The Business Are Us

Sharing Property with Fractional Ownership

Just like it sounds, fractional ownership is a percentage share of an asset. This is often an expensive asset.

In order to split ownership among several individuals, a company is sometimes set up as the owner of an asset. Then the individuals will own shares of the company.

This is referred to as a "mezzanine structure". With this structure, the actual deed or title of the property is divided into shares.

The benefit of a mezzanine structure is two-fold. Ownership in this case can transfer quickly without having to rewrite a title or deed, and there are certain tax benefits associated with this type of structure.

Shareholders will then support the company through some sort of maintenance and/or management fees. They will often also pay additional fees for every time, or for every hour, that they use the property.

This business practice began, historically, in the industry for business jets. In order to reduce costs, jet owners allowed businesses to purchase shares of the jets.

As a fractional owner, an individual or business has access to several jets that are similar to the one in which they own a share. They can request a flight from anywhere to anywhere with only a few hours notice.

Benefits of ownership are relatively to the number of shares that one has purchased. In other words, a company with more intense needs will be able to request more flights by buying more shares.

Since it began with larger machines, this concept has now spread to the market for smaller aircraft. Private pilots cannot generally afford their own plane, but they can purchase a portion of the plane and split the cost with other pilots--which practice is known as group flying--and with the management company.

In group flying situations, the management entity will often not provide pilots, crews, insurance, maintenance, catering, etc. as they will in the case of larger aircraft. Today, the aircraft manufacturing industry highly supports fractional ownership programs.

Fractional ownership differs from a timeshare in an important way. With a timeshare, an investor buys units of time for the usage of the property, but fractional ownership means that an investor will actually own part of the asset itself.

If a piece of property appreciates over time, a timeshare buyer will not have anything to show for it. On the other hand, the shares that fractional owners hold will become more valuable as the property becomes more valuable.

An investor, then, can choose to sell his or her holdings whenever he or she chooses. This can become a valuable source of investment.

Fractional ownership in the real property industry (namely, in the sharing of ownership of vacation homes, etc.) took off in the United States in the 1990s with ski resorts in the Rocky Mountains. People generally do not want to buy a whole cabin in the mountains that they will only live in for a few weeks out of the year.

Ragatz Associates is an international consulting and market research firm in the resort real estate industry. They estimate that in 2006, there were over 250 fractional developments in the United States and Canada.

In Europe and other similar locations outside of the United States, a form of this kind of property sharing has been present for many years. The main difference is that instead of a buyers going through a managment organization, private entities bind together independently in order to split the costs of large assets such as houses, apartments, condos, boats, etc.

In these European partnerships, investors may often pool resources in order to expand their assets. The control of these purchases remains entirely within the membership of the organization.

The most luxurious section of the fractional property market is the market for private residence clubs. These clubs provide all the amenities of a five-star hotel and occasionally, high-end hotels will manage private residence clubs on the side.

Individuals today can purchase fractional shares of high-end sports cars. The benefits and costs of these cars that would spend most of their time in storage if owned by a single individual can now be split among an entire group.

A new market has appeared in the sharing of claims to luxury yachts and boats. If someone owns part of a yacht--or sometimes replaced with membership in a yacht club--they may gain access to the usage of a variety of different yachts, sailboats, and other watercraft.

About the Author

Tom Selwick has been in real estate for over 25 years. He has made a living managing fractional ownership accounts for several different industries including vacation homes, resorts, and private yachts.

Tom Selwick
tomselwick09@gmail.com
http://www.fractionalluxurylodging.com

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Feb/26/2010 Comments Comments