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WHY WOULD A REALTOR CONSIDER SUGGESTING FRACTIONAL OWNERSHIP TO A POTENTIAL SELLER OR BUYER?

The concept of fractional ownership is unknown to many developers, builders, sellers and buyers, and even those aware of the concept are often unclear on its potential advantages. A Realtor who understands shared ownership concepts can often obtain a listing or make a sale that other Realtors cannot, open up a new avenue of marketing, or achieve a higher sales price. Knowledge and understanding of fractional ownership can be a particularly useful tool in times or areas where transaction volume for traditional sales is slow or seasonal.

WHAT LEGAL RESTRICTIONS APPLY TO FRACTIONAL OWNERSHIP?

Legal restrictions on fractional ownership can be grouped in four general categories: (i) national or state real estate law, (ii) local real estate law, (iii) private deed restrictions, and (iv) national or state securities or investment law. Even where a group of friends and family is purchasing the property to share, and therefore fractional interests will not be marketed to the general public, legal restrictions on fractional ownership may apply at some point in time, particularly when one of the co-owners needs or wants to re-sell his/her fractional share.

In the US, fractional ownership real estate law varies from state to state. Which law applies depends on where the shared property is located, how and where the interests will be marketed and, in some cases, where the buyers live. To determine which national or state real estate laws apply to a particular fractional ownership arrangement, it is necessary to determine how many interests will be offered, the general structure of the offering, how and where the interests will be marketed, and who will be permitted to buy. When regulatory approval is required, the cost and delay associated with obtaining the approval can be significant, and in some cases approval may be denied based on the location of the property or other restrictions.

Local regulation of fractional ownership is rare but increasing, particularly in resort communities. Private deed restrictions found in the governing documents of homeowners' associations (such as CC&Rs, Bylaws, Coop Agreements etc.) may also restrict or prohibit fractional ownership arrangements. Most local fractional ownership laws and private deed restrictions are triggered by the usage rights to be offered with the fractional shares, rather than by the number of owners or by the ownership structure. In other words, these restrictions are not imposed because fractional shares of property are being sold, but rather because they are being sold with the promise that one owner will be allowed to use a home or apartment at a particular time. Of course without the promise of some sort of defined and recurrent usage right, the fractional interests are probably unmarketable.

National or state securities or investment law may also apply to fractional ownership arrangements. In general, these regulations will apply where rental income is pooled among the owners, management responsibilities are delegated completely, or the purpose of the co-ownership is primarily investment. Application of these laws may result in expensive registration and compliance requirements, advertising restrictions, securities deal licensing, and requirements relating to the wealth and sophistication of each purchaser.

HOW ARE FRACTIONAL OWNERSHIP USAGE RIGHTS DIVIDED ?

Regardless of whether one is a fractional developer of a multi-unit fractional property, Realtor or seller for a single home to be offered factionally, or organizing a group of family or friends for a shared property purchase, deciding how the shared property will be used is usually the first step in structuring the fractional ownership arrangement. Usage structure will dictate most other elements of the fractional ownership arrangements, and become the most important and valuable benefit of ownership for the fractional owners.

In analyzing the various fractional ownership usage options, it is important balance predictability against flexibility, and also to remember that co-owners will exchange usage rights among themselves regardless of which system is adopted. The choice of fractional ownership usage allocation structure should be driven by the property location and size, its seasonality, the likely length of visits, and the manner in which people are likely to travel to the shared property. In addition, consider the complexity and cost of operating the fractional ownership usage system in light of the number of co-owners, and remember that a complicated or labor-demanding system will be subject to failures and manipulation and add to the co-owners' dues.

The most popular model for fractional ownership usage is the "Usage Assignment Approach". Each co-owner is assigned the exclusive right to use a home during a specified number of days, weeks or months each year. The usage periods can be fixed (such as "the month of February" or "the first two weeks of February and July"), variable (meaning they change each year), or a combination of fixed and variable. In multi-unit fractional properties, the usage rights can be to a particular home or unit, a group of homes or units (such as all of the three-bedroom units, or all of the sea-view units), or all of the homes or units. Purchase price can be influenced by the amount and/or quality of usage allocated to each co-owner. Usage rights can be restricted to owners only, or extended to family, friends, rental tenants, exchanges, or any combination of these. Different usage rights may apply to different usage periods. Usage periods can be assigned through an annual rotation among the Co-Owners of preset groups of days, weeks or months, an annual selection or draft process based on a rotating system of selection priority, a reservation system, or any combination of these usage systems.

A less popular model for allocating fractional ownership usage rights is the '"Pay-To-Use Approach". Co-owners pay a pre-agreed "usage fee" for each day or week of usage. The usage fees, along with any rental income generated if the home is also rented to non-owners, are used to pay the expenses of ownership. If the usage fees and rental income together exceed the expenses, the surplus is divided among the owners; if there is a shortfall, each owner must contribute. When the Pay-To-Use Approach is used, the purchase price and ownership of the home can be divided based on what each co-owner can afford, their investment goals, or any other criteria the group finds useful, but purchase price and ownership need not have any relationship to usage. It is possible to employ the Usage Assignment Approach, but still allocate a certain number of weeks each year as Pay-To-Use weeks, meaning that during those times the home will be rented out to owners or to non-owners and the resulting income split among the owners in proportion to ownership. In another variation, it is possible to employ the Pay-To-Use Approach but still give co-owners preferences or discounts for a certain number of weeks each year.

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