Mr. Brewer III

Hospitality Law

Fractional Ownerships: Advantages Over Timeshares or Blurred Distinctions Between the Two?

By William A. Brewer III, Co-Founding & Co-Managing Partner, Bickel & Brewer

Fractional ownerships have emerged as the hot new trend in the hospitality industry. Fractional ownerships enable multiple individuals to own a specific piece of real estate in common, with each holding a deed for an undivided share in the property that may be bought, sold, traded, or bequeathed like any other real estate asset.

In addition, much like a timeshare, each interest entitles its owner to possession of real estate for a certain amount of time each year. However, in timeshares, the "owner" typically purchases only a contractual right to occupancy, not an interest in real property. Thus, the critical difference between the two concepts is in the nature of the investment.

Fractional ownerships are considered by many to be the perfect vacation real estate vehicle for those wishing to own a home away from home without the expenses associated with single ownership such as maintenance, upkeep, refurbishment, and improvements. However, unlike the typical timeshare, fractional ownerships have generally been associated as real estate instruments for the wealthiest of consumers. Thus, fractional ownerships tend to be associated with properties of much higher value. They often come with five-star quality amenities, and individual possession typically spans months instead of weeks. These qualities have spawned the birth of a new market for those who want something more personal than a typical one-week timeshare, but do not want to spend mega-sums on a second home that will be empty most of the year.

Fractional ownership enjoys an additional benefit - appreciation. While timeshares typically depreciate in value, fractional ownerships have shown much greater resilience. Experts attribute this resilience to the relative newness of fractional ownerships in the hospitality industry and their perceived similarity to luxury vacation home "ownership."

If developers of fractional ownership projects benefit from the perception of "ownership" by prospective buyers, then it would seem important to maintain this quality as a distinction from timeshares. Fractional ownerships are subject to the same regulations as timeshares. In many jurisdictions, laws that regulate timeshares apply equally to fractional interests, as these laws typically apply to arrangements in which one has the right to use real property on an annual basis for a period of less than one year.

However, unlike fractional ownerships, timeshares usually take the form of lease agreements or equity interests in a club, and oftentimes pertain to a collection of individual properties as opposed to a specific property. Thus, fractional owners enjoy both the protections afforded timeshares and the security that comes from individual deeded property.

The legal distinctions separating fractional ownerships from typical timeshares establish an important qualitative divide that so far has served to prop up fractional ownership values. In order to prevent this line from disappearing as the fractional ownership market grows and develops, it will be necessary to enhance and support the "ownership" aspects of fractional projects. Resale values could deteriorate if fractional ownerships become just another form of timeshare. And, of course, should resale values fall, initial sale values are likely to follow.

Accordingly, developers in the fractional ownership market should take steps to ensure that those important distinctions from timeshares continue. As such, they should ensure that prospective buyers are aware of the important legal differences between the two investment vehicles in connection with the marketing of fractional ownership projects, and to promote the added security of acquiring an interest in real property as opposed to merely purchasing an in personam right of limited possession. Another is to build properties that are qualitatively different (i.e. having better design and construction, larger floor-plans, single-family units, more exclusive locations/addresses, etc.) than timeshare projects. Doing so will maintain the exclusivity of fractional ownership interests. So far, exclusivity naturally exists not only because fractional ownership ventures have focused on high-end luxury vacation homes and resorts, but because of the important rights which "owners" of real estate have over leaseholders or club members.

At a certain point, however, when the indicia of ownership are reduced by ever increasing burdens, such as common area maintenance fees, regulation by management companies or owner-elected boards through assessments, dues, and inconveniences, the fractional owner may have only limited "ownership" rights to protect his stake in the fractional product. Experts report that by dividing the ownership of a vacation home among multiple owners, developers can sell fractional interests of ownership for a collective amount that is two to three times the market value of the home. This business model, however, has its limits. Timeshare arrangements are typically divided into fifty-two different one-week ownership interests, and yet those vehicles struggle to maintain a fraction of their value over time.

The key to maintaining value appears to relate to the perception of enhanced exclusivity which comes from ownership. Fractional ownerships have enjoyed considerable success because consumers appear to value vacation property that they can comfortably identify as "home." Creating that emotional attachment to a property is far more difficult to accomplish when that property is shared with 51 other owners instead of three. The challenge for the fractional ownership interest industry in the future is to ensure that its perceived superiority to timeshares - both in terms of physical facilities, length of occupancy, and protecting the important legal distinctions between real property ownership interests and mere contractual rights of possession. In so doing, the market will continue to place substantially greater value on fractional ownership interests.

William A. Brewer III is co-founding and co-managing partner of Bickel & Brewer, with offices in Dallas and New York. Under Mr. Brewer's direction, Bickel & Brewer has become renowned for its innovative handling of disputes within the hospitality industry. For the past decade, Bickel & Brewer has represented hotel franchisors, management companies, owners, developers and investors in the highest profile litigation in the hospitality industry. He is a member of various philanthropic organizations, including the New York City Partnership and the Board of Trustees of Albany Law School. Mr. Brewer III can be contacted at 214-653-4811 or wab@bickelbrewer.com Extended Bio...

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