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Fractional Ownership Comes of Age

Fractional ownership interests have been marketed in North America since the early 1980's. Quartershare projects (4 owners in a unit) were first offered in Breckenridge, Colorado and in Hilton Head Island, South Carolina in 1981. Both resorts met with significant success at a time when interest rates were over 20%. I say they met with significant success because almost all sales of whole ownership resorts had come to a complete stop due to the high interest rates.

Timeshare and fractional ownership has proven to be virtually recession proof over the last 20 years. I believe the basic reason for this phenomenon is that timeshare and fractional products are much more user-oriented than whole ownership products. To illustrate the point I will refer to my hometown of Park City, Utah. Park City offers high-end ski resorts filled with second homes and vacation condominiums ranging in price from approximately US $250,000 to US $8,000,000. The interesting thing to note is that in the single family second home market, owner usage only averages about 17 nights per year, while the lower-priced condominium market averages approximately 23 nights per year. It is an incredible fact that owners will spend such large amounts of money for such limited usage.

The main reasons owners of vacation condominiums and second homes give as justification for such a purchase is 1) the ability to go on vacation when they want, even though it is relatively few nights each year or 2) the hope that real estate appreciation over time will offset the costs of not using the unit more often.

The beauty of fractional ownership is that both wishes, going when you want and real estate appreciation, are still possible. Yes, owners still have to use their condominium based on a schedule as identified below, but in the case of a quartershare; they get to make their choice at least once per month. In a typical quartershare program, owner "A" gets the first week of the year; owner "B" gets the second and so on throughout the year. The following year, owner "B" starts the rotation. The next year owner "C" starts the rotation, then owner "D" and back to owner "A" again. In this way each owner is treated fairly as to the use of high demand holiday weeks. Of course, with only four owners in a unit they can call each other to request a specific use week. In the event of a dispute the fixed rotation is the final word.

Fractional ownership is also environmentally sensitive in that more people are allowed access to beautiful resort areas and fewer condominiums need to be constructed. The developer, through development of or association with a quality rental management company, can enhance efficiency even further. If a respectable rental program is in place, owners will feel more comfortable putting their unit up for rent. Once the owners are confident in the rental management company and see the financial benefits of participation they will generally put their unit into the rental program except when they use it personally.

Fractional ownership is the wave of the future. It works for developers because of the premium that they can charge for fractionalizing a project. It makes sense to wealthy consumers, who would prefer to have the majority of their money earning income from other areas, and still gives them the use privileges that they demand. It also works for lowerincome clients who have been priced out of the resort real estate market. With fractional ownership everyone wins.

As with any new real estate product there are pros and cons. The pros are obvious as described above. The only real negative issue is consumer financing. Most lenders are not willing to allow separation of mortgage liability, which would require all fractional owners to sign on the entire condominium unit loan jointly and severally. This requirement would certainly kill fractional sales. Therefore, the key to a successful fractional program is consumer financing along with real marketing expertise. There are a few lenders willing to provide fractional consumer loans, based on the financial strength of the developer.

Brent Ferrin is the owner of Brent Ferrin Associates; a Park City based resort-consulting firm. His firm is currently developing 3 fractional projects for their own account and consulting on 4 other projects from Canada to the Caribbean. Brent spent five years heading acquisitions and development for the resort division of Marriott Ownership Resorts, a division of Marriott International. He was also responsible for developing the first quartershare resort in the United States. For additional information he can be reached at (435) 655-0555.