By John R. Kazanjian
August 5, 2005
Everything You Need to Know About Fractional
Ownership, Private Residence Clubs, Condo-Hotels and
Whole Ownership Home Buying
You’re seriously considering buying a second home or
vacation home. What are your options? Is whole ownership
the right choice? What about fractional or shared
ownership? What’s more important to you – investment or
enjoyment? This report from Star Resort Group answers
these questions and more.
A second home is something many aspire to own and enjoy.
You’re not alone. In fact, people are buying second
homes like never before. Second homes tend to be held
for seasonal and occasional use or whose usual occupants
live elsewhere.
The expansion of second home growth has had two driving
forces behind it: increased wealth and favorable
demographics. With tax laws that benefited the transfer
of wealth, the stock market boom in the 1990’s and
renewed house price appreciation, average household net
worth has risen dramatically. These demographic changes
coupled with the recent languishing stock market have
intensified second-home demand and contributed
coincidently to the extreme rise in prices within
destination resort areas. Second-home purchases are most
commonly made by middle-aged heads of households in
their prime earning years.
In 2004, the second home industry in North America
achieved record sales volumes. A total of 2.82 million
second homes were sold in the U.S., up 16.3% from 2.42
million sales in 2003. This growth trend is attributed
to several factors:
New Ownership Options Available to Meet New Market
Demands
In response to growing demand, the resort industry has
undergone substantial change in the last five years. In
order to broaden market appeal, developers have crafted
new second home real estate products to better respond
to people’s needs and desires. The most recent
innovations in the second home industry are the
introduction and rapidly increasing popularity of luxury
fractional real estate and the condominium hotel – two
of the fastest growing segments of the real estate
industry today.
Fractional Real Estate and Condominium Hotels are
primarily purchased for lifestyle enhancements. The
variations between these products tend to be in how the
owners plan to use their residences and what they hope
to gain from their ownership. To better understand these
differences it is important to note the two primary
motivations for owning a second home – as an investment
and enjoyment from use of the residence.
Similar to whole ownership purchases, fractional and
condo-hotel owners are granted ownership by fee-simple
deed with title insurance. Since Fractional Real Estate
and Condominium Hotels are backed by deed and title,
these purchases are considered equity-based investments
as opposed to the non-equity based multi-site
destination clubs also popular in today’s market. And,
just as you can with a primary dwelling, the deeded
fraction or condo-hotel real estate may be resold or
bequeathed.
Fractional Ownership
Fractionals are very upscale fully furnished second home
properties usually located within renowned destination
resort areas or select urban settings where cultural,
dining and shopping experiences are extraordinary. More
important to the consumer is that resort fractional
projects are being located within destinations that have
been family favorites for generations. These residence
programs normally include superior resort services such
as concierge, valet parking and personal gourmet chef
services for in-home dining, as well as the use of first
class quality amenities and a variety of recreational
activities.
Common settings for fractional properties are ski and
golf resorts and beach communities. Popular destinations
include Aspen and Telluride in Colorado as well as the
Caribbean. “Fractionals are typically found in resort
areas where prices for second homes are very high and/or
there is a scarcity of available real estate,” says
Richard Ragatz, president of Ragatz Associates, a
hospitality market research and consulting firm based in
Eugene, Oregon.
Carl Berry, CEO of Scottsdale-based Star Resort Group,
notes that the luxury fractional or private residence
club concept has become attractive because property
values in popular resort areas has skyrocketed out of
reach of all but the wealthiest buyers.
For example, Mr. Berry notes that $1 million now buys a
tear-down cabin in Aspen, Colorado, whereas a fractional
there costs $200,000 to $500,000, “which is chicken feed
compared to what these properties are going for.”
Nowadays, $200,000 will buy a piece of a $1.5 million
property, according to Ragatz, who notes that this
concept has been around a long time. “People have been
investing in second homes with relatives and friends for
years, but divided-ownership property was never a true
product until recently.”
John Kazanjian, EVP of Star Resort Group, emphasizes,
“The popularity of the second home fractional is that it
makes sense to purchasers who simply could not justify
the purchase that they might only use for a few weeks
out of each year. With a fractional, owners have the
asset and all the advantages of second home ownership
without the cost or year-round maintenance obligations.
Professional management relieves owners of the worry and
anguish that often accompanies second home ownership.
When coupled with superior hospitality service levels,
the fractional purchase is an exciting and sensible
alternative in the second home marketplace. Fractional
choices are broadening as developers continue to design
programs that truly allow owners to use their second
home as they prefer at a fraction of the cost.”
What Types of Fractional Ownership Are Available?
There are several different types of fractionals that
serve divergent interests. The most popular categories
include Traditional Fractions and Private Residence
Clubs.
Traditional Fractional
This original fractional format was first formulated in
the 1980’s to formalize the sharing of a single family
home within a destination resort area. Traditional
fractions now involve condominiums and attached
townhouses as well as detached single family homes.
These Traditional Fractionals are usually sold in
one-fourth interests, also termed Quarter-shares.
Quarter-share owners receive one week of use each month
for a total of 13 weeks per year. Variations of the
Traditional Fractional include: Fifth-shares with a
total of 10 weeks per year and assignment of use every
fifth week, and; Sixth-shares with 8 weeks of use per
year and allocation of time every sixth week.
Within each traditional fractional format, the weeks are
assigned through a calendar that rotates to distribute
the most desirable times of the seasons in a fair and
equitable manner. The owner may either use or gift their
weeks, or they can place their unused time in a rental
program and split the revenue with the property manager
after costs. Quality of the residence and furnishings is
in the 3 to 4-star ranges. Service levels are at the
3-star level, if included in the program offering.
Private Residence Club (PRC)
A Private Residence Club (PRC) is designed to meet the
needs of the same affluent buyer that would normally
consider purchasing a luxury wholly owned second home.
The purchase decision is primarily based on the buyer’s
motivation to enjoy the residence and the resort area,
although potential value appreciation is a factor.
Affluent purchasers recognize they have limited leisure
time and are looking for real estate that is price
proportionate to actual use. The Private Residence Club
ownership model follows a “pay for what you need and
want” philosophy in an intimate, exclusive community
together with highly personalized service and a wide
range of amenities. As in the Traditional Fractional,
owners purchase a share or “fraction” of a Private
Residence Club home. They receive a deed with title
insurance.
Private Residence Clubs comprise a high-end luxury
product sold on a one-seventh (1/7) to one-thirteenth
(1/13) share basis. Quality of the residence and
furnishings is in the 4-star to 5-star ranges. Service
levels are superior with every need or request by an
owner accommodated by an attentive staff.
As pioneered by principals of Star Resort Group, the
defining quality of the Private Residence Club is in the
owners’ ability to access their time in a flexible
manner and literally as often as they want, similar to a
golf country club and subject to the project’s
Reservations Policies and Procedures.
Dave Hanna, President of Star Hospitality and a member
of the first PRC development team explains, “In the
Private Residence Club program, the owner’s use of the
residence is on his schedule and not controlled by a
calendar. Generally, ownerships are granted a set amount
of time, termed ‘Pre-planned Vacations’, to guarantee
each owner access to their residence during peak
seasonal times. In designing a particular use plan, we
consider the length of the peak season and set a ratio
of owners to each home that allows enough flexibility so
owners can be assured of securing the times that they
want each year. Spontaneous visits by owners are
accommodated through a ‘Space Available’ reservation
program that allows for use as little as one night at a
time and up to seven nights per reservation. Some owners
may use the program less in certain years, making more
time available at the resort for the other owners.”
Carl Berry adds a note on hospitality service levels:
“Certain Private Residence Club projects prefer to
promote their program with “5-star service” levels. When
compared to the rating system utilized by the
hospitality industry for luxury hotels, residence clubs
that do not provide fine dining alternatives, butler
service and other requisites that earn the 5-star rating
are at 4 to 4.5-star levels. That is not to say that the
service isn’t excellent, for it is. It’s just not 5-star
by hospitality industry definitions. Owners at Star
Resort Group projects appreciate the tradeoffs between
having a 24-hour butler staff versus having to pay for
that convenience in their annual fees.”
PRCs are seldom rented, since the owners generally
prefer to keep unused time available for the owners
while maintaining exclusivity. The Homeowners
Association supports their thinking by not facilitating
or encouraging rentals. Should owners decide to rent any
of their guaranteed weeks to friends or associates, the
renters are treated as the owner’s unaccompanied guests.
Condo-Hotels
Statistics show that the market for homes with rental
income potential is nearly twice the size of the market
for vacation homes that are seldom rented. However, both
markets are growing rapidly in double digits. As
expected, the typical buyer is at least partially
motivated by investment and rental income and may be
younger and less affluent that the luxury whole
ownership second home buyer.
A Condo-Hotel unit is a condominium sold on a whole
ownership basis with the intent of the owner using some
of the time when they wish, while placing the balance of
their unused or unscheduled time into a hotel rental
program. An operating hotel with attendant services is
critical for this program to be successful. The appeal
of a condo-hotel ownership to prospective buyers is that
there may be an opportunity for rental income to cover
yearly operating costs. Strict rules apply toward
representation of the condo-hotel product as an
investment. It is first and foremost a real estate
product predicated on the owner’s planned use.
Although most condo hotels are sold as whole ownership,
some condo-hotel regimes have structured a hybrid
fractional overlay model into the mix of products in
order to reduce the price point and diversify the
market. Aside from the prevalent whole ownership
condo-hotel model, traditional quarter shares or fifth
shares tend to be the most popular hybrid within the
condo-hotel platform.
Whole Ownership Second Home Options
For those who choose to use their resort residence for
longer periods of time, or are inflexible in their use
times, or for those who simply prefer not to share and
are willing to pay the price, whole ownership of a
second home is the only acceptable format.
You're One Step Closer to Your New Home
Now that you're armed with all the facts, the next step
is to start shopping for your new second home. And now
that you know all about your fractional ownership
options and all of the benefits of only paying for what
you need, you just might find yourself owning your dream
home sooner than you thought possible.
John R. Kazanjian, is Executive Vice President of
Star Resort Group. He is a co-founder of The World’s
Finest Resorts and has served as CEO of Resort
Development & Advisors.
Kazanjian, John R. "Because You Want to Know Your
Options Before Buying a Second Home." August 2005 |
