Many houses and condominiums in vacation destinations have fractional ownership potential, and more and more owners and Realtors are considering selling fractional interests. In some cases, a fractional sale is the best way to maximize the sale price or speed the sale process in a slow market. In other cases, a fractional sale offers a way for a vacation home owner to continue to own a portion of his/her property and to continue to enjoy using it, while lessening financial and management burdens of ownership, and avoiding the hassles and risks of vacation rentals.

This article will help vacation home owners and real estate agents determine whether marketing fractional ownership shares is viable and makes economic sense, and describe the steps and costs involved in creating and marketing fractional ownership interests. A similar companion article entitled "Analyzing Fractional Ownership Potential of Resort and Multi-Unit Developments" focuses on helping owners and developers of resort and multi-unit properties determine the feasibility of creating a multi-unit fractional ownership offering or private residence club.

Many properties cannot be marketed successfully as fractional ownership. To determine whether a particular single family home or condo is appropriate for fractional marketing, consider these issues:

• Vacation Destination: While it is true that fractional ownership may have appeal under certain unique conditions outside of vacation destinations, virtually all successful fractional ownership offerings have involved vacation or resort properties. In general, if people are not using nearby properties as second homes, vacation rentals or hotels, do not consider a fractional offering.
• Repeat Visitors: Even a popular vacation destination will be a poor choice for a fractional sale if most visitors come only once. Fractional ownership appeals to buyers who already frequent the destination, or dream of doing so. To determine whether a site draws repeat visitors, research the local vacation rental or hotel market.
• Unit Size: Industry statistics show that the most appealing home or apartment size for fractional offerings is two and three bedroom. While larger and smaller unit sizes have been marketed successfully as fractionals, they have been more difficult to sell and yielded a lower price per foot. That said, a truly unique or spectacular property or location will sell regardless of size.
• Nearby Amenities: The proximity of amenities such as skiing, water, golf, or a very exciting urban environment, is a key determinant of success for fractional ownership offerings. The fact that a property is located in a vacation destination will not ensure success if the amenities that make the area desirable are far away from the property.

In assessing the factional sale potential of a home or condominium, look closely at the success or failure of other fractional real estate offerings in the same community. If there are no nearby fractionals, try to locate other communities with similar amenities and visitor patterns, and assess the success or failure of fractional property there. If you are unable to find any successful fractionals in similar locations, it may be because you are the first to stumble on a great new idea, but it is worth closely considering the contrary.

It is a waste of time to consider the economic benefits of selling fractional ownership before you assess potential legal barriers. Fractional offerings can be regulated by private deed restrictions, or by law at the local, state or national level. Any of these regulations can flatly prohibiting the offering, require expensive and time-consuming approvals, or dictate project size, structure, or marketing. It is impossible to determine the viability of a fractional sale without knowing whether offering fractional ownership interests is legally possible, subject to discretionary approval by some agency or board, or restricted in a manner that will add cost or diminish sale proceeds.

In assessing potential legal restrictions, do not assume that provisions relating to "timeshares" are inapplicable to fractional ownership, or that provisions allowing ownership of a home by more than one person constitute approval for fractional ownership. The applicability of a particular "timeshare" provision will depend on the wording of the provision rather than on what you name the product. The wording of the document or law, rather than the commonly understood meaning of "timeshare", or the definition of "timeshare" under another law, will determine whether the prohibition or restriction applies. Deeding ownership of a particular unit will create a "timeshare" under most rules and laws if the co-owners agree to allot a certain amount of usage to each owner each year. The fact that shared ownership of a lot or unit is explicitly permitted does not mean that sharing usage of the co-owned property by time is permitted, particularly where another, more specific provision of the document or law prohibits such arrangements.

To assess the legal requirements that potentially apply to a fractional offering, you will need to look at several potential sources of fractional ownership regulation:

• Fractional Ownership Restrictions In CC&Rs and Bylaws: Governing documents for planned developments and condominiums are often silent as to fractional and timeshare sales, but must be checked in every instance. Silence can be taken as permission in most U.S. states, but some states prohibit fractional offerings within an existing development unless the governing documents explicitly permit them. Altering documents or obtaining HOA approval may be problematic, depending on the content of the documents. In some cases, applicable law will mandate unanimous approval for modifications intended to allow fractional sales. Also keep in mind that the HOA managing board or owners might amend the documents during the course of your fractional ownership marketing effort, and it is unlikely that your fractional offering will be "grandfathered" approval if this occurs.
• Fractional Ownership Restrictions In Local Law: Fractional ownership restrictions in local law remain rare, but are becoming increasingly common, particularly in resort communities. Remember to check for specific laws relating to timeshares and/or fractionals, and for zoning provisions that indirectly restrict these uses to specific districts or to discretionary approval (or both).
• Fractional Ownership Restrictions In State Law: Most US states have timeshare regulations, and these are almost always written broadly enough to apply to fractional offerings. A particular state's laws may apply because the fractional property is physically located in the state, because the fractional property is marketed or sold in the state, or even, in some cases, because a buyer lives in the state. Consequently, a fractional offering may need to comply with the laws of multiple states, and it is common for a seller or Realtor to modify or restrict marketing and sales in order to manage regulatory burdens. While internet marketing will not, by itself, trigger regulation in a remote state, the follow-up on responses to such marketing can. Nevertheless, few fractional sellers carefully limit marketing, sales, and buyer residence to states where registration has occurred or is not required, meaning that it is a common practice to take calculated risks with regard to state fractional offering registration. Fra
• ctional sellers typically use disclaimers in advertising in an attempt to satisfy laws of remote states, but the efficacy of this approach is questionable.
• Fractional Ownership Restrictions In National Law: Although there is no US federal law applicable to fractional offerings, national laws exist in other countries. As with state laws, national laws can be triggered by project location, marketing, sales, or buyer residence. Generally, European countries' laws impose disclosure and rescission requirements (discussed more fully below), but do not involve project registration or approval. Mexico requires fractional project registration if marketing or sales activities will transpire there.
• Securities and Investment Law: National or state securities or investment law may also apply to fractional ownership arrangements. In general, these regulations will apply where rental income is pooled among the owners, management responsibilities are completely delegated, or the purpose of the co-ownership is primarily investment. Application of these laws may result in expensive registration and compliance requirements, advertising restrictions, securities dealer licensing, and requirements relating to the wealth and sophistication of each purchaser.

Fractional ownership restrictions generally fall into the following categories:

• Outright Prohibitions: Regulations that simply prohibit all or certain types of fractional offerings
• Approval/Registration Requirements: Regulations that require registration with, and approval by, a public or private board of authority. Approval can be discretionary or non-discretionary
• Consumer Disclosure: Regulations mandating disclosures in marketing and sales material, project documents, or both
• Rescission Rights: Regulations allowing consumers time to change their minds after signing a purchase contract

When reviewing potentially applicable fractional ownership laws or regulations, pay close attention to the definitions of terms and the existence of exemptions. Often, modifications in fractional ownership offering structure and size can remove or diminish the burden of a potential restriction. For example:

• Number of Users: Some rules apply only to fractional ownership arrangements involving more than a specified number of owners or users. Depending on the economics of offering size (discussed below), it may make sense to change the number of owners or users in order to avoid a burdensome restriction.
• Usage Structure: Some rules apply only when usage intervals will be short, resulting in frequent changes in occupancy. Depending on the expected marketing effect of mandating longer usage intervals, it may make sense to change the usage structure in order to avoid a burdensome restriction.
• Ownership Structure: Some rules apply only when the fractional owners will be on title to the property, and not to ownership through a special purpose entity such as a limited liability company (US), limited liability partnership (UK), nonprofit corporation, or trust. Other rules apply only to agreements recorded in county records, and not to "private" co-ownership agreements. Depending on the expected marketing effect, it may make sense to change the ownership structure in order to avoid a burdensome restriction.
• Rental Use: Some rules apply only when rental of the property will be permitted. Depending on the expected marketing effect, prohibiting rentals in order to avoid a burdensome restriction may make sense.

Depending on the economics of the fractional ownership offering, the need to satisfy one or more approval/registration requirements can make the fractional sale of a single home or condominium unfeasible. The typical legal expense for a non-registered US fractional offering of an individual home or condominium is $5,000 USD, while the typical legal cost for a registered project is $12,000-20,000. But some fractional ownership offering approval/registration requirements can be satisfied inexpensively, and you will need to determine the specific costs and risks by consulting with a knowledgeable attorney, or inquiring directly with the regulatory agency or board.

There are two methods for determining sale prices for fractional real estate interests: (i) applying a multiplier to whole ownership prices, and (ii) using comparable sales data from other fractional offerings. Employ both methods to obtain the most accurate fractional ownership share pricing projections.

Fractional ownership industry statistics show that the total sales price of fractional interests in a particular house or apartment is between 1.4 and 2.0 times its fair market value as whole ownership. The following factors generally determine where a particular fractional offering will fall within this somewhat large range of potential multipliers:

• Number of Fractional Shares: In general, selling more shares will yield higher sale proceeds, and push the whole ownership pricing multiplier up. Additional benefits of a higher number of fractional shares include potentially broadening the market by offering a less expensive product, increasing lead traffic, and matching each owner's usage allotment more closely with real-world second-home usage patterns (which reflect that most second home owners only use their vacation property 21-45 days per year). But offering too many fractional shares can backfire. For example, if the location has seasonal use patterns, a higher number of fractions may give each owner too little prime usage time. Selling more fraction interests will also discourage some buyers because of associations with traditional timeshares (which generally have 26-52 owners per unit) and reticence about being involved with too many other people. A higher number of fractional interests will also increase sales, marketing and operational expenses, l
• engthen the sellout process (adding to carrying costs), and potentially complicate regulatory approval.
• Branding and Developer Name Recognition: Fractional projects carrying names consumers recognize will generate significantly higher whole ownership pricing multipliers.
• Project Amenity Level: Amenities such as concierge services, exchange networks, spas, pools, on-site golf, etc., will boost whole ownership pricing multipliers. The level of finishes, furnishings and equipment within the house or apartment will have a similar but less dramatic effect.
• Prices of Whole Ownership Alternatives: When prices of comparable properties offered as whole ownership are higher (reflecting greater demand relative to supply), whole ownership pricing multipliers are also generally higher. Consumers perceive less value in shared ownership where whole ownership is more easily affordable.
• Number of Bedrooms: Fractional ownership industry figures show that whole ownership pricing multipliers diminish as the number of bedrooms increases.

When projecting fractional interest prices by applying a multiplication factor to whole ownership prices, it is important to put historical data in context. A real estate slump in a particular market will negatively impact both whole ownership prices and the whole ownership pricing multiplier. Make sure to use a whole ownership price projection that is based on what the property would sell for in the current market in 90-180 days, rather than on what the property would have been worth last year, or what you think it is "really worth under normal conditions". In addition, adjust the multiplier downward slightly to reflect lower overall real estate demand level.

The alternative method of pricing fractional real estate interests uses sales data from other fractional offerings expressed as either (i) price per week, or (ii) price per square foot. Price per week is calculated by dividing the price for each fractional share by the number of usage weeks per year allotted to each share. For example, a 1/12th fractional interest that included 4 weeks usage per year and sold for $100,000 would have a price per week of $25,000. Price per week figures must be adjusted for unit size since, generally speaking, larger homes or apartments will yield higher prices. Price per week figures must also be adjusted for variations in the number of fractional shares per unit, because fractional ownership industry statistics show that price per week diminishes as the number of usage weeks allotted to each owner increases. So you can expect that a 1/12th share will yield a higher price per week than a 1/6th share.

Price per square foot is calculated by dividing the aggregate sale price of all fractional interests in a home or apartment by the square footage of the unit. For example, if the total sale price for all 12 fractional shares in a 2,400 square foot home were $2,400,000, the price per foot would be $1,000. As you would expect, price per square foot figures must be adjusted for variations in the number of fractional shares per unit since, as noted above, larger allotments of weeks lower prices. Less obviously, price per square foot figures must also be adjusted for variations in number of bedrooms, because fractional ownership industry statistics show that price per square foot diminishes as the number of bedrooms increases. So you can expect that a two-bedroom home will yield a higher price per square foot than a three-bedroom home.

Finally, remember that comparable sales date from other fractional ownership offerings, like whole ownership pricing multipliers, will be strongly influenced by property-specific factors such as branding, developer name recognition, project amenities, and quality of finishes, furnishings and equipment.

The following chart shows a sample cost and return analysis for the fractional sale of a home or condominium with a whole ownership value of $750,000. The figures presume a pre-fractional mortgage balance of $600,000 (80% of whole ownership value) and gross fractional sale proceeds of 1.8 times the whole ownership value. Please note that the analysis assumes that the entire cash investment remains in the project throughout the development period. In practice, it is likely that cash requirements would vary from month to month during the course of the project.

When considering whether to market a single home or condominium as fractional ownership, a prospective seller must determine not only whether the offering makes overall financial sense, but also whether there are adequate financial resources to prepare and sell the property as fractional interests. This analysis is important because fractional sales involve certain expenses that are not incurred when selling a home and condominium in the traditional manner. For example:

• Furnishings and Equipment: Home and condos are generally sold empty, whereas fractional offerings are typically fully furnished and equipped. Most fractional buyers expect very high-end appliances, electronics, furnishings, linens, etc., and these elements must be of a quality likely to withstand a higher level of use than typically occurs in a whole ownership situation.
• Legal and Management: Home sellers typically incur little or no legal expense, whereas a fractional sale requires the creation of a management infrastructure and, in some cases, regulatory approval.
• Marketing and Sales: Home sellers typically rely on commissioned real estate agents for the entire marketing and sales effort. This approach has not worked for most fractional offerings. Successful fractional sellers invest in websites, marketing collateral, and other lead generating and education efforts, in addition to paying sales commissions. These expenses are incurred before sales proceeds are generated, and so must be funded by the seller as part of the cash investment.
• Carrying Costs: Homes marketed in the traditional manner need only be sold to one buyer, whereas homes marketed fractionally need to be sold to multiple buyers. Moreover, the sales cycle (the time between first buyer contact and closed sale) tends to be longer for fractionals than for whole ownership. Taken together, these factors dramatically lengthen the sale process, during which the seller will continue to carry all or most of the costs of ownership.

A project that has fabulous potential as a fractional from the standpoint of sale proceeds and return on equity will not be viable if inadequate cash is available to fund furnishing, marketing and sales. This analysis is particularly critical for sellers who are already in financial trouble.

All fractional sellers must consider two financing issues: (i) the need for, and availability of, mortgage loans for the fractional ownership buyers, and (ii) the disposition of any mortgages on the property prior to the fractional sale.

Although fractional ownership industry statistics show that only 60% of fractional real estate purchases involve purchase money financing, the need for buyer financing in any particular situation will depend on the nature of the home and the profile of the target purchaser. In certain markets, the lack of purchase money financing can be fatal. Two recent economic developments may elevate the demand for fractional interest buyer financing: (i) the increased difficulty of obtaining home equity loans, which were a popular means of financing fractional purchases; and (ii) the collapse of the stock market, which makes fractional buyers more reluctant to generate purchase money from liquidating stock holdings.

If you determine that financing will be important for the success of your fractional sale, you should first investigate the availability of fractional mortgage financing. In fractional financing, each buyer who wants financing obtains an individual mortgage secured by his/her interest in the property. This arrangement avoids exposing each owner to the risk of default by another. Unfortunately, fractional mortgages have become harder to obtain for single-home fractional ownership projects.

The alternative to fractional mortgages is a single loan secured by the entire property. While there are a variety of legal methods for managing the risks associated with these "blanket loan" arrangements, none of them completely eliminates the possibility of loss of owner investment and equity through foreclosure. Nevertheless, blanket loan arrangements have been very common in single-home fractional ownership arrangements for a long time (our office has been involved in over a thousand such transactions over 23 years), and default is extremely rare (we have not heard of a single incident). The risk of potential default must be managed through a centralized payment system and the maintenance of a significant default reserve fund. Fractional owner resale must also be made possible through careful loan selection and sophisticated refinancing provisions in the fractional owner contract.

For the fractional seller considering whether to offer a project with a blanket loan arrangement, the conundrum can best be summed up as follows. On one hand, some buyers will be dissuaded from purchasing by the risks associated with blanket loans. On the other hand, some buyers will be able to purchase only if financing is available, and choosing a blanket loan approach (unlike much less available fractional mortgages) ensures that financing will be available. The seller should generally balance these competing considerations, and make a decision about what (if any) financing to offer, before beginning marketing efforts. Delaying the decision risks wasting marketing resources, or even creating a buyer/seller contract dispute, when a financing approach is ultimately chosen that is incompatible with certain buyers' needs or concerns.

A fractional ownership seller with an existing mortgage must also decide whether to repay the loan in connection with the fractional sale, or to leave the loan in place for the fractional buyers. Few mortgage loans on individual homes allow "partial releasing" (a process for gradual repayment in exchange for conveyance of fractional interests free and clear of the mortgage), meaning that sellers opting to repay their mortgage will need to generate the required amount by closing the sale of the entire home, or of a certain number of fractional shares, simultaneously. For example, a seller with a $400,000 mortgage balance who plans to sell ten $100,000 fractional shares will need to close at least five shares simultaneously to generate enough sale proceeds (after payment of sales commissions and other closing costs) to repay the loan.

Closing the sale of a substantial number of fractional interests simultaneously can be challenging. Unless market conditions and pricing are particularly favorable, assembling the required number of purchasers will be time-consuming, and the early buyers may become impatient and back out before close. Some sellers allow buyers to use the property while waiting, but such "interim usage" programs involve risks and must be carefully designed and managed.

The alternative approach to handling an existing mortgage, leaving the loan in place indefinitely for the fractional buyers, or temporarily until the end of the sale process, creates different challenges. For example:

• Due On Sale Clauses: Most mortgages contain a "due on sale" clause, which provides that the transfer of any interest in the property (generally including any interest in a company or other entity that owns the property) requires lender consent. If lender permission is not obtained, the lender can demand immediate repayment. Although lenders rarely enforce "due on sale" provisions, the risk must be disclosed to prospective purchasers. Such a disclosure can create buyer resistance if not properly explained.
• Risk of Default: If left in place, even temporarily, the existing mortgage becomes a "blanket loan", which creates a variety of risks and management issues as discussed above. Of course, these disadvantages may be outweighed by the fact that financing is guaranteed, and the risks associated with making the sale contingent on obtaining new financing has been eliminated.
• Seller Exposure: The fractional seller is the named borrower on the existing loan, so the blanket-loan default risks faced by the fractional interest purchasers will also be faced by the fractional interest seller, at least for so long as he/she remains involved with the property or named as a borrower on the loan.
• Timing of Refinancing: Typically, but not always, the blanket loan is either replaced or assumed by the fractional buyers, simultaneously with, or immediately following, sale of the last fractional share. But in some cases fractional sellers decide that the economic rewards associated with the sales outweigh the risks of remaining a named borrower on the loan indefinitely, particularly where state law insulates the seller from personal liability.

If the above steps lead to the conclusion that a fractional ownership marketing approach is feasible and makes economic sense, you are ready to bring your fractional interest offering to market. We suggest the following pre-fractional-marketing steps:

• Organize the Fractional Ownership Offering: Marketing anything you cannot clearly define and explain is difficult, and this adage is doubly true with fractional ownership. Telling prospective buyers that you are trying to put together a group to buy a property will seem successful at first (most people will tell you they have interest), but you will discover many, many hours later that few if any of the supposedly interested buyers are willing to write checks. The fractional offerings that turn into closed sales are those where a seller, real estate agent, or consultant creates a fully realized ownership and usage structure, complete with pricing and financing (or a clear understanding that there will be no financing), before attempting any marketing or discussion with prospective buyers. To accomplish this, you will need to think about your buyers: How often will they want to come and from how far way? Will they travel by air or car? How long will they want to stay? Will they want to come at all times of year? What kind of financial resources will they have? How sensitive to risk will they be? What kind of amenities will appeal to them? The answers to these and similar questions will determine how many shares you offer, how you structure the usage, how you furnish and outfit the property, whether you offer financing, and all the other details of your fractional ownership offering. Part of our job as your fractional ownership attorneys is to help you work through these questions, then translate your answers into a concrete fractional interest offering.
• Create the Fractional Ownership Legal Structure and Fractional Ownership Contracts: Ideally, you would have the fractional purchase contract ready to sign when a serious buyer is identified, and the fractional ownership agreement and related documents ready to hand the buyer for review immediately after he/she signs the purchase contract and provides the good-faith deposit. The cost of readying all these documents is typically $2,500-3,500, a relatively small sum in relation the amount of money involved in the fractional offering. Nevertheless, there are instances where there is so much uncertainty about the viability of the fractional offering that a prospective seller is unwilling to commit this amount before testing the market. In these cases, we recommend organizing the offering (as described above), and preparing only a purchase contract and offering summary, all of which can typically be accomplished for about $900-1,200. When this approach is used, the seller agrees to provide the buyer with a full document set for review if a sufficient number of other buyers sign purchase contracts within a specified time.
• Prepare the Property For Fractional Sale: Ideally, the single home or condominium to be offered as fractional ownership is fully renovated, furnished and outfitted before marketing begins, allowing buyers to view photographs and visit the property before making a purchase commitment. But many fractional sellers renovate, furnish, and outfit during, or even after, marketing. This approach complicates the sale process (because buyers cannot see what they will get) and exposes the seller to some risk (because the finished product may not meet each buyer's expectations).
• Create a Marketing Plan: Fractional ownership is becoming increasingly common and popular, but is still a relatively new way to own real estate, making it challenging to market and sell. Fractional ownership of individual homes and condominiums is the newest (and fastest growing) segment of this new industry, making marketing and selling even more challenging. For a single-home fractional offering to succeed, the seller (and his/her Realtor and/or consultant, if applicable) needs to carefully plan and implement the marketing effort, by (i) figuring out a way to identify and reach the most likely buyers, and (ii) managing the "leads" in a way likely to lead to closed sales within a reasonable time. In the vast majority of cases, fractional interests will not "sell themselves" even when the property and the plan are wonderful. Fractional interests are luxury products, not necessities. Buyers need to be enticed, educated, comforted, and then incentivized to buy now (rather than "at some point"), or the fractional ownership marketing will go on and on and on until the seller finally gives up.

Selling individual homes and condominiums as fractional ownership can be a beneficial marketing approach, even for properties that are not selling well as whole ownership. As the sense of panic created by recent economic calamities subsides, more and more people are likely to view fractional ownership as a less expensive and lower risk alternative to whole ownership, and a superior alternative to vacation rentals and hotels. Nevertheless, fractional ownership marketing can be risky and challenging, and is not appropriate for all properties. It is essential to carefully assess the viability of any potential fractional interest project before investing significant resources.

Sirkin Paul Associates' has focused on real estate co-ownership since 1985, and has been involved in the creation of more than 5,000 co-ownership arrangements throughout the United States and the world. This breadth of experience allows us to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. We pride ourselves on our ability to write legal documents in plain English, develop simple and elegant usage and organizational structures, and offer efficient, reliable and cost-effective services for fractional projects ranging in size from a single house or condominium up to hundreds of factional interests. Our firm currently has five attorneys spread among our offices in San Francisco California, Evergreen Colorado, and Paris France.

D. Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership arrangements including shared vacation homes, TICs, equity sharing, co-housing, and legal subdivisions such as condominiums. His practice areas include transaction planning, offering materials, co-ownership contracts and CC&Rs, entity formations, regulatory approvals, fractional lending and mediation. He has worked on projects all over the world, including most U.S. States, as well as Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, Nicaragua, Belize and Mexico. He is an accredited instructor with the California Department of Real Estate, and frequently conducts co-ownership workshops for attorneys, real estate agents, corporations, and prospective home buyers. Andy is the co-author of The Condominium Bluebook, published annually by Piedmont Press, and The Equity Sharing Manual, first published by John Wiley and Sons in November 1994. He has written numerous articles on related topics, all of which are available at www.andysirkin.com. Mr. Sirkin can be contacted via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it , or by phone at 33-1-7666-0202 (EU) or 1-415-738-8545 (US).