Fractional Ownership Usage Arrangements


This article describes the most common usage allocation systems in fractional vacation real estate. The usage allocation system for a fractional vacation property decides who can use the property when and, in fractional arrangements involving usage of more than one property, which home an owner will visit. There is no best usage allocation system. Whether a system will work well for a particular fractional property will depend on the location, property characteristics, and target market.



Unit-Specific Usage


Many fractional vacation arrangements involve more than one resort, house or condominium. Sometimes the homes are located in different places, and other times there are multiple homes at one location. In these arrangements, each fractional owner’s usage rights can be either unit-specific, where each owner uses the same home on each visit, or non-unit-specific, where the home an owner will use depends on the usage allocation system. In unit-specific fractionals, the owners entitled to use a particular home share the cost of repairing and maintaining only that home, while in non-unit-specific fractionals, the owners using a certain group of homes share the cost of repairing and maintaining all of the homes in that group.


Take care not to confuse ownership with usage rights. In many multi-unit fractional developments, it is common to own a share of a specific villa or condominium, but never actually use the one you own. Conversely, there are situations where each owner owns a fraction of a multi-unit property, but always uses the same home.


Here are some advantages and disadvantages of unit-specific usage:


Unit-Specific Usage

• Feels more like home, since the owner visit the same home each time

• Allows the group that shares the home to have more autonomy and control of decorating, repairs, budgeting and other issues

• Exchanges can provide variation of vacation home when desired


Non-Unit-Specific Usage

• Makes it more likely there will be space when an owner wants to go

• Lowers maintenance costs by adding economies of scale

• Spreads risk of unforeseen maintenance problems among more people



Fixed Usage


Fixed usage systems assign each owner days, weeks or months of usage that remain the same each year. More desirable usage (such as high season or school holidays) is usually priced higher to reflect the fact that more buyers want it. Here are some advantages and disadvantages of fixed-date usage:


Fixed Usage

• Offers absolute predictability and consistency

• Facilitates relationships among neighbors and allows extended families to more easily coordinate visits

• Allows some owners to save money by buying off-season dates

• Inexpensive and simple to operate (keeping owner dues lower)

• Exchanges can provide variation of vacation timing

• Can be combined with non-fixed-date usage to allow some owners to have all fixed usage and others to have variety, or to allow each owner both fixed usage and variety


Variable Usage

• Lowers cost of high season usage by allowing more owners to share it

• Eliminates risk that life changes will make assigned period unusable

• Eliminates potential difficulty of finding owners willing to purchase undesirable usage periods



Variable Usage: Fixed Rotation


A fixed rotation plan ensures that, over a period of years, each owner will be entitled to use the property during each day of the year. For example, a simple fixed rotation plan for eight fractional owners assigns each owner every eighth week, and starts the rotation with a different owner each year so that each owner will have rotated through every week over the course of eight years. More complex fixed rotation plans can vary the length of usage periods (so that, for example, owners use the property for some two-week periods and some one-week periods), or group certain premium periods or holidays together (so that, for example, each owner gets at least a certain number of highly-desirable weeks or days every year). Here are some advantages of fixed rotation:


• Allows vacations and events to be planned years in advance

• Very early advance knowledge facilitates exchanges with other owners before they have made plans

• Less expensive and simpler to operate than usage reservation systems (keeping owner dues lower)



Variable Usage: Simple Reservation Structure (“Draft System”)


In a simple reservation system, each fractional owner reserves all of his/her usage for the following year at a particular time or during a specific window of time. A system of rules determines how the selection process works. An example of a simple usage reservation system for eight fractional owners would be where, during October of each year, each owner selects usage for the following year, rotating who chooses first. The owner with first choice in a particular year might choose two weeks, followed by the owner with second choice, and so on. After each owner had selected two weeks, the process repeats in reverse order, then repeats again in the original order. Here are some advantages of a simple reservation system:


• Provides flexibility for owners to adapt to tailor each year’s usage without relying on owner exchanges

• Less expensive and simpler to operate than complex usage reservation systems



Variable Usage: Unlimited Usage Reservation Structure


Unlimited usage reservation structures combine a limited amount of advance reservation with unlimited shorter-notice usage. For example, a private residence club with eight fractional owners per home might allow each owner to reserve three weeks of usage per year in advance based on a rotating system of priority(resulting in 24 reserved weeks. When advance reservations close, the 28 unreserved weeks become available on a first-come-first-served basis, with restrictions on how far in advance such reservations can be made, and on how many reservations can be held by each owner. When this type of reservation program is combined with non-unit-specific usage, owners with the flexibility to vacation on short notice are likely to be able to visit the property far more frequently than with other systems. Here are some advantages and disadvantages of unlimited usage reservation systems:


• Unlimited usage and last-minute getaways can spur sales

• Systems are expensive to operate (raising owner dues)

• Systems are prone to mistakes and breakdowns

• Systems are complex to explain to discriminating buyers



Combination Usage Systems


Some fractional ownership offerings have usage arrangements that combine elements of two (or more) of the systems described above. For example, half of each owner’s usage could be on a fixed system (ensuring consistency and predictability) while the other half might be on a rotational or reservation basis. Or part of the usage can be on a fixed rotation while the balance is open for reservations (either advance, last-minute, or both). Combined usage systems are particularly useful when usage patterns vary dramatically according to season, or when there is an elevated need to accommodate school vacations, or when there are location-specific annual events (such as golf tournaments and art festivals) that require special attention.



Offering Multiple Usage Options


No usage system will accommodate the needs of every potential owner, which means that choosing a particular one will inevitable eliminate some potential markets. For example, a variable usage arrangement will not work well for an owner whose work or school vacation schedule only allows visits the during a specific period, or for a retired “snowbird” who wants to escape most of the winter. On the other hand, choosing fixed usage based on these considerations might eliminate other buyers who do not share these special needs.


One solution is to offer multiple usage plans at the same fractional property. In a multi-unit property, this can be accomplished by offering different units with different usage plans. If the project involves only one home or condominium, different fractional shares can be offered with different usage rights. To take an extreme example, one particular fractional share could include fixed usage for the months of January through March (14 weeks) and marketed to a retiree, another share could get the two weeks of a famous golf tournament and be marketed to a corporation for an annual executive perk, and the remaining 36 weeks could be allocated to six owners on a fixed rotation basis. Depending on the property, such a combination usage approach could open new markets and maximize the total project proceeds.



ABOUT THE AUTHOR


Andy Sirkin has focused on fractional real estate projects since 1985, and has been involved in the creation of projects throughout the United States, as well as Europe, and Central and South America, ranging in size from a single house or condominium up to hundreds of factional interests. This breadth of experience allows the firm to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. Andy is the author of two books as well as numerous published articles, and has compiled a searchable disk containing the complete text and a summary of fractional ownership law for all 50 U.S. states. He has also created an extensive library of instructional material for fractional developers, brokers, and buyers, available at sirkinfractionallawyers.com. He is an accredited instructor with the California Department of Real Estate, and frequently conducts workshops and appears at conferences throughout the world. He currently splits his time between offices in Paris and San Francisco, and can be contacted via email at DASirkin@earthlink.net, or by phone at 33-1-7666-0202 (EU) or 1-415-738-8545 (US).


Contact us at dasirkin@earthlink.net or (00)(1)(415) 738-8545. Sirkin & Associates has offices in California, Colorado and France
©November 25, 2009 by D. Andrew Sirkin.