The Types and Categories of Fractional Ownership Arrangements
Fractional Ownership, Co-Ownership, and Shared Ownership
Understand the most commonly used fractional ownership terms and jargon.
“Fractional Ownership”, “Co-Ownership”, and “Shared Ownership”
Fractional ownership, co-ownership, and shared ownership can describe any arrangement where two or more people share ownership of something, whether or not they share usage. Fractional ownership seems to be emerging as the one most commonly used for time-based sharing of vacation real estate in the U.S., but co-ownership and shared ownership are often used to describe these arrangements in other English-speaking countries. The fact that an arrangement is described using one of these terms rather than another can be attributed to the seller’s personal taste and the location of the project, rather than two the project type or characteristics.
“Private Residence Club”
Generally, a private residence club (or “PRC”) involves equity ownership (although not necessarily deeded ownership) of a specific property with 4-13 owners per home. Private residence clubs tend to be on the high end of fractional ownership options with regard to unit size, amenity level and pricing. In most PRCs, usage is not unit-specific, meaning that a particular owner uses whichever unit (of appropriate size and type) happens to be available during his/her usage period.
“Destination Club” and “Vacation Club”
Destination club and vacation club mean different things to different sellers, and the definitions used here will not hold true across the board. Destination clubs and vacation clubs commonly involve multiple homes in different locations, with a usage system that allows participants to use any of the homes in the club. There are equity and non-equity variations, distinguished by whether or not the participants have an ownership interest (which can be deeded or non-deeded) in one or more homes controlled by the club. Both equity- and non-equity clubs often provide an exit strategy after a pre-set number of years of participation. In non-equity clubs, the amount received by the departing club member is generally based on the original purchase price, or on the price being charged for new memberships at the time of the member’s exit, while in equity clubs the payout is based on the market value of the properties owned by the club.
Timeshare is perhaps the most misunderstood term in the fractional vacation property lexicon, largely because many sellers want to distance themselves from the high-pressure sales tactics, poor quality, and dismal resale performance of many first generation timeshare projects. Under the common legal definition, timeshare describes any arrangement where usage of property is shared based on time, and there is no reliable distinction between properties marketed as timeshares and those marketed as fractionals or private residence clubs. Contrary to what most people think, many timeshares are deeded and many fractionals and private residence clubs are not.
Quarter share is used to describe any fractional ownership arrangement that involves four equal shares of ownership. Most quarter share arrangements involve deeded fractional ownership of a single home or condominium, but there are exceptions to this general rule.
“Equity” versus “Non-Equity”
In equity fractional arrangements, the participants own and use the shared property, while in non-equity arrangements they only use it. Ownership may mean being named on legal title to the shared property, or owning a trust, company or other entity that owns the shared property. The property that is fractionally owned may be a single home, multiple homes, or a multi-unit resort. In general, equity fractional arrangements are less risky, provide tax advantages, give the owners a greater degree of control over the shared property, and are more likely to hold value or appreciate over time. But like all generalizations, these can be misleading, and it is important to examine the merits of each particular offering.
“Deeded” and “Titled”
In deeded and titled fractional arrangements, the participants are listed on the legal title to the property. The property that is deeded may be a single home, multiple homes, or a multi-unit resort. The advantages of deeded fractional ownership are typically exaggerated, and the disadvantages are rarely appreciated. Compared with other equity fractional vacation arrangements, the advantage of deeded ownership is superior tax treatment for U.S. taxpayers who own U.S. fractional property, but this advantage only exists if all the fractional owners use the property exclusively as a residence. Other supposed advantages, such as better resale value, more owner control, and lower risk, are illusions. Moreover, deeded ownership has some significant disadvantages compared with other types of equity fractionals. Inadequate or improperly prepared fractional ownership documents (or worse, no documents at all) cause much more significant and expensive problems in deeded ownership than in non-deeded ownership. Deeded arrangements also have more cumbersome financing and resale procedures, and higher liability risks. If the shared property is not within a country with a quick, inexpensive and efficient system for transferring ownership and a well-developed non-judicial enforcement system, deeded ownership should be avoided.
“Condominium Hotels”, “Condo Hotels”, and “Condotels”
The terms “condominium hotels”, “condo hotels”, and “condotels” usually describe a hotel that has been subdivided into condominiums, where each owner owns the entirety of a specific condominium. Management operates the hotel and shares the proceeds with the condominium owner, who can also use the property him/herself, sometimes free of charge and sometimes for a fee. When there is only one owner per condo, these arrangements are not fractional ownership. But the terms are sometimes used to describe a hotel that has not been subdivided, where the owners own a percentage of the whole development rather than the entirety of a specific room or suite. When used in this way, the terms describe a type of fractional ownership, but the arrangement does not actually involve a condominium.
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 our contact form.