Fractional Ownership Usage Plan Options and Comparisons
Common usage allocation systems in fractional ownership, private residence clubs, destination clubs, timeshares, and quartershares
The usage allocation system for a shared vacation home decides who can use the property when and, in arrangements involving usage of more than one property, which home an owner will visit. There is no best usage allocation system. Whether a use plan will work well for a particular fractional ownership, private residence club, destination club, timeshare or quartershare will depend on the location, property characteristics, and target market. This article identifies the key issues in fractional ownership usage plans, describes alternative ways to address these issues, and provides some sample usage arrangement structures.
Fixed and Variable Use Allocation
Broadly speaking, shared vacation home use plans fall into two categories: (i) fixed usage structures, where each fractional ownership interest is permanently assigned specific days, weeks or months; and (ii) variable usage structures, where each owner or family uses the shared home on a rotating or reservation basis.
Basics of Fixed-Use System
Fixed usage systems assign each owner specific days, weeks or months of use that remain the same each year. More desirable usage (such as high season or school holidays) is usually priced higher.
Here are some advantages of fixed use systems:
- 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 a variable use plan to allow some owners to have all fixed usage and others to have variable, or to allow each owner both fixed and variable use
A Simple Variable Use System: The Fixed Rotation
A fixed rotation use 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)
Another Simple Variable Use System: The Annual Draft
In a reservation system exclusively based on an annual draft, each fractional owner reserves all of his/her usage for the following year at a particular time, or during a specific window of time, the previous year. This selection process could take place at an annual owner meeting (personal, virtual, telephonic, etc.), through a series of email interchanges between a manager/administrator and each owner, or using an online platform.
A system of rules determines how the selection process works. The most important rules are:
- The “units” of time that can be reserved, which are typically seven-day weeks that always begin and end on the same day (e.g. Friday), possibly with some longer or shorter units to accommodate certain holidays like Christmas and New Years
- The number of selection “rounds” that will occur during each of which which each owner can reserve one or more use periods
- The number of use periods that an owner can reserve in each round, which may vary from round to round
- The system for determining the order in which owners choose their use during each selection round
In developing the rules for the draft, it is important to consider specific factors about the property and the owner group. For example, if the property is highly seasonal, the system should ensure that each owner can reserve high season time each year regardless of his/her position in the selection priority that year. Another important factor to consider in developing the draft-based usage rules is the likely visit durations, which will likely be influenced by both seasonality and the proximity of the owners to the property. If owners need to fly to the property, they are likely to visit less frequently but for longer periods; if they can drive to the property, they are likely to visit more frequently and may come for periods as short as a single long weekend. Expected visit duration will also be influenced by work and school vacation schedules.
To illustrate, imagine a group of eight owners sharing a home in a location that offers 16 weeks of high season. To make sure each owner can reserve high season time, it would make sense to have each owner select only one week in each of the first two rounds. However, if it is also important for owners to reserve consecutive high season weeks due to school or work vacation schedules, then it might make sense to have each owner select two consecutive weeks in the first round. Later rounds could be one week each, two weeks each, or any other arrangement, with selection rounds continuing until each of the eight owners has picked six weeks.
Here are some advantages of a reservation system based on an annual draft:
- 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
More Complex Variable Use System: Limited Capacity Annual Draft Coupled With Flexible Reservations For Time Not Reserved During Draft
A more complex variable use system is the limited capacity annual draft. This usage plan is common in private residence clubs. In this system, reservations available during the annual usage draft are limited to a pre-set number of days or weeks per owner. For example, in a group of eight owners, the system might allow each owner to reserve only three weeks a year via the annual draft. The weeks reserved in the draft, often referred to as “Planned Vacation” (although terminology varies), typically have more flexible use rules such as allowing owners to give their “Planned Vacation” time to unaccompanied guests or to offer it for rent by non-owners.
The period not reserved through the annual draft, which would consist of 28 weeks or 197 days in the above example, is then made available for owner reservations on a space-available, first-come-first-served basis, subject to a series of rules designed to ensure fairness and equity. This class of reservation is often called “Last Minute” or “Short Notice”. It is fairly common to include two different classes of reservations of this type, with each class having a different set of rules.
Here are some examples of rules that often apply to this type of reservation:
- Minimum and maximum durations for each reservation
- Requirements for the number of reservations that each owner can hold at any one time, meaning that an owner must use or cancel a reservation in order to make another one
- Windows during which reservations can be made, such as limits on maximum and/or minimum days in advance
- Cancellation penalties (to deter owners from tying up time and then not using it)
- Restrictions that preclude unaccompanied guest and renter use
Here are some advantages of a reservation system based on a limited capacity annual draft:
- Allows owners to plan a portion of their annual usage well in advance based with a guaranteed level of selection priority
- Also allows more spontaneous usage as each owner’s actual schedule and availability unfolds during the course of the year
- Can be set up to enable owners with more flexible schedules (such as retirees) to use the property for more days than they would be allotted under a system with a strict usage division based on the number of owners (i.e. a 1/8th owner with a flexible schedule could use the property for more than 1/8th of the time)
- Makes it less likely the property will sit vacant
More Complex Variable Use System: Rolling Reservations
Another more complex variable use system is rolling reservations. This type of use plan is common when factional ownership groups for individual homes are organized and managed by web-based fractional ownership platforms such as Pacaso. In these system, owners can reserve the property any time subject to certain limits and based on availability.
From the standpoint of the owners sharing the home, the most important aspect of rolling reservation systems is that they allocate usage equitably and predictably. In this regard, there are three key goals for any rolling reservation system: (i) each owner must get his/her fair share of usage; (ii) reserving desirable usage must not require that an owner have a lot of free time available to “game” the reservation system; and (iii) there must be controls in place so that the system cannot be changed in a way that effectively penalizes certain owners based on their lifestyle or job/school calendar restrictions. Remember that each owner will buy his/her fraction based, in part, on an assessment of whether the use plan and reservation system will work for him/her; if the system can be changed, an owner can suddenly find him/herself unable to use the property in the way he/she expected when making the original decision to buy or participate.
Rolling reservation systems vary on the extent to which they rely on written rules or computer algorithms. Written rules have the advantage of guaranteeing equity and predictability over the long term, but the disadvantage of being unable to adapt to the actual usage patters of the owner group. There is no ideal system; rather, prospective factional ownership buyers considering an offering that relies on a rolling reservation usage system need to study the details and changeability of the use plan and assess its pros and cons in light of their individual needs.
Here are some examples of rules that often apply in rolling reservation use plans:
- Limits on the total number of usage days-per-year for each owner
- Limits the total number of high-season days-per-year for each owner, or an alternative system under which owners that use more high-value days get fewer total use days
- Minimum and/or maximum durations for each reserved use period
- Minimum number of days that must pass between a particular owner’s use periods
- Windows during which reservations can be made, such as limits on maximum and/or minimum days in advance
- Cancellation restrictions and/or penalties
It is common for rules-based rolling reservation systems to include two (or more) reservation categories, each with somewhat different rules. For example, there may be a one system for reservations made well in advance, and a different system made for last-minute or short-notice reservations.
Here are some advantages of a rolling reservation system:
- Allows owners the maximum level of usage flexibility
- Can accommodate owners with widely varying usage needs and patterns
- Can be used regardless of property location and seasonality
- Makes it less likely that the property will sit vacant
What Fractional Ownership Use Plans Make Sense if the Owners Also Want to Rent Out the Property?
Before answering this question, it is important to distinguish between rentals by (and for the exclusive benefit of) individual owners and rentals where the rental income will be shared by the entire owner group. In the former case, owners have the right to rent out their assigned or reserved time, typically through an in-group rental manager or outside management company, and each owner retains all of the net rental income generated from his/her time. This type of rental is compatible with fixed usage structures and with certain variable usage structures (including fixed rotations and annual reservation drafts).
Where the group will jointly undertake vacation rentals for their shared benefit, there are two alternative usage allocation approaches worth considering. The first is to block out certain periods each year for vacation rentals, and then apply an owner use plan only to the remaining portions of the year. This approach can be made compatible with any of the owner use plans described above. It has the advantage of ensuring that a certain amount of owner use time is available each year, and allows each owners to plan out his/her usage in advance. But because certain periods are not made available for rental, it will not maximize potential rental income.
If maximizing potential vacation rental income is preferred, it is better to adopt some sort of “pay-to-use” approach. This means that owners reserve and pay for time using the same system as renters. It can be combined with various owner preferences such as allowing owners to reserve time before the time is made available to renters and/or giving owners a discount on rent. Often, even when the owner occupancy is based on the “pay-to-use”, owners are permitted to make last-minute reservations without paying on the theory that the property would otherwise sit vacant and, consequently, no rental income is being lost.
Exclusive and Non-Exclusive Use
In most vacation home sharing arrangements, each family has the exclusive right to use the shared home during his/her assigned or reserved use periods. But this is not the only way shared vacation home use can be organized. Depending on the size and layout of the shared property, and the relationship between the owners sharing the home, allowing two or more owners to use the home at the same time may be an option.
Generally, owners want to be sure to have exclusive use of the home during at least some of their assigned or reserved use periods. Exclusive use gives owners the flexibility to enjoy the home alone, or to invite friends or extended family who are not co-owners. So, when usage plans contemplate non-exclusive use periods, they generally combine both exclusive use periods and non-exclusive use periods. In other words, each family in the fractional ownership group is allowed to reserve the home for exclusive use some of the time and is also allowed additional stays on a non-exclusive basis.
When non-exclusive use is allowed, it is useful to include parameters that diminish the likelihood of misunderstandings and conflict. Usage guidelines are desirable even when (especially when) the owner group is comprised exclusively of close family and/or friends. For example, to ensure that the house remains reasonably available to everyone during non-exclusive use periods, it makes sense to restrict use to owners and immediate family during these periods. Also, to avoid exceeding the sleeping capacity of the house, it is a good idea to have each owner provide notice to the others of when he/she plans to visit the house during a non-exclusive use period, and to include with that notice a description of which bedrooms he/she plans to use. It should be understood that everyone will honor and accept these “bedroom reservations”. Other owners can then decide whether or not a visit is possible and desirable based on the remaining bedroom availability.
Unit-Specific and Non-Unit Specific Use
Some fractional ownership, private residence club, destination club, timeshare, and quartershare 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 of unit-specific and non-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
- 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
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 ownership, private residence club, destination club, timeshare, or quartershare 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 been a recognized expert in fractional ownership for more than 35 years. Since 1985, he has focussed on advising and preparing contracts for small groups of families and friends who want to buy and share vacation homes as partners, and on advising and preparing contracts for sellers and real estate agents who want to market and sell fractional interests in a particular vacation home. While work with individual owner groups, buyers, sellers, and real estate agents remains a major part of Andy’s fractional ownership practice, his work now encompasses advising and preparing contracts for web-based platforms (such as Pacaso) that organize, facilitate and manage fractional ownership arrangements for specific homes, and advising and preparing contracts for fractional ownership developers (who buy properties to renovated and furnish for sale as fractional ownership interests), fractional ownership marketing and sales firms, and fractional ownership management companies.
Andy has worked on fractional ownership of properties located throughout the U.S. and the world, and has also advised fractional ownership startups, platforms, developers and related businesses based in, or focussing on, locations throughout the U.S. and many other countries. However, most of his work has involved fractional ownership in the U.S., the U.K., Western Europe, Mexico, and the Caribbean. He has been a featured speaker at many fractional ownership and timeshare conversions and symposia, an accredited instructor with the California Department of Real Estate, and a frequent interviewee on fractional ownership for podcasts and news coverage throughout the world. Andy is based in Paris, and can be contacted via the contact form.