Have you ever dreamed of owning a vacation home in Pebble Beach, California or a mountain château in Aspen, Colorado? Rather than fighting security lines at the airport, perhaps your dream is to drive up to your plane and go wherever you want, whenever you want.
Pleasures once thought to be enjoyed only by the very rich – vacation homes, aircraft, and yachts – are possible for more people today. While the expense of ownership always exceeds the cost of renting a luxury residence for a limited period, the benefits of having one’s place – familiarity and convenience – can outweigh financial considerations. The best thing about owning an asset is that it is always there when you want to use it.
Timesharing Is Not Property Ownership
Many confuse collectively owned or fractional share ownership with timesharing. The two are vastly different.
In 1974, the Caribbean International Corporation (CIC) offered the first timeshare program in the continental United States. Rather than owning the property itself, interested parties could buy the right to use a one- or two-bedroom condominium in the U.S. Virgin Islands for one week each year. The term of the timeshare agreement was 25 years. Each unit offered 50 one-week shares, with the remaining two weeks each year used for maintenance and repairs.
While critics complained that property sold as timeshares was frequently overpriced, this new financing method proved popular with customers who sought to return to the same site each year. Unfortunately, when sales abuse became common, many countries established regulations over the sale and management of timeshare properties. In the United States, individual states enacted a 10-day cancellation period for any reason applying to new contracts in the event of “buyer’s remorse.”
Although the FBI issued a special report in 2012 about timeshare scams, the concept remains popular with consumers. According to the American Resort Development Association, there are currently more than 5,300 resorts in nearly 100 countries owned by more than 9 million timeshare owners today.
Timesharing is not property ownership. Rather, you pay for the right to use a property. It is a contract between the timeshare purchaser and the company owning the property, and does not convey any of the tax or financial benefits of ownership.
There are substantial differences between timeshares and fractional ownership of a property, whether individually or collectively:
- Number of Owners Per Property. Timeshare properties are designed to have 50 to 52 members who use a certain property – without owning it. A collectively owned property rarely has more than 12 owners.
- Vacation Use Per Year. Timeshare owners typically have access to a property one week each year while collective property owners usually have a month or more of use.
- Household Income Variation. According to David Disick, writing for The Fractional Consultant, the minimum qualifying income for a timeshare purchaser is about $75,000 per year, while a fractional property owner typically has an income of $150,000 annually.
- Quality of Property. Fractionally owned vacation homes tend to be more expensive per unit ($1,000,000 vs. $100,000) with greater amenities and more luxurious furnishings.
- Reputation. Timeshares in the U.S. developed a bad reputation in the 1960s and 1970s due to sponsors over-promising and under-delivering. As a consequence, state governments passed stringent disclosure and consumer protection laws affecting the industry. In contrast, fractional ownership of vacation homes became associated with glamor, luxury, and the lifestyles of the rich and famous. The emergence of such hotel chains as Ritz-Carlton and Four Seasons in the fractional ownership industry increased its popularity.
An Explanation of Fractional Ownership
While appearing similar to a timeshare property, a fractional interest in a property is quite different. Owners own a fractional share of a specific asset, with each of 3 to 12 owners entitled to use the asset in proportion to their ownership percentage. Owners are each responsible for their pro rata share of expenses or profits should they arise. For example, luxury real estate chosen wisely can appreciate over the years. When the property is sold, the fractional owners receive their proportional share of the profits and are liable for any capital gains tax due.
A sponsor/manager typically develops a fractional ownership property and markets the units to individual property owners. Owners are also responsible for their financing, although many project sponsor/managers establish a relationship with a local lender for potential buyers’ convenience. While many sponsor/managers retain fractional ownership units until they are sold to new fractional owners, some may continue to own fractional units and be bound to the same contract terms as other fractional owners.
Management of the asset – including the preparation of tax documents, scheduling of owner use, and ongoing inspections and maintenance – is typically provided by the sponsor/manager initially, with fees detailed in the purchase contract. When all of the units are sold, the owners typically establish a board to replace the sponsor/manager.
The board determines the budget for the property and negotiates management fees with a property manager. Fees are typically a flat monthly amount, but depend upon the services provided to the fractional ownership group. Operating expenses such as insurance, maintenance, repairs, improvements, utilities, and project management are divided into proportion of ownership so a 12% fractional share would pay 12% of the expenses.
Advantages of Fractional Ownership
While real estate is the most popular asset in the fractional ownership realm, other expensive assets such as aircraft and boats are also available through fractional ownership programs. Even exotic cars from Ferrari, Lamborghini, Maserati, and Aston Martin are available under fractional share programs.
However, as far as real estate goes, compared to both timeshares and full property ownership, fractional ownership offers the following benefits:
- Financial Leverage. The combination of 10 to 12 investors in a property vs. sole ownership or a small private partnership provides a greater investment pool, enabling the purchase of a larger, more expensive asset. Also, the costs of professional management are shared.
- Tax Advantages. The tax treatment for a fractional ownership share is the same as a wholly owned or partnership property, whether real estate or a capital asset, such as an airplane or yacht. Subject to limitations depending on personal circumstances, taxes, interest, and depreciation are deductible on the fractional interest property owner’s tax returns.
- Simplified Administration Duties. Unlike a private partnership, fractional share owners are rarely involved in the initial purchase and management of the asset, purchasing their units from a sponsor/manager who initially develops or purchases the property, converts it into fractional shares, and sells the shares to individual purchasers. The terms of the fractional share agreements are fixed and do not vary between owners except the percentage of shares owned that affects the proportional share of expenses and property use. Decisions about amenities, service providers or vendors, and administration of the asset are defined before purchase.
- Greater Vacation Flexibility. Many second-homeowners complain about the feeling that they should visit their property at every opportunity, since it otherwise sits idle. Fractional ownership properties restrict an owner’s use to a limited term each year. As a consequence, owners report they are less inhibited about visiting other locations. Furthermore, most properties participate in asset exchange programs. Real estate companies such as Elite Alliance and The Registry Collection allow members to trade time in their homes for time in other exclusive properties around the world. The Registry Collection also includes exchanges for private yacht use and luxury hotels. Many fractional ownership aircraft companies, such as NetJets, provide access to a variety of plane sizes and configurations.
- Potential Property Appreciation. Fractional ownership units in luxury items generally enjoy an active resale market. However, potential owners should be aware that there are no guarantees of profits or even liquidity, as future sales prices of each asset depend on the asset’s continued popularity, condition, and competitive assets. Fractional share owners are generally free to sell their shares at any time, although some programs may require offering their shares to the other owners first. Some airplane and yacht programs include a provision in the fractional share contract to sell the asset at a predetermined point in the future, then distribute the proceeds pro rata to the owners. The sale is intended to capture maximum tax advantage from depreciation of the asset while ensuring the plane or vessel has the latest technological advances.
Disadvantages of Fractional Ownership
There are also certain disadvantages to fractional ownership of expensive assets. Those include the following:
- Competition for Use. Many vacation houses are located in areas with variable seasons, making some months of the year more desirable for visits than others. For example, sailing and boating occur primarily during the hotter months. Since reservations are usually accepted on a first come, first served basis – regardless of the percentage of ownership – all owners may not get their ideal choice.
- Restrictions on Use. Many properties do not allow pets or smoking on location. Some may restrict the number of occupants per home. Finally, some programs prohibit rentals of a property, limiting its use to family and friends. This ban means that owners may forego income even though the asset is idle.
- Liquidation of a Fractional Unit. The sale of individual fractional units may be difficult due to financing obstacles, adverse changes in the community (such as crowding, traffic, or crime), or requirements to offer the units first (or sell exclusively) to other fractional unit holders.
- Forced Liquidation. Some fractional ownership properties have predetermined future sale dates of the property as a whole, often 8 to 10 years in the future for real estate, and 3 to 6 years for aircraft and boats.
- Shared Decisions. A board of property owners or the sponsor of the fractional shares makes decisions about amenities, management, and schedules, rather than a single property owner. As a consequence, compromises are sometimes necessary – and this may be irritating to individual owners.
Fractional ownership of an asset is intended to convey all the benefits of sole ownership – use, tax treatment, appreciation – while allowing multiple owners to leverage their investment to purchase more expensive assets than otherwise would be possible or practical.
Luxury Real Estate
According to The Wall Street Journal, fractional ownership offers entrée to million-dollar vacation homes for far less money than buying outright. High-end hotel operators including Four Seasons, Fairmont, and Ritz-Carlton offer fractional units. The Four Seasons Residence Clubs offer homes in the United States (San Diego, Jackson Hole, Scottsdale, and Vail) and in foreign countries (Costa Rica, Mexico, and Italy). Ritz-Carlton properties include Lake Tahoe, San Francisco, Aspen, and St. Thomas.
In addition to exclusive hotel operators, private developers offer fractional share properties across the globe. For example, Timber Resorts offers homes in Hawaii, the U.S. Virgin Islands, Tuscany, Jupiter, Florida, and five Colorado ski resorts.
While properties range from condominiums to standalone homes, they are designed to appeal to affluent households. According to Michael Waddell, writing in the Hotel Business Review, amenities include “luxury linens, high-quality towels and robes, showers with multiple shower heads and steam, built-in bars, high-quality cocktail glasses and stemware, gourmet ranges and high-end appliances, fully stocked kitchens, and, of course, the latest in technology. Flat-screen TVs with DVD players are present in every room, along with wireless technology and iPod interfaces.” Fractional share owners do not typically have any input into the furnishings or amenities of a house, as decisions are typically made by the program sponsor/manager.
In addition to owning a vacation home for a fraction of its cost, significant potential for appreciation exists if the property if chosen wisely. According to CNNMoney, Steve Dering, founding partner of DCP International credited with the first fractional share program, notes that shares in the Deer Valley Club in Park City, Utah, initially purchased for $130,000 sold for $650,000 10 years later. Dering also notes that you can own your property in a trust or transfer it by gift or will, ensuring your family continues to enjoy it.
When purchasing a fractional share in a real estate property, it is important to investigate the operator/promoter of the property – the organization of the functional share program that offers fractional share units to the public – in addition to the property itself. Unlike owning your home, you are likely to be dependent upon the developer initially for the management of the property. If you buy a property associated with a reputable company that boasts a skilled management staff, you are likely to receive the benefits you expected from your investment, and more.
As empty-nesters, my wife and I purchased two fractional shares of a three-bedroom, two-story, furnished home in the Owners’ Club, an exclusive community associated with the Barton Creek Resort. Each share entitles its owner to spend 28 days in the house and the right to play any of the four championship golf courses sans green fees (our guests were entitled to a 50% discount to play). The Owners Club provides an opportunity to invite family and our friends to stay in luxurious resorts around the country while playing some of the greatest golf courses in America.
Since the Owners’ Club had similar housing communities in Hilton Head, The Homestead, and Puerto Vallarta, we could trade portions of our time in one resort for another and remain entitled to the same privileges. After owning the shares for two years, I subsequently sold one, receiving enough profit to pay the mortgage on the remaining share. My only continuing cost is my portion of property taxes and the management fee.
Potential buyers of a fractional share in a resort property should be aware that their investment may not have similar results. As with all real estate, location means everything. Also, the supply of the desirable properties must be limited as demand continues to increase.
For years, Americans have complained about the hassles of flying. Their complaints include a list of inconveniences like long security lines, extra fees that disguise the real cost of travel, cramped seating, limited schedules, and frequent cancellations and delays. According to ABC News, some folks consider airline travel “a battle in which it’s all they can do to come out alive.”
As a consequence, more people are turning to private airplane travel by flying their own planes, chartering, or participating in a fractional ownership program. Instead of dealing with a busy hub airport, these people use smaller general aviation airports and avoid dreaded security lines and luggage checks. Their schedules are flexible – if they’re late to the airport, the plane waits. During the flight, they can choose to eat or drink whatever they want, listen to music, or watch movies.
While many travelers prefer to charter private aircraft, others have decided that fractional ownership of their own plane is a better option, primarily due to the number of flights they anticipate taking each year, the average distance of each trip, and the length of their stays at each destination. Experts recommend that those flying more than 50 to 100 hours per year, or with frequent flights less than two hours, should consider owning a fractional share rather than chartering private planes.
A typical noncommercial aircraft flies about 800 hours per year. The manager of the fractional share program typically splits the cost of each aircraft into 1/16th or 1/32nd shares (50 or 25 hours of flight annually). A person who flies 100 hours or more can purchase multiple 1/8th shares.
While the fractional share purchaser has legal ownership of a specific airplane – and may be entitled to deduct depreciation and other expenses – purchasers typically have access to a fleet of planes of different sizes that are available on an “interchange” basis. Since a smaller plane has lower operating costs (fewer pilots and less fuel), this option allows owners to have a cheaper alternative when fewer passengers are traveling and time is not critical. In addition to the initial share cost, owners also pay a monthly management fee and a surcharge based upon hours of flight usage. Many fractional share programs intend to sell their planes at the end of five years, ensuring that owners have access to the latest technology.
Most fractional share programs offer well-maintained jets and turboprops that keep a high resale value. According to Aircraft Bluebook Marketline, small and medium jets and turboprops averaged a market price decline of about 4% annually during the first eight years of ownership. Potential fractional share buyers should recognize that the resale price of an airplane depends on its age and condition, including the number of hours flown, as well as simple demand.
When planes are used entirely or partially for business, all of the costs of operation – including depreciation and interest on debt – are generally deductible on a pro rata basis (business use / total use). In addition to passenger comfort, schedule flexibility, and boarding convenience, advantages of private flying include the following:
- Direct Flights. Ownership or charter means you can fly directly to your destination without stopping (except for fueling on long flights).
- Destination Choices. There are considerably more private airports than the large hubs that commercial airlines use. Typically, you can land at the airport closest to where you are ultimately going.
- Time Savings. You can save time every step along the way. Departures and take-offs, as well as landing and disembarking, are faster.
There are, however, some disadvantages to private flying:
- Higher Costs. Commercial airline flights cost considerably less than flying privately, whether as a charter or an owner. A GulfStream G-V, seating up to 12 passengers plus crew cabin configuration, can burn $15,000 to $20,000 worth of fuel on a round-trip flight from Los Angeles to New York City. And that’s not even considering landing fees, maintenance, hangar cost, and pilots.
- Aircraft on Ground (AOG). Just as commercial liners cannot fly in bad weather or with mechanical trouble, private planes are likely to be grounded at some point when you want to travel.
- Pilot Availability and Expense. Unless you intend to fly the plane, one or more pilots are necessary. Some private aircraft even require two pilots. The median income for a private jet pilot is $86,101, according to Payscale.
SherpaReport, a publishing company dedicated to luxury homes, resorts, and aircraft, lists seven fractional share companies serving the United States. NetJets and Flexjet are the two largest, offering a selection ranging from small to heavy jets:
- Small Jets. Seating for four to seven passengers and a flying range up to 1,700 miles.
- Medium Jets. Seating for 8 to 10 passengers with a range up to 2,000 miles.
- Super-Medium Jets. Seating for 10 to 50 passengers with a range of more than 5,000 miles.
- Heavy Jets. Fully equipped galleries, restroom, and separate living space for up to 18 passengers. Capable of 12 hours of flight time up to 6,000 miles, these planes are generally used for international flights.
While there are fractional programs for one- and two-piston engine planes, the greatest increase in airplane type for the past 25 years has been in small and medium jets. According to the AOPA, there were 21,301 multi-engine piston planes and 2,277 small and medium jets in 1977. By 2011, multi-engine piston planes had declined to 16,170 while the number of jets increased to 11,925. As a consequence, Flying Magazine claimed that general aviation is going through a revolution due to shared aircraft ownership, even though the number of private pilots has fallen from 350,000 in the 1980s to less than 200,000 today.
The high cost of new airplanes without using fractional ownership programs is considered to be one of the prime causes for this decline. In 1977, a new Cessna Skyhawk cost $22,300 when the average household income was $11,992. As of 2016, that same aircraft – albeit with new technologies and more features – costs $350,000, while the U.S. median annual household income is $52,000. Jamie Larkin, the founder of Ascension Air, claims that passengers who fly less than 160 hours per year are better off financially with a fractional share than full ownership of a prop plane.
While owning an airplane is expensive, the status one receives is priceless. Best of all, when you want to fly, your jet is right at your fingertips with a phone call.
Boat owners often claim the two best days of their lives are the day they buy their boats and the day they sell them. Like luxury real estate or airplanes, few boat owners get full use of their asset.
According to SherpaReport, typical yacht owners use their boats only 20 days per year. Even though the boat floats idly in its berth, the costs of ownership – maintenance, storage, and insurance – continue. As a consequence, ownership of luxurious yachts and power boats has traditionally been limited to the very rich. It is no surprise that fractional ownership of sailboats and power cruisers in the $500,000 to $1,000,000 range has become increasingly popular around the world. Boats are based in prime locations on both American coasts, the Mediterranean, and Australia. Many fractional share programs offer an exchange program allowing owners to trade their boats based at one port with other owners around the world.
Fractional interests typically range from 10% (27-plus days of use) to 20% (57-plus days). Many fractional share programs have a limited term of three to six years, during which the asset is fully depreciated. At the end of the term, the asset is sold and proceeds are distributed to shareholders proportionately. The typical vessel, whether sail or power boat, is equipped with a master cabin, two to three guest rooms, air conditioning, flat-screen televisions, bathrooms, and a galley.
The fractional share contract may include an option for the owner to elect between “bareboat,” in which the owner is responsible for the operation of the boat, or “full service” when using the boat. Full service includes a captain and crew to provide everything from the provisioning of supplies, cooking, cleaning, and boat operation.
Owning a fractional share of a yacht has many of the same advantages and disadvantages as owning shares in a second home or an airplane:
- Cost-Benefit. Owning a boat that is everything you ever dreamed of in a luxury yacht for a fraction of its price.
- Ease of Use. Fractional ownership eliminates the hassles of exclusive ownership, including maintenance, storage, and management
- Tax Benefits. By owning a fractional share, you may benefit from favorable tax treatment. Interest, management, and operating costs may be deductible for a boat when the asset is primarily used for business purposes. In any event, depreciation remains deductible, and capital gains treatment is available at sale.
Disadvantages include the following:
- Distance From Owner’s Home Base. Your boat is typically moored on either coast, necessitating travel time and expense when you want to use it, unless your primary residence is on the same coast.
- Scheduling Challenges. Scheduling your use during a prime season may be difficult.
- Financing. Financing a fractional share in a boat may be difficult, requiring specialized lenders familiar with the asset’s characteristics.
My ownership of fractional interests in two different vacation homes, as well as a single prop airplane, has been very satisfying and well below the costs and hassle of owning the assets alone. We enjoyed the properties year-round, becoming intimately familiar with the communities and our neighbors over the years.
In Breckenridge, Colorado, we discovered the best restaurants and watering holes, explored the wooded peaks surrounding the valley, and reveled in the area’s history as a gold mining town. In Austin, we always attend the Austin City Limits Music Festival to hear the latest music, or South by Southwest, the largest music event of its type in the world. Best of all, we don’t pay the full cost of assets that we would only use some of the time anyway.
Have you ever shared ownership in an asset?