Real Estate Leasing via a SCI or an Operating Company: Structure, Advantages and Risks

A manager who wants to house the business in its own premises, a workshop, a logistics warehouse or an office floor, quickly runs into the question of financing. A conventional bank loan ties up the equity contribution and uses up the borrowing capacity of the operating company, at the very moment when it needs cash for its business. Real estate leasing (crédit-bail immobilier) offers an alternative: financing 100% of the building with no initial equity contribution, by placing the transaction either directly in the company that carries on the business or in a dedicated SCI (société civile immobilière, a French property holding company). This choice of structure is not neutral, whether for estate planning, for tax, or above all on the day the business runs into difficulty. This guide sets out the mechanism of real estate leasing, compares the SCI structure with a direct purchase, analyses the fate of the contract in insolvency proceedings and explains the exercise of the purchase option and its tax treatment.

Real estate leasing: mechanism and legal framework

Real estate leasing is defined in Article L.313-7, 2° of the French Monetary and Financial Code (CMF). It refers to the transaction by which a finance company (the lessor) buys or has built a building for professional use and then lets it to a business (the lessee), with the option for the latter to become owner of the property at the latest when the lease expires. Other long-term occupation titles, the long lease (bail emphytéotique) and the building lease (bail à construction), are compared in our article on choosing the title according to the asset.

Three features characterise the transaction and distinguish it from an ordinary letting:

• the lessor remains the owner of the building throughout the term of the contract, which is its security
• the lessee pays rent that repays the capital invested, the interest and the financier's margin, over a long term, often fifteen to twenty years in practice
• a purchase option is stipulated from the outset, at an agreed price, generally a residual one, which the lessee may exercise at the end of the contract

Real estate leasing is a credit transaction reserved for authorised financial institutions. The lessor is most often a specialised subsidiary of a banking group. To be enforceable against third parties, in particular the lessee's creditors, the contract must be published at the land registry (service de la publicité foncière), in accordance with the requirements of the CMF. This formality is decisive: without proper publication, the lessor may find itself in conflict with the other creditors if the lessee defaults.

What distinguishes real estate leasing from a simple letting and from a loan

Unlike a conventional commercial lease, real estate leasing has an acquisition logic: the rent is not the consideration for mere enjoyment of the premises, it is the staged repayment of a financing. Unlike a bank loan, the business does not own the property during the term of the contract, which has consequences for accounting (the building does not appear among the assets on the lessee's balance sheet before the option is exercised) and for tax. The boundary with the transaction by which a business sells its premises and then takes them back on lease is drawn in our article on real estate sale and leaseback.

SCI or operating company: which should be the lessee?

This is the first structuring decision. The real estate leasing contract for a business may be signed directly by the company that carries on the activity, or by an SCI created to hold the real estate.

The direct structure through the operating company

Here, the trading company (SARL (limited liability company), SAS (simplified joint-stock company), professional practice company) itself signs the lease. It pays the rent, deducts it from its taxable profit and, at the end of the contract, exercises the option to record the building as an asset. This arrangement is simple and avoids setting up an additional entity.

Its major drawback is the mixing of real estate assets with operating risk. Once the option is exercised, the building becomes an asset of the trading company, and therefore security for its creditors. If the business fails, the real estate is absorbed into the proceedings. The separation between the working tool and the manager's personal assets disappears.

The structure through an SCI

Real estate leasing through an SCI rests on a classic separation in business law. The SCI signs the leasing contract, pays the rent to the lessor, and then lets the building to the operating company under a commercial lease. Two flows then coexist:

• the SCI pays the leasing rent to the lessor
• the operating company pays a commercial rent to the SCI

At maturity, it is the SCI that exercises the option and becomes owner of the premises. The manager holds on one side the trading company, on the other the real estate assets housed in the SCI.

This arrangement pursues several objectives: isolating the real estate from operating risk, preparing the transfer of assets independently of the sale of the business, and enabling the manager to build up a personal real estate asset financed by the business. It does, however, require particular vigilance over the consistency of the flows, failing which there is a risk of tax requalification, in particular where the commercial rent paid by the operating company to the SCI does not correspond to the actual rental value.

Leasing through an SCI or direct purchase by the SCI: the comparison

A manager who chooses the SCI route has two options of its own: have the SCI acquire the building with a conventional bank loan, or have the acquisition carried by a real estate leasing contract taken out by the SCI. The difference is real.

Equity contribution and financing capacity

A conventional bank loan to the SCI requires an equity contribution, generally a significant one, and the bank's agreement to security over the property (mortgage) and often the manager's personal guarantee. Real estate leasing in principle finances the whole of the transaction, costs included, with no equity contribution. For a growing business that wants to preserve its cash, this leverage effect is decisive. On the banking criteria and the security required from a borrowing société civile, see our guide to property loans for an SCI.

Guarantee and security

Under a conventional loan, the SCI is the owner from the outset and grants the lender a mortgage. Under real estate leasing, the lessor retains ownership until the option is exercised: its security is the right of ownership itself, which is stronger than a security interest. This difference explains why leasing is sometimes available to entities that would not obtain a conventional loan.

Accounting and tax treatment of the rent

Under real estate leasing, the rent paid by the SCI is deductible throughout the term of the contract, which spreads the deduction over a shorter period than the depreciation of an acquired building (the depreciation of a building is spread over decades). This tax cash-flow advantage is, however, paid for when the option is exercised, through a mechanism of add-back described below.

A word of caution, however: the SCI's tax regime determines the value of the structure. An SCI subject to income tax (IR) that receives rent treated as property income cannot always freely deduct leasing rent on the same terms as a company subject to corporation tax (IS). In practice, holding a real estate leasing contract through an SCI frequently leads to an election for IS, which has heavy and definitive consequences for the taxation of later capital gains on sale. This choice deserves a quantified simulation before any signing.

The fate of the contract when the business runs into difficulty

This is the point at which the choice of structure shows its full importance. A real estate leasing contract commits the business over a long term, a period during which a deterioration in the business is always possible.

Leasing signed by the operating company that enters insolvency proceedings

Where the lessee is the operating company and it becomes subject to safeguard proceedings, reorganisation (redressement) proceedings or judicial liquidation, the leasing contract is an ongoing contract within the meaning of Article L.622-13 of the French Commercial Code. The court-appointed administrator (or the debtor with assistance) has an option: to require continuation of the contract, or to renounce it.

If continuation is decided, rent falling due after the opening judgment must be paid when due, failing which the contract may be terminated. If continuation is not chosen, the contract is terminated and the lessor, as owner of the building, takes back its disposal. Because it has remained owner and its contract has been published, the lessor is in a very protective position: it can reclaim its property, unlike a mere mortgage lender who must submit to the collective realisation procedure. For the business in difficulty, this means a real risk of losing the use of its business premises.

The protective value of the SCI structure

Where the leasing is held by an SCI and only the operating company fails, the real estate largely escapes the proceedings. The SCI, a separate legal entity, is not in insolvency proceedings. It remains party to the leasing contract. The commercial lease concluded with the operating company becomes an ongoing contract in the tenant company's proceedings, but the SCI retains control of its building and can, where appropriate, relet the premises to a purchaser of the business.

This separation is, however, not absolute. Several factors can break it down:

• a personal guarantee or security given by the SCI or the manager in favour of the lessor, which restores a link of liability
• commingling of assets, which may lead to the insolvency proceedings being extended to the SCI if the flows between the two entities are abnormal (rent not at arm's length, no written lease, shared cash)
• total economic dependence of the SCI on the single defaulting tenant, which may itself place the SCI in cessation of payments because it cannot meet the leasing rent

The strength of the structure therefore depends on its rigour: a written and dated commercial lease, rent consistent with the rental value, separate accounts, and no unjustified financial flows.

Exercise of the option and its tax treatment

Exercise of the leasing purchase option is the culmination of the transaction: the lessee exercises its right to buy the building at the residual price provided for in the contract, often modest after years of rent. It is also the most delicate moment for tax, because the tax authorities reconstitute the advantages gained from the deduction of the rent.

The exercise price and the duties payable

The option exercise price corresponds to the residual value stipulated at the outset. The transaction is a transfer of ownership, subject to registration duties or to land registration tax depending on the case, and the VAT regime depends on the nature of the building and the date of its first occupation. An acquisition that seems harmless because of its low residual price may thus generate significant ancillary costs.

Tax add-back: the price of the earlier advantage

During the life of the contract, the lessee has deducted all of the rent, including the portion corresponding to the land, even though land is not depreciable under the ordinary regime applicable to an owner. Article 239 sexies of the French General Tax Code (CGI) provides for an add-back when the option is exercised, in order to neutralise this advantage.

In practical terms, where the exercise price is lower than the value of the building reduced by the depreciation that the lessee could have claimed had it been the owner, a portion of the rent previously deducted must be added back to the taxable profit of the year in which the option is exercised. The add-back relates in particular to the share of the rent attributable to the land. For an SCI or a company subject to IS, this add-back may represent a significant tax charge, concentrated in a single financial year, which must be anticipated in the financing plan.

After the option is exercised: depreciation and future capital gain

Once the option has been exercised, the building enters the assets at its exercise price, increased where applicable by the sums added back. The new owner may depreciate the building (not the land) under the ordinary rules. On a later resale, the capital gain is calculated from this entry value. The applicable regime differs radically depending on whether the SCI is subject to IR (capital gain of private individuals, with relief for length of holding) or to IS (business capital gain added back to profit, with no relief). This point, often underestimated at the time of signing, may weigh heavily on resale or transfer.

The risks to map out before signing

Real estate leasing is a powerful tool, but it concentrates several areas of risk that a preliminary analysis must cover.

The first risk is that of a long-term commitment. The contract runs for many years and early termination is costly: the contractual indemnities may correspond to a substantial share of the rent remaining to run. A business whose property needs change rapidly must weigh this rigidity.

The second risk is tax. The combination of the SCI's regime (IR or IS), the treatment of the rent, the add-back on exercise of the option and the taxation of the capital gain on resale forms a coherent whole that cannot be decided segment by segment. An overall simulation, taking into account the holding horizon and the transfer plan, is indispensable.

The third risk concerns personal guarantees. Lessors frequently ask for a guarantee from the manager or from the operating company, which reintroduces the link of liability that the SCI structure was precisely intended to cut. Negotiating the scope of this security is a first-order issue.

The fourth risk is structural: the consistency of the flows between the SCI and the operating company. An absent commercial lease, a rent that is manifestly undervalued or overvalued, shared cash: each is an anomaly that exposes the structure to tax requalification and to extension of the insolvency proceedings in the event of default.

Conclusion

Real estate leasing remains one of the few tools for financing business premises in full without an equity contribution, while preserving the operating company's cash. Held through an SCI, it combines this leverage effect with the separation of real estate assets from business risk, and prepares the transfer. This attractive structure holds, however, only if it is rigorously built: a botched structure, with inconsistent flows between the SCI and the operating company or poorly negotiated guarantees, destroys the protection sought and may even worsen the situation in the event of difficulty.

The position is clear: leasing through an SCI is almost always preferable to direct holding by the operating company where the manager has a long-term estate planning view, but it cannot be improvised. Before any signing, have a complete tax simulation prepared covering the SCI's regime, the add-back provided for by Article 239 sexies of the CGI on exercise of the option and the taxation of the future resale, and then have the leasing contract, the commercial lease and the scope of the guarantees reviewed by a lawyer, so that the separation between the real estate and the operating risk withstands the test of insolvency proceedings.

Frequently asked questions

Can an SCI enter into a real estate leasing contract?

Yes. An SCI may be the lessee under a real estate leasing contract within the meaning of Article L.313-7, 2° of the French Monetary and Financial Code. It signs the contract, pays the rent to the lessor and lets the building to the operating company under a commercial lease. The SCI's tax regime (IR or IS) must be decided in advance, because it determines the deductibility of the rent and the taxation of the later resale.

What is the difference between real estate leasing and a bank loan for an SCI?

Under a conventional loan, the SCI is the owner from the outset and grants the lender a mortgage, generally after an equity contribution. Under real estate leasing, the lessor remains owner until the option is exercised and in principle finances 100% of the transaction with no equity contribution. Leasing spreads the deduction of the rent over a shorter period than depreciation, but generates a tax add-back when the option is exercised.

What happens to the leasing contract if the business is in reorganisation or liquidation?

If the lessee is the operating company, the contract is an ongoing contract within the meaning of Article L.622-13 of the French Commercial Code: the administrator may require its continuation or renounce it. The lessor, having remained owner and having published its contract, may reclaim the building if the contract is not continued. If the leasing is held by a separate SCI, the real estate in principle escapes the operating company's proceedings, except in the case of a guarantee, commingling of assets or excessive economic dependence.

How does exercise of the option work in real estate leasing?

Exercise of the option is the lessee's exercise, at the end of the contract, of its right to buy the building at the residual price fixed from the outset. It entails a transfer of ownership, subject to registration duties or to land registration tax, and triggers the tax add-back provided for by Article 239 sexies of the French General Tax Code. The building then enters the assets at its exercise price and may be depreciated for its construction element.

Why does exercise of the option lead to a tax add-back?

During the contract, the lessee has deducted all of the rent, including the portion corresponding to the land, which is not depreciable for an ordinary owner. Article 239 sexies of the CGI neutralises this advantage by requiring, when the option is exercised, the add-back to profit of a portion of the rent previously deducted, in particular the share attributable to the land. This charge is concentrated in a single financial year and must be anticipated.

Does the SCI structure really protect the manager in the event of failure?

It offers real but not absolute protection. As the SCI is a separate entity, the real estate is not absorbed into the operating company's proceedings. This separation breaks down, however, if the manager or the SCI has given a guarantee, if assets are commingled (rent not at arm's length, shared cash, no lease), or if the SCI depends economically on a single defaulting tenant to the point of no longer being able to meet its own leasing rent.

Should an SCI under real estate leasing opt for IS or IR?

The choice depends on the holding horizon and the transfer plan. IS allows a wider deduction of the rent and depreciation after the option is exercised, but the capital gain on resale is a business capital gain with no relief for length of holding. IR retains the capital gains regime of private individuals with relief, but limits the deductibility of expenses. An overall quantified simulation, including the future resale, is needed before deciding, because the election for IS is irrevocable.