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The pitfalls of tax exemption

All is for the best in the best of worlds for tourism residences? Not exactly. The last crisis happened, leaving many players high and dry. If we look at the last decade, the projects launched during the height of the real estate market had the annoying habit of reaching completion during a weak period. Fateful effect of the calendar: 2001 and 2003 saw the arrival of 8,000 to 13,000 new apartments versus a range of 2,000 to 6,000 apartments in other years. 2008 – annus horribilis for the tourism sector – is no exception. This new supply joins an already strong capacity, and even an overcapacity in certain areas. Aggravating phenomenon: these openings combine with a difficult economy. Real estate sales and rental rates are on a downtrend, pulling down the already limited shareholders’ equity of many players that found themselves with a volume of leases to pay that are often much higher than the acceptable average, meaning 30% of the turnover.It was inevitable: the compulsory liquidations and placements in receivership multiplied over the last twenty-four months. “With residences created in poor locations, providing a limited array of services – no meeting rooms, swimming pool or balneotherapy– promoters led their customers into dangerous places. No entry barrier with managers lacking in commercial savoir-faire to boost occupancy assets management advisors have a results culture but did not play their role regarding the inherent risks of this real estate product, investors attracted by the fiscal appeal and a "guaranteed rent", a decoy within a conventional framework: what happened had to happen,” says the specialized attorney Christopher Boinet. Among the main actors who passed under the sword of Justice: Transmontagne by 2007; Appart’Valley, LVR and Maisons de Biarritz in 2008; Rent A Flat, Rhodes Tourisme Résidhôtel in 2009; Antaeus at the beginning of this year and Mona Lisa more recently. With an idea to taking advantage of the setbacks of its counterparts and finding some treasures among the ruins, Quiétude Evasion acted as a sweeper and took over Appart and Sun Valley one after the other in July 2008, LVR in October 2008, part of Maisons de Biarritz – while the others were taken over by Lagrange – in January 2009 then several Resid’hotels in May of the same year. Crash: it took no more than three months for the liquidity crisis and the market to lead Quiétude into receivership. The world of tourism residences "is full of people who are not much wiser" than La Fontaine’s frog. Because they did not head the lesson of this fable, professionals have put many owners with often modest revenues in difficulty, leaving them with no other choice than to accept a drop in leases set by takeover entrepreneurs. Tax exemption has its demands: the need to maintain the level of 70% of properties available for rental or risk losing the tax benefits. “Everyone is in the same boat at a tourism residence. A 9-year journey to Cytherus can turn into a holiday or a disaster,” concludes Christopher Boinet. The probable consequence of this difficult period will be to reform and make the market healthier. The SNRT had already undertaken a first step by the end of 2007 by instituting a charter of good practices whose main points were introduced in the law of July 2009 about the development of tourist services. This included 9-year firm leases, more information for the investor with an annual presentation of accounts for each residence and the election of a manager prior to the project. “The manager must be present from the beginning of the operation in order to include its view as an operator of common areas, services, and conception of apartments,” underscores Pascale Jallet. In order to pull confused owners out of this rut, the finance act of 2010 now authorizes leases that are partly variable, and thus more interesting for those taking them over as the risks are shared. Another innovation: owners have the possibility to join forces to either manage the residence themselves or sign a management contract – rather than a commercial lease – with a hotel or vacation center management specialist who will commercialize the residence on their behalf. Is it possible to do more to protect future investors? Christopher Boinet offers the hypothesis “of a protection system guaranteeing 6 months rent by a third party insurance company or bank.” It is not certain, however, that all the players would open to this idea.

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