In the current economy, there appears to be precious little developer financing available and virtually no purchaser mortgage financing for luxury fractional and PRC vacation properties. This paper will set forth the case that can be made to sources of both types of financing.

It will then set forth the case in favor of financing acquisition of luxury single family residences for sale as fractionals, a special opportunity in the current climate.

Luxury fractionals and PRCs grew to $2 billion in 2007 sales, a substantial increase over 2006 sales, and even in the downturn of 2008 still reached $1.5 billion in sales. These results were achieved even though this relatively new product was virtually unknown prior to the mid-nineties.

Based on growing public acceptance of fractional vacation home ownership and the strong sales history of this relatively new industry segment, it is reasonable to believe that, as the economy turns around, prospects for future sales will be bright.

Ragatz Associates (Ragatz), a leading feasibility analyst in the fractional industry, opines that existing luxury fractional and PRC owners represent only 1.5% of income qualified households and that with the following penetration rates, the following would be the number of households owning PRCs.

Clearly the potential market for qualified fractional buyers is very deep.

The average use of second homes in the United States is approximately four weeks annually. A dramatically growing segment of the second home ownership market has the means and desire to own a second home but is not prepared to tie up substantial assets in owning and maintaining a single property that will be used for only a few weeks a year. These purchasers want to be free of the burdens of absentee property management. They ask, "Why pay 100% of the cost of a vacation home used only a fraction of the year?" For these buyers, fractional ownership simply makes good sense.

Industry experience is that revenues from luxury vacation homes sold as fractionals generate one and a half to two times the proceeds of that home sold as whole ownership. The following examples illustrate how fractional sales can generate additional revenues.

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of 1.5 $7,500,000
• Average price of a 1/10 fractional $750,000 or 15% of whole ownership

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of l.75 $8,750,000
• Average price of a 1/10 fractional $875,000 or 17.5% of whole ownership cost

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of 2.0 $10,000,000
• Average price of a 1/10 fractional $1,000,000 or 20% of whole ownership cost

Today's buyer realizes that actual vacation home use is rarely more than a few weeks in a year. Accordingly, today's buyer realizes that fractional ownership makes sense, especially in the current economic climate, where a lower price point is appealing to more people. The more reasonable offering prices of fractionals thus greatly expand the potential pool of qualified buyers. This recognition is borne out by 2007 and 2008 fractional sales statistics.

Ragatz Associates reported that 2007 luxury fractional and PRC sales increased 12.4% in sales volume and 8% in the average price per fraction over 2006. Another leading industry feasibility analyst, NorthCourse Leisure Real Estate Solutions, reported 2007 fractional sales in the U.S., Canada and the Caribbean increased 20% over 2006.

This performance far exceeds that of whole ownership real estate. The National Association of Realtors reported that sales of whole ownership vacation homes in 2007 fell approximately 31% from 2006.

Understandably, fractional sales experienced some decline in the 2008. However, Ragatz reports that:

• North American luxury fractional industry and PRC sales reached $1.52 billion in 2008
• While this represented a drop of approximately 30% from 2007 sales, sales of wholly owned second or vacation homes in 2008 dropped by about 40%
• Moreover, the top segment, PRCs, dropped only 24%

From this data, it is reasonable to anticipate that the luxury fractional segment of the vacation home market will be the first to rebound as the economy improves

It is widely anticipated that the market will eventually recover. During the years of the economic downturn, many people have deferred their vacation purchases due to market uncertainties Developers who are prepared to market well-conceived fractional offerings will be well-positioned to profit from this pent up demand.

Fractional real estate will likely prove highly attractive to many purchasers. It is more affordable than whole ownership, and its costs closely match the owners' vacation use. For these reasons, it will likely be the first vacation option to rebound and will likely continue its strong sales performance of the past.

The logic of, and the experience with, luxury fractional mortgage financing present a strong case in favor of this financing. Purchasers of luxury fractional interests are affluent, responsible business owners, corporate executives and professionals. Their profile resembles that of purchasers of luxury whole ownership of vacation residences. The performance of luxury fractional mortgages, prior to the current economic climate, was excellent.

The magnitude of fractional sales, even in the current climate, demonstrates the magnitude of potential mortgage business. Again, this is an opportune time for capital sources to benefit from this market.

This is an especially opportune moment for financing the acquisition of existing luxury single-family residences for the purposes of reselling them as fractionals.

There is an oversupply of luxury vacation homes. Many owners have suffered through months and sometimes years of low offers or no offers at all. Asking prices have come down significantly. The profit potential for developers and investors is greatly enhanced by the opportunity to acquire prime properties at very favorable prices and the ability to negotiate favorable terms such as extended escrow periods, seller financings and the right to market properties prior to closing on the property.

Think outside of the box even now, some sources can be found, such as foreign investors; individual high-net-worth investors from your own networks, from top performing brokers in the location of your development, from Internet sources; and specialized funds.

Keep in touch with your funding sources. Let them know you are still in business. Despite the severe credit shortage, it is necessary to proceed with development planning and continue maintaining periodic contacts with potential funding sources. As the economy continues its recovery, capital sources will once again be receptive to sound business proposals.

Keep in touch with your networks and those of your professional advisors.