What is a Fractional Interest Project?
By
now, most industry operators will be somewhat familiar with the
term “fractional interest”.
The concept is one of shared ownership, with each owner receiving
deeded fee
simple real estate ownership in a unit. The typical application
is in a high end resort setting. The number of fractional interests
is normally fixed, and owners, in addition to their fee simple
ownership position, are provided with specific rights of use and
other entitlements. The legal structure of a fractional project
is therefore complicated in that specific entitlements need to
be documented along with traditional real estate sale terms to
provide a purchase and sale agreement that protects the interests
of both the buyer and the seller.
Are Fractional Interest Projects the same as Timeshare
Projects?
Yes, and no. While the promoters of Fractional
Real Estate would prefer not to be associated with timeshare, the
concept is in fact a form of timeshare. Hence, fractional projects
are subject to the same regulations as timeshare projects in many
jurisdictions. With fractional interest however, the interval sold
is considerably longer than a timeshare interval, entitlements
are different, and ownership is deeded. Because of the variance
in interval being sold, a timeshare project (with upwards of 50
intervals per unit built) entails a much different selling process
than a fractional project (with between 4 and 12 intervals per
unit). The nature of the selling process, sales budget requirements,
number and nature of purchasers, and end use considerations are
all much different for timeshare than for a fractional project.
Things You Need to Understand
Because a fractional project is not like timeshare
in many respects, and also not like whole ownership, it is important
that anyone considering a fractional project spend some time
understanding the unique elements of the fractional world. Some
of these are:
- Who and where is the target market for the units?
- What are the
potentially competitive real estate projects?
- How big will the
project be, and what is the most appropriate concept (given
the nature of the market)?
- What are the regulatory issues in the
markets in which the units will be sold?
- How will the fractional
sales program be implemented?
- Will the developer provide financing
to buyers?
- Is the project economically viable as an operating
business after the initial sales are completed?
- How will the
project be managed after it is sold?
Use
the Experts – Don’t
Try to Re-Invent the Wheel!
The
fractional real estate industry has been around for long enough
that there are experts in each of the critical
fields who are available for consultation. While these experts
may not be experienced in a specific jurisdiction, they are aware
of the issues, the questions to be asked, and the potential pitfalls
that can influence the success of a fractional project. Industry
statistics are available – most notably from a company called
Ragatz Associates in the United States who publish an annual market
profile of the Fractional Interests. It is critical to fully understand
your local real estate market, the track record of recreational
home sales, seasonality of visitation and various economic factors
at an early stage. A market feasibility study is as important for
a fractional project as it is for any other type of development.
It is equally important to have appropriate legal advice from a
firm with experience in the development of fractional real estate
documentation. No less important is the experience of your design
team and the target market knowledge required to design the right
product. Similarly, the sales program should be developed with
realistic sales velocity expectations, and a properly trained sales
team to achieve the desired results. Ragatz reports that the average
across the industry is 8 fractions sold per month – that
means a 25 unit project being sold in quarter shares (100 fractions)
could take upwards of a year to sell. With a ratio of approximately
10 presentations per completed sale, the sales team would need
to source 1,000 potentially qualified purchasers - a large undertaking
for a 25 unit development.
An Evolving Industry
Fractional
Interests are but one method of making recreational real estate
attractive to potential purchasers. Successful
real estate projects are good for everyone – and help our
industry evolve to better serve existing and new markets. If you
are considering a fractional interest project, we would encourage
you to seek out expertise in the key areas, and use the knowledge
gained to mitigate risk and enhance the success potential of the
project.
Dan Hill, Director
PKF Consulting, Vancouver, BC
