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Fractional Ownership

At the moment, everybody is talking about fractional ownership. It is 'the next big thing'. In fact, as we will see, it is nothing of the sort. It is a very simple concept and something with which members of The International Law Partnership Ltd. have been dealing for over 25 years.

What is fractional ownership?

Fractional ownership is, at its simplest, a way for a number of people to buy a property together and share the use of it.

If you and your brother and your next door neighbour decide to buy a house in France and for each of you to use it for one third of the year and pay one third of the cost and one third of the expenses that is a simple form of fractional ownership.

Fractional ownership is also sometimes referred to by different names. It has been called tenancy in common. It has been called joint ownership or shared ownership. It is sometimes called co-ownership. In each case it has the same key ingredients.

How does fractional ownership differ from timeshare?

In some cases, there is no difference at all. When timeshare first became popular it often involved the people who bought the timeshare weeks owning a proportionate part of the property or of the company that owned the property as well as having the right to use the property for a certain period each year. In these cases the main difference between timeshare and fractional ownership is that, generally, timeshare properties have more owners who each have a shorter usage right than fractional ownership properties - though there are some large fractional ownership schemes where even this is not true.

Modern timshare however, is different from fractional ownership. With most modern timeshare you are effectively buying only the right to use what boils down to a hotel for a long period into the future. You do not have any ownership of the hotel and you have no control over the way in which the hotel operates.

This type of timeshare is very different from fractional ownership. With fractional ownership the owners always own the asset and, as owners, they have the right to control how it is used and how it is maintained.

What is a typical fractional ownership?

There are two main types of fractional ownership. There are fractional ownership projects set up by private individuals for their own use and there are commercial fractional ownerships.

Private fractional ownership projects

A typical private fractional ownership project could involve four or six or twelve people together buying, say, a house in the south of France for, say, €500,000. If there were six of them they would each have the right to use the property for two months of the year and they would each pay one sixth of the price of buying the house and sixth of the cost of running it.

The people who bought the house in France might be so happy with the concept that the same group bought another property in some other place. That would usually be a completely separate legal structure - a different fractional ownership.

Commercial fractional ownership

The problem with private fractional ownership is that you seldom know enough people amongst your circle of family, friends, colleagues at work etc. to bring together a big enough group to set up a fractional ownership project. Also, setting up such a project requires quite alot of hard work and a major investment of time.

Commercial fractional ownership projects do three things. They bring togegther a group of people who probably do not know each other but who have a shared interest in, say, buying a house in Paris. They set the whole project up so that they can deliver to you the keys to a finished property. And they avoid you and your fellow owners having to argue about the type of bathroom taps you want to fit or the colour of the carpet.

Once the project is set up these commercial fractional ownership projects are often managed, on an on-going basis, by the company that set them up but they will always have to manage the property within the guidelines and in accordance with the instructions given by the group of owners. In other words, it is the owners who are in ultimate control.

When can I use the house?

In a few cases you will not be able to use it at all! Some fractional ownership projects are set up as pure investments where the owners are not allowed to occupy the property or where, if they wish to do so, they have to pay full commercial rent. The main reason for setting up a project in this way is that it allows and investor to hold and portfolio of high class properties in a number of different places whilst only investing a relatively modest amount of money. This diversification can reduce risk and/or generate better investment returns.

However, in the vast majority of cases, fractional ownership is all about giving the owners the use of the property for a certain period each year.

These usuage rights can be organised in many different ways. You can have fixed rights where, for example, you have the right to occupy the property every August and somebody else has the right to occupy it every November. In these cases you will often find that the prices of the individual fractions vary depending upon the popularity of the period in question.

Other projects operate on a rotating usuage system. Where, this year, you might be entitled to occupy it for June but next year your right will jump forward, say, three months and then it will jump forward the following year by another three months.

Yet other projects will operate a partly fixed and partly floating arrangement.

A few will operate on a 'first come first served' basis.

If I don't use the property can I let someone else use my time?

Almost always you will be able to allow your family and friends to occupy the property if you are not going to use it yourself. In many cases you will also be allowed to rent out your weeks if you do not want to use them - though some fractional programmes prohibit this as they want to maintain the high quality of the property and the feeling that it is a home.

How is the property maintained?

The owners will usually appoint a manager - who maybe a professional or one of their own members - to take responsiblity for maintenance. They will agree a budget each year and they or the manager will arrange for any work that needs to be done. This will usually include a through clean between visits.

How much does a fractional cost?

This depends on the property and the number of owners. We have set up a fractional ownership on a €50,000 property in Bulgaria where each of twelve owners paid €5,000 for a one twelfth share of the property and the right to use it for one month a year. At the other extreme, we have set up an arrangement in a €2,000,000 property in Paris where each of thirteen owners will have paid nearly €200,000 to join.

You will notice that, in each case, the cost of joining is a bit more than the value of the property. This is because the price you pay includes furniture and, of course, the fees involved in setting up the fractional ownership and some profit for the person who did so. It is a oretty good test of whether is good vale to check that you are not, betwwen you, paying more than about 20% than the 'bricks, mortar and furnishings' cost of the building.

Can I sell my fraction?

Yes.

In many cases you must first offer it to the other owners at the price you want to charge but, even in those cases, if they do not want to buy it you will have the right to sell it on the open market.

Some fractionals are set up in such a way that everybody agrees at the beginning that the property will be sold in, say, 10 years' time. They will use it for their pleasure or as an investment during this period and they hope that it will have grown in value by the time they come to sell it.

Conclusion

Fractional ownership is an incredibly flexible concept which can be ideal for people who do not want to use a property for more than a few months per year and who would prefer not to to have to get involved with all of the aggravation assocated with renting out their property during the periods when they are not using it.

The main thing to look out for when buying a factional ownership is that you are not paying much more than the value of the house and its furniture plus a reasonable level of profit for those who set the thing up.

Of course, if you are looking to buy a fraction you will need to make many of the same checks that you would make when buying a house or apartment. See our guide to buying a property.

If you are looking to set up a fractional ownership the main thing to look out for is that you need to choose the best legal structure and a usage pattern that will suit your likely customers.

Whether you are buying a fraction or setting up a project the lawyer, accountant and other professional members of The International Law Partnership Ltd. will be pleased to help you.

Next steps

Please look at the Legal Guides, videos, MP3 seminars and other materials set out to the right of this page.

If you would like us to help you, please complete our Client Pack and send it back to us. We will contact you to clarify your requirements and then introduce you to the person most appropriate to deal with your case.

If you do not find the information that you need, please send us an email explaining your problem and we will contact you.

© The International Law Partnership Ltd. Page last revised 5 Feb 2010

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