This article gives answers to the most frequently asked questions that are raised by buyers of fractional homes. It is written by one of the leading fractional lawyers, who has been focusing on fractional homes for over 20 years.WHAT IS FRACTIONAL OWNERSHIP?
The phrase "fractional ownership" is typically used to describe shared ownership of a vacation or resort property by people in an arrangement which allocates usage rights based on time. In other words, only one owner will be allowed to use a particular home or apartment at a particular time. Fractional ownership arrangements can be applied to a single home or apartment (typically referred to as a "one-off fractional") or to a multi-unit building or resort development. In multi-unit developments, each co-owner may have ownership rights to all the units, some of the units, or only one unit, and his/her usage rights, and cost obligations, may or may not correspond to his/her ownership rights. Groups can be assembled by a real estate development or hotel company, an individual builder, Realtor or seller, one or more of the prospective buyers/users, or groups of friends or family members.
The terms private residence club (or "PRC"), timeshare, shared ownership, vacation home partnership and fractional co-ownership are also used to describe these arrangements, and there are no consistent distinctions in the use of these descriptions. Since property usage is allocated based on time, this type of co-ownership falls within most legal definitions of a "timeshare", which means it can be subject to restrictions and requirements applicable to the creation and sale of timeshare property. Nevertheless, there are significant practical distinctions between most arrangements commonly called fractionals and more traditional timeshares, and these are discussed more fully below. Fractional ownership arrangements should not be confused with "destination clubs" (in which participants purchase a temporary right to use without ownership), or a "condohotel" or "condotel" (in which each participant has whole ownership of a particular hotel room or suite).HOW DOES FRACTIONAL OWNERSHIP DIFFER FROM TIME SHARES?
From a strictly legal standpoint, most definitions of the term "timeshare" encompass any arrangement under which a group of people share use of a property based on time, regardless of whether they own the property and regardless of whether a management company or developer is involved in organizing or operating the property. But from a practical standpoint, there are significant differences between most of the arrangements historically referred to as timeshares, and most fractional ownership arrangements.
Contrary to popular belief, the difference between a fractional and a timeshare is not whether title to property is conveyed to the purchasers. As an attorney who has been involved in shared ownership for more than 20 years, I can say definitively that many "timeshare properties" involve direct, titled ownership, and many "fractional properties" do not. This misconception about the difference between a fractional and a timeshare often leads to two significant problems: (i) an assumption that timeshare restrictions and regulations do not apply to fractional projects, and (ii) failure to evaluate the important elements of an offering to make sure that it really is better than the old-fashioned timeshares with bad reputations.
The meaningful differences between most old-fashioned timeshares and most modern fractional ownership arrangements are (i) the extent to which each participant's rights and responsibilities are limited to a particular home or group of homes, and (ii) the extent of each participant's ownership and control. Having deeded ownership to a particular home or condominium does not necessarily mean that a co-owner has the right to use the home he/she owns (as opposed to others in the development) or has expense responsibility which is limited to that home. Nor does deeded ownership give a co-owner any particular level of control over how the home he/she owns will be cared for and managed, what ownership costs will be in the future, or whether there are any meaningful prospects of making money based on increasing property value. These issues must be examined based on the documents governing the shared property, not based on what the arrangement is called and whether or not ownership is deeded. Here are the key questions to ask about a fractional ownership arrangement:
- What is the balance of predictability and flexibility in the usage system? Can the system be changed and, if so, to what extent is each co-owner protected from changes that will diminish the usefulness of the property for him/her? Is the usage system fair, can its fairness be verified and confirmed, and in what ways might an unscrupulous owner or manager manipulate the system?
- To what extent will each co-owner be able to control and predict which home he/she will use on any particular visit? Will he/she return to the same home on each visit? If not, how much variation will there be in size and other amenities, and how much control (if any) will the co-owner have in determining which home he/she will use?
- Are each co-owner's costs and responsibilities limited to the home or homes he/she will use, or do they extend to homes that only other owners will use? In the latter case, will each co-owner's costs and responsibilities be proportional to his/her usage rights?
- What is the per-night cost when one adds up all of the annual costs (including management fees and dues) and divides them by the number of days of use each year? How likely is it that per-night costs will increase faster than the costs of alternative lodging? To what extent will per-night costs be influenced by the need to provide services that some co-owners may not want or use, or by the need for a large developer or resort operator to make a profit?
- Will the co-owners have any control over how costs (particularly management fees and dues) increase over time and how the property is managed and maintained?
- To what extent are co-owners free to rent out the shared property and control the rent charged?
- Can a fractional owner vacation somewhere else, and how easy is it to get the desired location and dates?
- What restrictions apply to re-sale, what competition will a fractional share owner face within the property and the immediate area, and what financing (if any) will be available to the buyer?
Although many people dream of owning vacation property, most either can't afford the type of property they want, or reason that they would not use the vacation home often enough to justify the expense. Fractional ownership provides a solution to these problems by allowing each co-owner to pay only a fraction of the costs and ongoing expenses of vacation home ownership, and share the risks of unforeseen maintenance problems and value depreciation with others. Of course, in exchange for spreading the costs and risks, the owner gives up some of the usage rights and freedoms of whole ownership. But job and school commitments prevent most people from using a vacation home more than a few weeks or months each year, and some loss of freedom and control is often an acceptable sacrifice for the huge cost savings.