Friday, May 12, 2006
Fractional Ownership And The Partition of Title
The pro’s and con’s of deeded title partitioning in real estate.
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Second homes are possibly the ultimate ‘status goods’ – something that many people would like to have but no one really needs. Purchasing a second home, whether a place at the beach, the lake or in the mountains is a fascinating trend in real estate, but often times those who finally own one are quick to express frustration at not being able to spend more time there. It hardly makes sense to have the expense of a mortgage, upkeep, insurance and taxes for a place you don't use more than a couple of weeks a year.
Fractional ownership, therefore, was developed to obviate to the superfluous costs associated with ownership of vacation properties. Modeled upon time-shares, fractional ownership takes the practice one step further by fractionalizing the deeded titles of real property assets. As in time-shares, certain privileges are granted to the individual owners, such as a number of days or weeks allotted for using the asset, and may also offer a proportionate share of income as well.
The main difference between fractional ownership and time-shares is the manner in which title is held. Whereas time-shares give the right to use of the real capital asset in accordance with the contract, but at some point the contract ends and all rights revert to the property owner, fractional ownership offers deeded titles and is, therefore, real property. The other big differences between time-shares and fractional ownership holdings are prices, financing and fees. While time-shares can be purchased for a few thousand dollars, fractional ownerships can run $100,000 or more - much more.
Lenders are general restive when it comes to lending on fractional ownerships. This is due not only to the partition of a single title into many deeded ‘mini-titles’, but also because of the difficulty in assessing a market value on the individual fractions. Market value in fractional ownership, in fact, is in direct function of all the strings that attach to them, such as usage time.
For instance, four investors may each own one equal fractional title in a chalet in Whistler, British Columbia, a typical Winter resort. The total aggregate market value of the chalet is $1 million, so that each investor should theoretically own a real property asset valued at $250,000. Unfortunately, because of the seasonal nature of the resort, the value of the fractional ownerships of the two investors that can use the chalet over the Winter months will likely be higher than those of the other two investors. This is so, because demand for chalets in Whistler is higher during Winter, so that values escalate accordingly.
As a direct and proximate result of a limited pool of financing, the market for fractional ownerships is limited as well, since the pool of prospective purchasers dwindles in tandem. And because of this, if the borrower defaults it could be difficult for the lender to sell the property. Additionally, maintenance fees running in the thousands of dollars per year tend to complicate matters further.
Under the circumstances, then, who buys into fractional ownership? Typically, they are people who could afford a vacation home, but don't have the time to use it fully. Furthermore, the more expensive the property, the more fractional ownership makes sense. It is not a type of investment one would get himself into to make a killing in real estate. The fractions usually are sold at a premium, so unless the property values in a market just go through the roof, gains will be modest. But the vast majority of fractional ownership buyers are not real estate investors - they are, more often than not, typical status good seekers looking for a getaway.
Luigi Frascati
Real Estate Chronicle
