Owning a Luxury Vacation Home Through Fractional Ownership

by : David Yarian

Vacation homes present the most widespread use of the fractional ownership model. After growing in popularity in Europe, the system first reached the ski resorts in the U.S., then to the East and West coasts. Now fractional vacation homes are expanding all through the country, particularly in Florida, in golf developments and in other resort areas.

Fractional ownership is also available at destination or residence clubs currently being built and run by various major players -- Ritz Carlton, Starwood, Four Seasons, Hyatt and others. These companies administer large resorts in California, Florida, and the East Coast. Residence clubs also exist on a smaller scale, frequently as part of a hotel or residential development whose principal purpose is to accomodate short-term guests or to sell homes to individual buyers.

Regardless of the diversity of forms a fractional ownership vacation home may take -- from luxury single-family coastal properties to what are essentially 5-star hotels and resorts; from coastal condo developments to residence clubs that are part of a larger development -- they all share a lot of general characteristics.

Most significantly, fractional ownership is not a timeshare. The difference is that a fractional share owner possesses a deeded share for a portion of the property. In contrast, timeshare "owner" is permitted to access his property for specific periods of time; he does not have ownership rights in the property.

An alternate structure that is used at times for single-family vacation homes is the Fractional Property LLC, basically a holding company in which all share owners have an equal interest.

Whether the fractional share owner possesses a deeded portion of the property or a share in an LLC, there are numerous advantages. If the property goes up in value, owners' shares also appreciate in value. Share owners can buy, sell, trade or otherwise convey their fractional share of the property. Share owners, as part of the Property Owners' Association, have participation in decisions affecting their property. There may be tax advantages to the share owner from deducting mortgage interest or the fractional share of the depreciation on the property.

Some fractional vacation companies manage properties in diverse parts of the world. Owners can buy a fractional share in one of these properties, but are able to trade right of use to their vacation home for use of a property in an alternative location.

Fractional ownership vacation homes are handled by a property manager who takes care of all business matters, coordinates scheduling of owners' visits and may take care of countless matters to make the owner's arrival easy and effortless. Owners' personal possessions may be taken out of their private storage area and placed in the home, prepared for their arrival. It is possible to have the refrigerator and/or liquor cabinet supplied with specified items; tee times, tennis lessons, child care, spa appointments and charter fishing can be set up.

A fractional share of a vacation home gives the owner the right to a specified amount of use of the property. A 1/13 share means the owner enjoys the benefit of four weeks in the property each year; a 1/6 share entitles one to eight weeks each year. Some fractional properties provide a set calendar, with owners' weeks revolving in the course of the year, resulting in fair distribution of desired holiday times. Some developments allow owners to trade time among themselves; others have complex bidding procedures where an owner may have a number of fixed weeks per year and a number of floating weeks, that are determined year by year.

All the details of the legal and financial structure of the fractional vacation property are clearly set forth in the deed, LLC Operating Agreement, and other management instruments. Most fractional homes have a monthly or quarterly fee assessment that provides for operating costs, administration, taxes, insurance, maintenance, landscaping, and a fund for replacing furnishings. Yearly accounting of all costs and budget projections for the approaching year are made available to share owners for approval and input.

The growing popularity of fractional ownership vacation homes is explained by the remarkable advantages they provide -- mainly, that of having access to a luxury vacation home minus the expense, liability or headaches of owning it outright. No repairs, no shopping (unless you want to), no worries. All the owner has to do is show up, unpack the bags and - enjoy.

Financing options for fractional vacation properties will be covered in a separate article.