Structuring Fractional Ownership Offerings

STRUCTURING FRACTIONAL OWNERSHIP OFFERINGS

The three product structures most commonly used to create Fractional Ownership interests are detailed below. These formats have to be considered against the background of the relevant laws governing immovable property within the jurisdiction in which the subject property is situated, as well as any wider regulatory measures which may impact the sector.

The principal formats are:

  • Deeded Interests, typically using what is termed “tenancy in common”;
  • Some form of Corporate structure;
  • A Right to Use, which is a contractual right only, preferably secured through the interpolation of an independent Trustee.

Fractional buyers typically pay a one-time purchase price and thereafter, yearly annual dues which cover the expenses of operating and maintaining the fractional property. In some fractional projects, separate fees may be charged for the use of certain amenities, such as Spa’s for example

The way in which the fractional product is structured is dependent primarily on the real estate laws and any related regulatory frameworks which apply within the jurisdiction in which the property is situated. Some jurisdictions may allow what are termed “Deeded Interests” where an individual buyer’s title or ownership is recorded in a Land Registry so as to effectively be a registered interest in immovable property. The real estate laws in some jurisdictions may not facilitate undivided ownership interests or may impose restrictions on ownership of real estate by foreigners. 

Blog 4 Image 2Additionally, other formats ranging from corporate frameworks to trust-based structures are not uncommon. With the corporate structures, the unencumbered ownership of the real property comprising the luxury accommodations, may be vested in a non-trading company vehicle, with Fractional Owners acquiring shares within that company, where the Company’s Articles of Association spell out the entitlements to annual usage and enjoyment of the property vested in the shareholders.

Some fractional structures place the unencumbered ownership of the real estate in the hands of an independent trustee, under the terms of an express “Deed of Trust”, so as to apply what may be termed the “safe hands” principle, where owners’ rights are then conceptualized as a form of Club Membership, sometimes for a defined term of years. The property may be realized in an arm’s length sale and the net proceeds distributed pro rata amongst the Fractional Owners or the property might also revert back to the Developer.

Some jurisdictions have enacted legislation that defines the product in fairly general terms but stipulates that the product must have a finite duration, as is found in Spain. In the United States, Developers usually offer Fractional Ownership buyers an undivided percentage interest in fee simple in an individual residential accommodation and the related common areas of the applicable resort or other property, because under USA Accounting Rules, the Developer must divest itself of its entire ownership interest in order to be able to recognise the sale for accounting purposes.

These illustrations are provided in order to demonstrate that there are a plethora of different formats by means of which a Fractional Ownership offering might be created so that initially, depending upon the jurisdiction in which the development is located, great care is needed in order to determine the precise nature of the product being offered and how it is actually structured.

Fractional Ownership properties often comprise a strata-titled or condominium apartment but they can also be a town-house or a detached luxury home. Some fractional projects participate in an ex­change program, whereby purchasers have access to other properties of comparable quality lo­cated in other parts of the world, through an affiliation with an independent exchange company.

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