Opinion: Fractional shares in France is simply a general partnership of strangers put together by a syndicator / developer who may have little or no experience in real estate market evaluation and renovation.
PREF's Advice: Do careful due diligence on the syndicator and his/her backers. Do the same (if you can) for potential co-owners.
Opinion: The weak Dollar and general global, economic uncertainty have caused the "buy" side of Paris real estate to "dry up." Fractional shares is a way of stimulating the market for developers and under-employed realtors. With a distinctive American entrepreneurial ring to it, the concept has the feel of a real estate "flavor of the month."
PREF's Advice: The Euro is strong and European economic policies are conservative and well regulated: now is a reasonable time to buy in Paris, but you must buy well (and, certainly, NOT at twice the going price in the marketplace).
ALL CASH PURCHASE
Opinion: If you own a weak currency (e.g., Dollar) it is financially advisable to diversify into a stronger currency (e.g., Euro). However, a lump sum purchase immediately locks you in for all time into the (presently unfavorable) exchange rate. Currency fluctuations over time (e.g., Dollar up and Euro down) could cause you to lose value on both the buy side and the sell side of a fractional shares purchase.
PREF's Advice: Take out a low interest French mortgage and gradually ease ("average") into Euros using regular monthly payments. One bank, BPI, will even loan on a fractional shares purchase and renovation in certain circumstances. Contact: Stephane Denner, BPI International
ORGANIZATION OF CO-OWNERS
Opinion: Often organized as an American Limited Liability Corporation or "LLC" (shields you in USA, but not in France), you may have as few as two partners or as many as twenty-four (i.e., 12 couples sign up for one month each). The syndicator may be seeking to have you do marketing to your friends to fill out the purchaser group.
The LLC will often create and own another sheltered entity in France called an SCI or Societe Civile Immobiliere. This simple type of French company protects the owners from some tax disadvantages, but it also makes it illegal to rent out the property.
PREF's Advice: Find out as much as you feasibly can about the people who will be your overseas partners. The likelihood that you will know your other "partners" is slight. Is that the best basis for making a sizeable real estate commitment in a partner format?
French banks will usually not routinely lend to real estate entities shielded behind both an LLC and an SCI.
Opinion: Fractional shares may perform poorly as an investment because the property is purchased at or above market rates and then renovated to haute de gamme standard for a cost that cannot be recouped at the time of a future planned or unplanned sale. Direct and indirect syndicator fees may escalate the cost basis to the point that the property is not readily saleable at a profit.
To capture charm elements these projects favor ground (garden) and top (view) floors, the ones with the most security issues in old buildings.
PREF's Advice: Always track Paris real estate in terms of Euros per m2 costs. Be wary of syndication fees in excess of 30% of the property value plus renovation. Insist on regular "return on investment" (ROI) reporting.
Be security conscious of the property's situation (as the French are -- avoiding ground and top floors) to protect your investment. Find out as much as you feasibly can about the people who will be your overseas partners.
Opinion: How saleable would an owner's interest be if they decided to drop out of the partnership? Co-owners and or the syndicator might have first right of refusal, but they usually are not compelled to buy back shares. Does that mean new buyers join the group or are ongoing expenses allocated across the remaining co-owners?
PREF's Advice: Getting in is always easier than getting out. Have your legal or financial adviser evaluate your risk at the time of any withdrawal of a partner. Generally, a fractional share purchase will be a very illiquid investment. Always track Paris real estate in terms of Euros per m2 costs. Insist on regular "return on investment" (ROI) reporting.
Opinion: Properties in Paris have appreciated at the rate of at least 1% per month (yes, per MONTH) over the past 5+ years. The Euro has appreciated >50% against the Dollar since its inception in 2002. While no one can predict the future here, there is a risk of "buying at the top" and placing yourself in jeopardy should either the housing market or the Euro falter.
PREF's Advice: "Buying at the top" is a risk for any kind of Paris real estate investment. That said, there is no "bubble" in Paris prices as the market is driven directly by limited supply and strong demand and not speculation.
A problem with fractional share properties is that they often contain sky-high syndicator fees that are not obviously labeled as such and which can, effectively, price your purchase far above the prevailing market (as figured in Euros per m2).
LEGAL / INHERITANCE
Opinion: Under French law "no child is left behind" --i.e., cannot be disinherited. Upon the death of the first spouse the fractional shares ownership group will have at least one new member and s(he) could be in diapers.
PREF's Advice: French inheritance law is different from many other countries. Get expert advice from your Notaire on your particular situation BEFORE you sign.
Opinion: It seems that fractional share syndicators only recognize a few arrondissements (3, 4, 6, 7) as suitable for their activities. That may be because they draw their clients from the upper reaches of the Investor Pyramid, those who wish to be in an "exclusive" situation and who believe that there are only a few "best" neighborhoods in Paris. A litany of luxe services (concierge, flowers, champagne) are offered, some at additional cost.
PREF's Advice: PREF recommends buying and living in a "real French neighborhood," simply defined as a place where the people who work there can afford to live there. The high end locations may attract at first, but the real charm of Paris lies in its >300 small neighborhoods, at least one of which would be right for you.
Opinion: Most countries' tax laws favor a buy-to-let situation with a mortgage. Fractional shares is more of a personal, affluent, lifestyle indulgence rather than a viable investment with high profit potential. Few, if any, benefits of a fractional shares purchase would be deductible against French or home country taxes.
PREF's Advice: Indulge yourself with a fractional share purchase if you want turn-key luxury at a high price, Invest yourself with an individual or small partnership purchase of a buy-to let apartment with a mortgage in a real French neighborhood if you want to do well financially over time.
File your forms and pay your taxes (and take your deductions) in both France and your home country.