by the builder, but they have completed the apartments now, and the hard won result is very pleasing. Needless to say we will be using another building firm for the next apartments, and they come highly recommended (but so did the first one!) so we will see.
They leave next week for the UK, and we wish them everything of the best.

Future Management. As I said in my last letter we are developing a very interesting liaison with some people locally who have been successful in the business here for many years, and who have asked us to work with them. They are good people, and our relationship is growing. We had a productive meeting with them and our accountant earlier this week. (This is where we are benefiting from having the impact that size gives us – enough apartments to be noticed).

However, it is so busy here with so many facets to what needs to be managed that it is clear that we need first class and full time management on the ground. It is a massive job, and Vicky and I just can not commit to being here all the time. We need someone else, and we are fortunate we have those people ready to step in as soon as they can tie up their affairs in London.

Our son and daughter in law, Lao and Katherine (who married in Cape Town in December) have been in London for about 8 years, except for a break of a year or two in Zimbabwe, and wanted to get out of that rut. It took them less than 24 hours to decide to leap in where Steve and Avril step out when I offered it, and I am very comfortable that they will put in whatever it takes to make this enterprise fly. It was a huge decision for them to make but Lao has been involved since the outset, built the website, and contributed enormously with ideas and support. They visited Steve and Avril here late last year, Lao is brushing up his “O” Level French, and Katherine has been studying French language tapes for an hour or two a day for months. They are young and rearing to go – a positive ideas factory, and for them the sky is the limit!

Financial stuff – and many questions answered. (Not compulsory reading!!)

The most common question is “what happens if there is a war with Iraq?” I don’t know, but the chances are that Europeans will tend to stay within the perceived safety and security of Europe, but still look for fun in the sun…. Cannes??

Who does the income tax returns for the French authorities? Normally it would be the proprietor, and they are due each year at the end of February. However our accountant in Nice has suggested that it is a very simple matter, and we could do it for you for a small “honoraire”, send them to you for signing, and forward for you to the authorities if you wished.

What would be the costs? It is hard to be exact, but he thought that preparation and submission would cost no more than 200€, and that those whose annual income exceeded 10 000€ might consider it wise to run them past the accountant (not obligatory) in which case budget 400 to 500€.

How much is tax on a) interest, b) capital gains, and c) death duties?
a) He took this to mean – how much is income tax? Minimum is 25%, and it rises through various bands to a max. 50%. It is charged on NET profit, so all possible deductions are factored in first. If income is declared in the proprietor’s home country, taxes paid there are deductible from French tax liability – however, French authorities are very relaxed about where you choose to pay your taxes, and if it should be France that you choose they are quite happy with that. No questions.
b) Capital gains tax is 33%. Price of property, plus all notary’s fees and transfer taxes, plus costs of improvements to property, plus devaluation and depreciation of about 2% per annum each, deducted from the new selling price is your capital gain. (See below for more on CGT)
c) Death duties are calculated on a sliding scale, depending on whether you leave heirs who are in “direct line” (immediate family), but for most of our purposes one can work on about 30 to 35%.

Capital Gains Tax.
Anyone owning 2 or more apartments is very likely to earn a gross income in excess of 23 000€ per annum from them.
If income earned from renting furnished apartments falls in the range 23 000 to 150 000€, and a simply established small company is set up to operate the business, and that company has a “sole proprietor”, then after 5 years that company is granted complete exemption from CGT. It does not matter if properties are bought and sold in the time period – just that annual income stays in the band. It is simple and I believe cost effective to set up, and open to any of us.
If the company is sold before the 5 years is up, CGT is calculated and payable in the normal way.

Trusts, Foreign registered companies and SCI,s.
These have been our biggest headaches, and we have not got all the answers yet, but let me give you what I have. I will not try to disguise the feelings that I was given on the subject.
a) Trusts are not recognized in France as any sort of entity. They are simply regarded as a foreign registered company. Worse still, they are thought to be associated with “tax havens” and regarded with suspicion in an era when the French are super sensitive about money laundering.
b) Foreign registered companies (or trusts) may buy property in France but are penalized heavily, are unlikely to get finance, and I was told by Notary Froumessol this morning that it would be “stupide” to consider it. Whereas calculation of CGT as already explained above is subject to all sorts of deductions for individuals or French companies, no deductions are permitted for foreign companies. In fact, he used the word “amortisement” to describe how each year the capital value of your property is reduced by a couple of percentage points in their calculations, so that when you come to sell the value used to calculate CGT is considerably less than you paid for the property. Apparently (and simply explained) this penalization occurs because they assume that you are reaping tax and other advantages elsewhere through foreign ownership, and the French are not prepared to give you a free ride, or be left out of your action.
c) Societe Civil Immobiliere (SCI’s) are an option, but it has been explained to me again that there really is not much point in spending probably 2000€ to set one up, when their original function in the market (25 years ago) has been accounted for by changing laws. They are outdated and expensive to administer because they have to be administered professionally – no short cuts. They were designed to offer some protection to surviving spouses and children from death duties. The meanest catch of all for most of us :-
“Upon death, the applicable law is that of the country where the property is situated.”….(that’s fine for owners in their own name)….”This is not the case when the property is owned through an SCI, in which case the applicable inheritance law will be that of the home country, constituting an efficient solution to inheritance problems.” Oh dear! I still have enquiries on the go as to whether there is a way out of or around this clause about “home country”. I will keep you in the picture, but now have an address of an English speaking expert who can advise – by phone or e-mail if required – because each individual’s circumstances are different. Contact me if you need to talk to him.

You can set up a French company and use that to purchase property, borrow, and run a business here if you wish, as in that circumstance the authorities are comfortable that they have you completely accountable – they know who you are, what you are doing, and it’s transparent and above board. I would say that the decision on whether to take that route or not depends on the size of your operation here, and isn’t attractive or cost effective to most of us at this stage.

That is the feedback I have had today, and it is fairly consistent with what I have had before. Froumessol could not understand why anyone would want to register property in names other than their own. Correct estate planning took care of all practical considerations in his view. I was not qualified to argue with him but I know there’s more to it than that.

A few final points to add.

1. I have been telling you that:
Purchase price always includes agent’s fees. That is correct.
Additional costs are Transfer Fees at about 7%.
Notary’s Fees at about 7%.
Combine those last two into only one charge of about 7% – called the “fret de notaire” which contains them both. (It’s actually a sliding scale that starts at 6.09% for properties of 200 000€ or more.)
Sorry about that.

2. We have been working on our estimates of income, and in the effort to be realistic/conservative in our projections we have reduced our 40 week per year occupancy estimate to 28. However the rates we were using were unrealistically low, and their adjustment upwards to real market rates means that our revenue predictions remain almost unchanged. We need to work on tweaking the 28 week figure ever upwards. If we get close to 40 it will be fantastic. We’ll try.

3. In all of the property analyses that I have done, including those that I send you today, I have worked on a mortgage interest rate on borrowing of 4.1%. It is no longer that as it’s dropped to 3.9%, but I’m a bit stuck as to how to change the formula on the computer. It’s not a simple formula. So until I sort that out it remains a little high in our examples.
Every analysis assumes a 50% mortgage. We have some who opt to pay outright, others who are S.A. or U.K. based who go for 60% or 70%.

4. Please read the explanation of all my formulae and estimates which are in Property Letter No.2. If you don’t have it I can quickly cut and paste just that bit on an e-mail to you if you ask. It’s well worth understanding what all the figures mean.

Celine Dion is in town at the Palais des Festival from tonight for a week or more. She hasn’t booked one of our apartments unfortunately, but Cannes is definitely coming out of its Christmas low period. This afternoon the place is buzzing.

Please let me know quickly if either of the apartments below interest you. Two that we looked at just behind the Grand Hotel a few days ago were gone before we had time to think – they were on the market for less than a week. Also very importantly, all calculations are done at asking price. We almost never buy at asking price – we make an offer which is accepted or rejected or negotiated.

I will keep in touch. Please don’t hesitate to phone or e-mail me for anything.

With both of our kindest regards,

Guy & Vicky.

P.S. There are a group of apartments which we are very interested in, all in one block, right on the sea, overlooking the beach, and a stone throw from the Palais des Festival. (For those of you who know Cannes, they are at the end of the Old Marina, under Le Suquet – the old city – next to the Hotel Sofitel. From the balcony, left is the Marina and Festival Hall, and in front and to the right is open beach with views across the bay towads St Tropez) We have currently one person interested in them all, and he has first option. With his permission I may be able to give more detail in a day or two in case some or all of them fall through for him. Their asking prices range from 207 000 to 223 000, and there is a need for rapid action or we will lose them. Please indicate your interest.

No 1
PROPERTY ANALYSIS

1 Property Name: No 16 Rue Freres Pradignac
Location: Cannes centre
Type: studio
Floor level 1st floor
Sq m 32.37
Occupation Date immed

2 Purchase cost of property 110000.00
Garage
Parking
Cave/cellar
Total property cost 110000.00
Tsf duties 7% 110000 7700.00 7700.00
Tsf duties 3% 0.00 0.00

Total cost per sq m 3398.21

3 Mortage % 50.00 55000.00
Deposit % 50.00 55000.00

Rate of Interest 4.10
Monthly repayments 409.59

4 Estimated rental income Rate per week
2 weeks @ film festival 2 1143.00 2286.00
7 weeks @ peak 7 700.00 4900.00
5 weeks @ shoulder to peak 5 600.00 3000.00
8 weeks @ medium 8 450.00 3600.00
8 weeks @ out of season 6 400.00 2400.00
Total Income 28 16186.00

5 Income/cost of property 14.71 %

6 Estimated costs Rate per month
Advertising 70.00 840.00
Tax fonciere 50.00 600.00
Tax habitation 50.00 600.00
Insurance 30.00 360.00
Levy – property 45.00 540.00
Water 14.00 168.00
Electricity 50.00 600.00
R & M 60.00 720.00
Management 202.33 2427.90
Services 28 cleaning weeks @ 50 euros ea 1400.00
Total annual expenses 8255.90
Mortgage repayment 409.59 4915.02
Total with mortgage repayment 13170.92

7 Investment
Deposit 55000.00
Tsf duties 7700.00
Other 0.00
Finders fee 2750.00
kitchen 1000.00
furniture 2500.00
redecoration 2000.00
Other 0.00
Total invested 70950.00

8 Net Profit – Return on Investment – 1st yr
Annual gross rents 16186.00
Annual expenses 8255.90
Gross annual operating profit 7930.10
Debts service 4915.02
Net overall operating profit 3015.08
Net Profit R.O.I. % 4.25 %

9 Capital Appreciation – R.O.I – 1st yr
Original purchase price 110000.00
Cost of improvements Kitchen & redecoration 5500.00
Total 115500.00
Forced appreciation Adding value – better use
Natural appreciation 12.00 13860.00
Revised Value of Property 129360.00
13860.00
Appreciation R.O.I. % 0.20 19.53 %

10 Equity Buildup – R.I.O. – 1st yr
Initial Loan Amount 55000.00
Amount applied to principal 2627.53
New Principal Balance 52372.47
Equity Buildup Initial loan amt – new principal bal 2627.53
Equity Buildup R.O.I. % 3.70 %

11 Tax Shelter R.O.I. – 1st yr
Expenses will offset most or all
income for tax purposes – depending
on individuals tax circumstances 10.00 10.00 %

12 Return on Cash invested % 4.25 %
Appreciation % 19.53 %
Equity Buildup % 3.70 %
Tax Shelter % 10.00 %
Total R.O.I. % 37.49 %

This studio flat has character. Set one block from the Croisette between the Carlton and Grand
Hotels and in the heart of the shopping, conference and restaurant district of central Cannes.
It is on the first floor of an old building without a lift. But the staircase is light and easy.
This is a corner apartment, with tall wooden windows and shutters double glazed against sound from
the street which is narrow and bustling and largely pedestrian.
As you enter the flat, there is a small bathroom, with separate loo. Hall leads through to the studio with
two columns and arches and an open plan kitchen.
It comes fully furnished, but would need some improvements, although it is rentable immediately.
It has a double bed, and a pull-out sofa bed.
We would recommend a new bed, and it would benefit from fresh paint, and some enhancing furnishing.
This apartment has a nice slightly bohemian feel.

No 2
PROPERTY ANALYSIS

1 Property Name: Under refurbishment Miramar Antibes
Location: Centre Cannes
Type: 1 bedroom
Floor level 1st floor
Sq m 48 48.00
Occupation Date mid April

2 Purchase cost of property 180000.00
Garage no
Parking no
Cave/cellar yes
Total property cost 180000.00
Tsf duties 7% 180000 12600.00 12600.00
Tsf duties 3% 0.00 0.00

Total cost per sq m 3750.00

3 Mortage % 50.00 90000.00
Deposit % 50.00 90000.00

Rate of Interest 4.10
Monthly repayments 670.23

4 Estimated rental income Rate per week
2 weeks @ film festival 2 1143.00 2286.00
7 weeks @ peak 7 875.00 6125.00
5 weeks @ shoulder 5 550.00 2750.00
8 weeks @ medium 8 450.00 3600.00
6 weeks @ out of season 6 400.00 2400.00
Total Income 28 17161.00

5 Income/cost of property 9.53 %

6 Estimated costs Rate per month
Advertising 70.00 840.00
Tax fonciere 38.00 456.00
Tax habitation 38.00 456.00
Insurance 30.00 360.00
Levy – property 45.00 540.00
Water 14.00 168.00
Electricity 50.00 600.00
R & M 50.00 600.00
Management 214.51 2574.15
Services 28 weeks @ 50 euros per week 1400.00
Total annual expenses 7994.15
Mortgage repayment 670.23 8042.76
Total with mortgage repayment 16036.91

7 Investment
Deposit 90000.00
Tsf duties 12600.00
Finders fee 4500.00
kitchen 0.00
furniture 5000.00
redecoration 0.00
Other 0.00
Total invested 112100.00

8 Net Profit – Return on Investment – 1st yr
Annual gross rents 17161.00
Annual expenses 7994.15
Gross annual operating profit 9166.85
Debts service 8042.76
Net overall operating profit 1124.09
Net Profit R.O.I. % 1.00 %

9 Capital Appreciation – R.O.I – 1st yr
Original purchase price 180000.00
Cost of improvements Kitchen & redecoration 5000.00
Total 185000.00
Forced appreciation Adding value – better use
Natural appreciation 12.00 22200.00
Revised Value of Property 207200.00
22200.00
Appreciation R.O.I. % 0.20 19.80 %

10 Equity Buildup – R.I.O. – 1st yr
Initial Loan Amount 90000.00
Amount applied to principal 4299.60
New Principal Balance 85700.40
Equity Buildup Initial loan amt – new principal bal 4299.60
Equity Buildup R.O.I. % 3.84 %

11 Tax Shelter R.O.I. – 1st yr
Expenses will offset most or all
income for tax purposes – depending
on individuals tax circumstances 10.00 10.00 %

12 Return on Cash invested % 1.00 %
Appreciation % 19.80 %
Equity Buildup % 3.84 %
Tax Shelter % 10.00 %
Total R.O.I. % 34.64 %

This one bedroom apartment will be ready in April. It will have marble floors
with a modern kitchen, and bathroom. Inset chromium lights etc.
It is on the first floor of a 1940’s building overlooking a side street that
connects the Croisette to the Rue d’Antibes (main shopping street).
There is an oblique view of the sea if you lean out of the window and
look down the street. This apartment has no balcony, but it feels spacious
with large West facing windows that are double glazed against sound and
weather. It has good position in the centre of the hotel and conference
district, with the beachess only a block away.
This will be a luxury apartment in a prime position with extreme rentability.
It will only require furnishing.

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