Owning a fraction instead of the entire property could be the answer for today’s credit squeeze and higher risks associated with certain types of investments.
If you want to eat only a slice of pie, would you want to spend all that money to buy the whole pie if you can share the cost with others who also wish to eat from the same pie? Of course, it makes sense to just bear part of the cost that commensurates with what you consume. That is fractional ownership or owning a fraction or a slice of something bigger.
Fractional ownership is not to be confused with timeshare. The buyer’s rights in a timeshare are purely contractual in that they have the rights to use the property for a specified period of time during each interval. Although it may be provided that they need to also pay a certain amount of maintenance charge in addition to the cost of purchasing the timeshare, they have no legal or beneficial rights to the property. On the other hand, a fractional owner is able to have ownership of the property, but not the entire parcel of the real estate.
WIN-WIN SOLUTION
The practice of joining together with family and friends to share ownership of a property has been around for many years. But the official fractional ownership in the property industry only started in the US ski resorts in the early 1990s. These first fractional developments recognized that people did not want to buy whole homes, which they would use only for a few weeks a year in the mountains.[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5″ ihc_mb_template=”1″ ]
Outside the US, a non-commercial form of fractional ownership has been in existence for several decades. In this form, otherwise unconnected individuals (rather than family or friends) form private syndicates to purchase, for example, vacation property or boats. These syndicates operate as private member groups with small numbers on a non-profit basis, generally just sharing expenses and usage. These can involve assets ranging from modest apartments or condominium-type properties to multimillion euro / dollar properties. They are able to leverage their collective ability to make purchases of additional assets such as boats or vehicles as additional facilities, while retaining control entirely within the membership of the group.
MANAGEMENT MATTERS
Every fractional endeavour requires some sort of management, to administer the rules and regulations (which are agreed upon before the fraction is purchased) to maintain the asset to the degree laid out in the ownership documents. Generally, the management will oversee the daily operation of more than one property, although it is not necessary.
A single fractional asset may be managed by a single entity. Each owner is guaranteed a prescribed amount of access to the asset, which typically can be used or offered to the public as rental or charter. The income is usually split between the management company and the fractional owner, unless the owner finds the renter himself. Additionally, each owner pays a portion of the annual management fees and maintenance, relative to the percentage of ownership.
The rules and regulations as between owners should include methods of determining the allocation of time spent on the property between owners, the sharing of the taxes and other expenses, the eventuality of owners selling their respective shares, and most importantly, the methods of enforcing non-compliance by
the owners.
Fractional ownership divides a property into more affordable segments for individuals and also matches an individual’s ownership time to their actual usage time. A fractional share gives the owners certain privileges, such as a number of days or weeks when they can use the property. Occasionally, the property is sold after a predetermined time, thereafter distributing the relative proceeds back to the owners.
A few private owner groups have developed highly sophisticated usage allocation schemes and other features based on the principle of attempting to get as close as possible to the flexibility of individual ownership, and only compromising this to the minimum extent necessary to accommodate multiple owners. In such schemes, the basic agreement is between the members themselves, whereas in most commercial fractional ownership schemes, the owner’s principal relationship is with the property developer and/or promoter of the scheme.
COMPANY AS OWNER
In situations where the legal framework does not allow for ownership above a certain number of individuals, this is done by creating a “mezzanine structure”, i.e., creating a company which owns the property thus allowing multiple owners or investors to own shares in the company. Those shares can then be purchased and owned by more
than one individual. The reasons for a “mezzanine structure” can vary. Two common reasons are to allow transfer of shares without the need to reflect changes on the title or deed to the property, and for tax benefits.
The main advantages of fractional ownership schemes are that buyers find it more affordable with a smaller amount of investment, thereby cutting down the need for financing as well as sharing out the risk of an investment with other co-owners.
Also it offers greater flexibility for the investor to exit his investment because he can dispose a portion of it rather than the whole. In mezzanine structures, there is the further attraction of circumventing real property gains tax. During times like this when banks go on a credit squeeze and property-based loans are harder to come by, fractional ownership does have its merits.[/ihc-hide-content]