Fractional Ownerships: Advantages Over Timeshares or Blurred Distinctions Between the Two?
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | November 23, 2009
Fractional ownerships have emerged as the hot new trend in the hospitality industry. Fractional ownerships enable multiple individuals to own a specific piece of real estate in common, with each holding a deed for an undivided share in the property that may be bought, sold, traded, or bequeathed like any other real estate asset.
In addition, much like a timeshare, each interest entitles its owner to possession of real estate for a certain amount of time each year. However, in timeshares, the "owner" typically purchases only a contractual right to occupancy, not an interest in real property. Thus, the critical difference between the two concepts is in the nature of the investment.
Fractional ownerships are considered by many to be the perfect vacation real estate vehicle for those wishing to own a home away from home without the expenses associated with single ownership such as maintenance, upkeep, refurbishment, and improvements. However, unlike the typical timeshare, fractional ownerships have generally been associated as real estate instruments for the wealthiest of consumers. Thus, fractional ownerships tend to be associated with properties of much higher value. They often come with five-star quality amenities, and individual possession typically spans months instead of weeks. These qualities have spawned the birth of a new market for those who want something more personal than a typical one-week timeshare, but do not want to spend mega-sums on a second home that will be empty most of the year.
Fractional ownership enjoys an additional benefit - appreciation. While timeshares typically depreciate in value, fractional ownerships have shown much greater resilience. Experts attribute this resilience to the relative newness of fractional ownerships in the hospitality industry and their perceived similarity to luxury vacation home "ownership."
If developers of fractional ownership projects benefit from the perception of "ownership" by prospective buyers, then it would seem important to maintain this quality as a distinction from timeshares. Fractional ownerships are subject to the same regulations as timeshares. In many jurisdictions, laws that regulate timeshares apply equally to fractional interests, as these laws typically apply to arrangements in which one has the right to use real property on an annual basis for a period of less than one year.
However, unlike fractional ownerships, timeshares usually take the form of lease agreements or equity interests in a club, and oftentimes pertain to a collection of individual properties as opposed to a specific property. Thus, fractional owners enjoy both the protections afforded timeshares and the security that comes from individual deeded property.