Fractionals are not a cookie-cutter product. Of all resort real estate products they are the most complicated as they are 100% use by the buyer. There is no investment [sure, a little in that "I want to make a buck, when I sell"] angle to it as there are in lots, whole homes, villas or condos or condo-hotels.

We know from 16 years experience in fractions, that all the components have to be covered originating from what's best for the buyer all the way to how, as the developer, I make money from them.

Are they "timeshares on steroids?" No, predominately timeshares are a travel and an exchange product. Are they just lesser whole units? No, whole units are 'all in' as the gambling term goes.

Fractions need to offer all the 'use' associated with a whole unit plus more amenities and services due to the buying power of multiple owners. So, this means that the use plan should allow for 'unlimited use' [more later on this]; the dues need to cover all maintenance, up-keep, reserves, operating costs and the personnel need to execute these tasks while giving owners personalized attention for reservations, planning their visits, on-site hospitality - really all one might expect from a resort hotel and more.

For this case study the developer has built and sold whole units. This is good, because the developer understands how subdivisions work [lots of money in and the profit at the end, and pricing that begins low and ends high] but may not have thought of the full service aspect that fractions need to offer.

Additionally, the developer needs to consider that while there is more profit potential, the sales period may very well be longer than with whole units, and is he willing to bear the risk of being 'on the sales continuum' for a longer period of time? The longer one is in sales the more risk there is associated with the process. But, if the profits are higher, then the risk may be acceptable.

Make more money? Get out of a stalled project? Offer a more contemporary product? Get into a mixed-use product project? Add more traffic to my retail? Keep the resort more alive in off seasons? Up sell fractional owners after a few years?

All these motives are realistic, but the developer needs to be prepared to enter a whole new product line, that while it is more attractive to the savvy buyer, has more 'ins and outs' than whole units or even timeshare.

In this case study the developer has arranged for these 10 industry experts to show their knowledge, so he can be better prepared. In many different ways this is the process any developer must go through to fully vet not only his team but also himself and his core, company resources.

Certainly, the developer needs to have the experience and capital to begin a new project. Also, he should have the finance and accounting functions covered for obvious reasons. Because, in this case, our developer has experience he should have some grasp of marketing - surely the 'old' and maybe a little experience on the new, electronic media.

• Market research to determine if there is a project
• Fractional documentation and registration - specific to fractions
• Product development, amenities, exterior and interior design specific to fractions
• Construction and buyer financing & presale implications
• Marketing and lead generation specific to fractions
• Selling systems and sales team development, training and management specific to fractions and/or mixed use
• Owner association[s] formations, subsidy and management
• Hospitality management commensurate with an amenity-rich and service intensive resort property

It is unlikely that a whole unit developer will have many of these fractional-specific bases covered, hence working with an established company [ies] will be necessary.

We believe so, or we would not be presenting this document.

At Star Resort Group we know so from over 16 years experience beginning with the first, real fractional the Deer Valley Club. We also know so as we financed the first fractional development company to become the first multi-site fractional developer and marketer.

1. With the advent of resort condos in the 60s more and more Americans bought vacation homes - both houses, villas and condos. The condo explosion offered a 'ready to go product' that many chose. If not, they decided to buy the more traditional product. With all that experience, and those headaches, and the guilt of non-use the market was poised for a new product.
2. Timeshares were a new product, but one geared for a lower income demographic than resort home ownership.
3. The documentation developed for timeshares allowed early fractional developers to over lay that documentation on their projects thereby giving each owner a set of rights and obligations while keeping each owner legally separate from the other.
4. From the beginning of vacation homes, with the rise of the middle class in America, there have always been multiple owners; family members, groups of friends, etc. But, distinct from fractions today, they were jointly and severally liable to each other.
5. Early-adaptor companies, like American Ski Co, built their resort network on quarter shares for the lodging component of the resort, so they could concentrate their money on ski hill development. This was a very successful strategy until they got caught over extended at the Canyons, Park City. But, their track record is solid on the quarter share/hotel alternative product.
6. Early-adaptor buyers were those who owned or used to own a vacation home, knew the financial drain and the maintenance issues, and who saw in fractions a viable and real alternative with more amenities and services than they had in their own vacation home.
7. Of vital importance these buyers were from the same income demographic as the buyers who owned or still owned a vacation home. Fractions were not a downscale product. This has remained true through today.
8. Those projects were well planned and executed. Conversely, many look-alike projects have not been successful as the developer, the use plan resource, the marketer or the seller did not understand the differences in the fractional product compared to the whole unit or the timeshare.

Common sense says that buyers will use a vacation home-fraction at a resort they can drive to. In most cases that's a regional resort. Sometimes, one can get both….Denver to Vail regional for them, destination for the rest of us. However, prices for vacation homes are usually lower in a regional resort, so the comparison against a fraction is lower. Or, to look at this from the other end of the spyglass, the multiple for a fraction may be lower over the comparable whole unit price.

In many cases the wealthier go to destination resorts, and by definition they have more discretionary income, so the fractional purchase is less of a financial decision. Wealthy folk, with young families, will probably select a regional resort, so there are plusses and minuses with both.

Here's a pitfall to avoid. The expected buyer needs to have the discretionary income to easily afford the fraction, or a middle of the road whole unit. Those without that extra income are not in the vacation home flow in their home social group, and it's unlikely that they will step out of their social circle to buy something that others are not buying - even if they could afford it.

So, here's an example: Star developed and sold the Northstar Club, Northstar-at-Tahoe as a regional fraction sold to the San Francisco Bay Area. The owner's wealth was substantial, but it was a weekend retreat for them. The units were large, three and four bedrooms, but the overall finishes and common areas, while very nice, were not luxurious. It is managed to a PRC level.

By contrast, when Star did a venture with Aspen Ski Corp. on the Snowmass Club the units, while a bit smaller, were total luxury, and the common areas more extensive, and the whole project overall more luxurious befitting the Aspen clientele.

So, consider a fractional project or adding fractions as a component to a planned project, or using fractions to kick-start a stalled project?

The usual avenue, and still the best for the purposes of obtaining financing, is the Ragatz feasibility report along with possible focus groups and/or a survey instrument. To get the money this is still a 'must'.

However, for the 'ready-to-go' developer the SMART report has immediate and valid benefits especially if the developer has databases that are unique to the project or area. To quote from the SMART description:

"It is our observation that the developer to date has had only one option - the traditional feasibility study - to judge the potential of a proposed project. Often that type of study will not address the more practical questions of (1) is there an actual, viable market for the product? and (2) from the developer's standpoint, what is the ideal product configuration for that market?

It is the objective of the Star Marketability Assessment Report (SMART) to provide real-world information to the developer at a cost less than the traditional feasibility study, and which is written from the viewpoint of principals who have been on the front lines in developing, marketing and selling high-end fractional interests.

The report is made up of two components which, when combined, will give you the information needed to make a go-or-no-go decision, and a head start on the specific nature of the offering:

A consumer research component which will provide statistical analysis of target audience demographics, levels of affluence, vacation travel habits, vacation home ownership patterns, levels of understanding of fractional ownership, and propensity to purchase a fractional product at certain price levels.

This information is then cross-referenced against the InfoUSA Wealthfinder database and the Donnelly Lifestyle Cluster Spectrum to provide a comprehensive profile of the prospective buyer.

The research will be conducted in two phases, if necessary an on-line survey prompted by an e-mail message, and if needed a follow-up postal mail survey if there are not sufficient numbers of e-mail addresses available to generate a reliable and projectable response rate.

This is followed by a through a written report authored by the principals of Star Resort Group offering (1) our professional opinion on the marketability of the project based on alignment with - or reasonable exceptions to - generally accepted criteria for success; and (2) preliminary recommendations on project scale, fraction size, use plan, architecture and interior design, services and amenities, and pricing."

There are many type of market research, but at Star we believe the SMART is the most functional and direct with accountable results to the developer. And, for the money it can't be beaten. Regardless, the developer will need to determine what the primary and secondary markets want and need in terms of a product, use, services and their attendant costs.

Star advises that wherever possible, a mixed-use configuration be incorporated into the project. The reasons are:

1. Two products for sale are better than one, as the customer can have the choice of going one of two ways in a purchase.
2. The developer, if whole units can be sold at the outset, will be able to take down enough of the project financing to allow the extra time for the fractions to be sold without incurring high interest costs.
3. The fallback for any fractional project is to sell whole units, so having them at the outset makes sense.
4. The sales team will relish the opportunity to move the customer back and forth between products to ascertain which product they want to purchase.

What's in a name? Private Residence Club, as a moniker, has been around way before the early 90s, when luxury fractions came into being and took that name.

Since then the name, Private Residence Club [PRC} has been all over the map. The Destination Clubs have tried to use it. The media continues to mix up the use of PRC between any shared ownership product. Dick Ragatz was the first to attempt to quantify at PRC as being sold at over $1,000 a square foot. He may amend that designation as building costs increase, or more luxury projects come to market in golf or beach destinations, where the cost of construction is less than ski areas, where luxury fractions first appeared and the dollar value was first applied.

Dick also coined the term 'traditional fraction' meaning a product being sold from $500 to $999 per square foot. In reality there are products all over the map, and depending on the unit size some projects can never get to the $1000 level regardless of how "lux" they are.

Service levels may be a better indicator for a project with a 24-hour front desk, separate concierge function, daily housekeeping or at least trash, towels and bed making, and enhanced owner services. All these cost money, so the buyer willing to pay in the form of dues to have these services can distinguish a high-end or luxury product. Call it a PRC or a luxury club or just a darn nice fractional project…it will be known by how its operated years after sell-out.

By definition all resort areas are seasonal. Well, some say Hawaii is not seasonal. Well, it is to those who use it such as the Northern tier of the U.S. vs. Southern California. So, seasonality, by one indicator and from those there who want year around business, against the buyer of the fraction who wants to come at more specific times of the year. Who needs to get out of LA in the winter, when it's 75 degrees?

Setting seasons for the sophisticated buyer is different than, say, the seasons of a timeshare resort, which is driven by getting the highest exchange company rating or by a less discerning buyer who will come during the shoulders of a season because the price is right and it's the same first class unit.

There is no "fudge room" in setting seasons. An example goes back to the Northstar Club at Tahoe, which was configured as a primary winter product. Star looked at the real, real prime ski weeks during the winter season. Forget beginning at Thanksgiving or early December because [a] there may not be snow and [b] upscale folk are not skiing yet. So, begin at the Christmas week. Then, forget the first two weeks of January; the snow may be great but the buyers are getting over the Holidays and not on vacation.

So, that leaves two Holiday weeks, two weeks in January, four in February, four in March and two in April, because Easter is all over the map. That totals 14 weeks. So, Star sold a 1/7th interest to 'guarantee' two prime winter weeks.

The other time - pre Holidays, January, latter April? All space available for owners to use. If the use plan is to be believed, see below, then it must be bullet proof!

If there's a 'heart of the watermelon' this is it!

Wrong size fraction or wrong use plan - there's no sale. It's as simple as that, and as complicated as that. This is a truism of the highest order.

1. How the primary and secondary markets want to use the resort area.
2. These may be different, which may lead to a use plan within a use plan.
3. What the developer wants to sell is immaterial.
4. What the buyer wants to buy is everything.
5. Documents should accommodate multiple sized fractions to be sold.
6. Price is not as sensitive as one may think.
7. The multiple over whole units may be higher with smaller fractions.
8. Gross sales with small fractions will be higher as will marketing costs.
9. The risks increase the longer a project is in sales.
10. Buyers will not pay for unused time - in their view.
11. Rental programs may compensate for unused time.
12. The balance is quite delicate between the gross the developer needs to achieve, less distribution costs, and the amount the buyer will pay and the time they perceive they need.

1. This is defined in the underlying documents.
2. It needs to be fully transparent.
3. The buyers need to be able to understand it, which means that is does not have to be simple as the buyers are smart people.
4. The purest use plan is a rotating priority…harder to understand; proven to work.
5. Based on market demand selected fixed weeks can be added to the rotating priority system.
6. The buyer will always opt for more flexibility, but also want 'guaranteed time'
7. The fixed time - fixed unit has very limited use.
8. The fixed time - flexible unit has some more use, but still limited.
9. The planned time window can either be 'x' months in advance or on a rolling calendar basis.
10. Space available time is usually present and an important factor in buyer decision-making and satisfaction.
11. Short-time use [known by many names] is an important factor to some buyers
12. A combination of planned time, space available time and short-time use all make possible the fraction to be used as one would use a whole unit. This means that an owner can actually use more time than the number of nights in the purchased fraction divided into 365 nights per year.

The simplest model is to take the whole unit price, add on the expected extra sales and marketing cost and divide by the number of shares to sell. In the 1980s this is how condos on Hilton Head Island were sold. Today, many 'one-off' homes take the same approach.

From a project model, where the developer makes a conscience choice to offer fractional product there has to be a financial reward for selling more interests than the comparable whole units.

Dick Ragatz, when he began his work in fractions, determined that the markups were in the range of 1.75% to 2.50% of the comparable whole unit prices. As the years have moved on the high end has come down to 2.25% and in some cases to 2.00%.

Does the buyer feel gouged? That a question that's been raised off and on, and in the 'value' economy we are now in it may be important to consider.

In the previous discussion about regional vs. destination resorts I mentioned that destination resorts tend to have the higher prices for vacation homes. So, it should hold true that the fractional multiplies can be higher.

Oooops, Aspen is overbuilt with fractions this winter, so what to do? Subdivision pricing dictates that prices begin low and go up. The old adage is true that it's easier to raise than lower prices. So, shame on the developer who is caught in a price-softening environment by taking too high of a multiple at the outset.

There are some that say in the current market the multiples should be not more than 1.50% to meet buyer demand. The product and FF&E costs, the marketing and sales and the carry all have to be very carefully managed in such an environment.

Projects usually test prices by having a 'founders' tier wherein there is some flexibility to go down or up. But, once the rollout occurs the developer is pretty well stuck.

Enhancements can make a difference with price sensitivity. Toss in a year or two of HOA dues, some ski passes, or golf rounds, or airline tickets…these all can have the effect of keeping price integrity.

Rentals may not have a place in a small sized project, with small sized shares being sold, in a very exclusive manner as the private club environment may be cheapened by rentals. You know the old, sniff, sniff, who needs them? I wonder of any of those folk are still around?

Rentals with small share sizes usually don't work because in a 1/12th share program the owner wants to use the two good weeks and who wants to rent the shoulder season weeks?

In a larger share size like a 1/8th there is some room for rentals especially in a fly-to resort area, where the normal owner is unlikely to come more than two or three times a year.

The old saying, 'opposites attract' in marriages? Well, that means one is more right brained and the other more left brained. So, during the sales process the right-brained spouse 'gets it'. The left brained spouse is lagging in the selling process, and this is where rentals, or exchange or other enhancements can make the difference.

If one offers rentals it should presuppose that rentals can be delivered. In most cases this is easier said than done, so beware…if offered results have to be there or unhappy owners will ensue.

Internal exchange between owners has always been offered, and is an important service to offer.

In the beginning of fractions it was assumed that owners did not want external exchanges as the fraction was their vacation home, and exchange smacked of timesharing. Over time owners 'demanded' exchange.

1. Third party service company: The Registry Collection, Resort to Resort and Preferred Residences. An affiliation with one of these companies can meet the exchange demand.
2. Self-administered program: designed by the developer/HOA to include a handful or two of resorts that have common ties to the project by virtue of geography and quality. Some projects have this program and also have the external program.

These are the components of a successful fractional program. Many topics have come before 'Components' and many will follow, but the solid core of a project is built around these components. So, be thorough in your studies, use the best possible resources to aid you and good fortune in your development.