Helping companies do the best possible due diligence

Introduction

The luxury fractional property industry is the newest trend in vacation real estate, starting in 1992. Targeting the more upscale consumer, a luxury fractional property program offers four- and five- star, higher-end destination resort-style homes with special amenities and services, and often special privileges, such as access to private golf courses and beaches, private jet travel, private yacht travel, luxury travel services, safaris, and private tours. The consumer becomes a private club member by paying an initial fee, and then chooses a number of weeks at one or more of a group of luxury homes and/or condominiums in high-end locations. The member is also responsible for annual fees, and/or fees for various special services and amenities.

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon (at) superdiligence (dot) com
Due Diligence, Inc.
www. superdiligence (dot) com

Definition

Phrases abound in this very new market niche, depending on factors such as the types of developers, locations, and styles of programs. The following phrases are most often used:

• luxury fractional property
• luxury fractional residence
• luxury fractional home
• luxury fractional second home
• luxury vacation residence club
• private membership club
• private residence club
• private vacation club

To be most comprehensive, a universal definition of the luxury fractional property niche should include the following elements:

• a high level of exclusivity
• a private club
• a real estate investment vs. a simple vacation
• affluent customers
• an investment asset
• concierge service
• event and activity reservations
• four and five star level of services
• highest-level finish work
• low-pressure sales tactics
• housekeeping service
• no general public access
• no sales gimmicks
• pre-arrival grocery shopping
• privacy
• relationship selling
• shared ownership
• sophistication
• top drawer furnishings
• trip planning

Background and History

The oldest fractional ownership method is when an extended family or group of friends cooperate by sharing the use of a vacation house, and allocating the costs throughout the group to lower each member’s individual financial burden.

Timesharing, a form of fractional ownership, began in in the early 1960s. First, European families decided to join together to purchase vacation homes, to “share” the costs and “share” the time spent. Soon, resorts in Europe started selling “weeks” in “shares” of “time” at their resorts. This concept migrated to the in the early 1970s, with the first timeshare units typically converted from motels and hotels and sold as efficiencies and one bedrooms. The concept quickly spread through resorts and condominium projects in the , and the process of swapping timeshares began by 1974.

While the timeshare industry suffered very serious reputation issues for some time, Marriott Hotels and others worked hard to bring the industry into a respectable position, and by the early 1980s, over 150,000 timeshares were active in some 500 resorts. By 2000, there were over 5,000 resorts with over 5 million timeshare vacation properties.

The first fractionals, basically just portions of a property larger than time-share portions, started appearing in 1971 and 1972, with pioneers such as Email Hanslin and Carl Berry creating larger then 1 or 2-week programs, and building and marketing true fractional properties. Unfortunately, these programs did not catch on with the public, and the timeshare industry flourished.

In 1992, the Deer Valley Club was created in Park City, Utah, and the Franz Klammer Lodge was started in Telluride, Colorado . These were the first luxury fractional properties, and Derring, Hanna and Whitteron, founders of the Deer Valley Club, created the phrase ‘private residence club.’

Soon, everyone from small developers to the Four Seasons and the Ritz-Carlton jumped on the bandwagon. The early concentration of the industry was in the Rocky Mountain ski-areas, including Aspen, Jackson Hole, Lake Tahoe, Park City , Snowmass, Steamboat Springs, Sun Valley , Telluride and Vail. This quickly expanded into many destination resorts, golf resorts, beach resorts, and even urban areas in the US, Mexico, and the Caribbean, including Arizona, Bermuda, Cabos San Lucas, California., Charleston, Florida, Grand Bahama Island, Grand Caymans, Hawaii, Hilton Head, New York City, Palm Desert, Palm Springs, Pinehurst, Scottsdale, St. Barths, St. Johns, and Texas.

The industry boomed to over $510 million in sales in 2003 with about 150 projects, and by the end of 2004, about 200 fractional property projects existed in one form or another. The industry is expected to reach $1 billion in annual sales within 2 to 3 years.

Structure

There are two types of luxury fractional property structures, the straight fractional program and the club-style program.

Fractional-ownership programs fall between owning a second home completely, and time-share programs. Full ownership means you have exclusive use, and all the responsibilities. Time-share purchases give you a set number of weeks that you can use at their resorts, but you do not own any of the real estate.

Purchasing a fractional-ownership program gives you a “fraction” of the property rather then the entire property. You receive a legal deed to the property giving you an undivided, fractional fee-simple interest in the property, also known as strata title ownership. You share the costs with the other owners of the balance of the fractions. Shares in fractional-ownership programs range from 1/13^th to 1/2, with the most common share size being the 1/4 share.

Typically, some form of professional third-party is responsible for the management of the property, with all the fractional owners contributing their share of the costs. In some cases, a homeowner’s association model is used, where you sub-lease the shares in the property from the association, who in turn leases the property from the developers. Each fractional owner is also responsible for their share of property taxes, insurance, utilities, upgrades, remodeling, etc.

Owners of fractional shares can re-sell their shares, often for a profit, or leave them to family members in their estate.

Club programs differ from fractionals in that you first buy a membership in a private club, then commit to paying annual dues and some variable costs. For that, you receive the right to use a number of weeks every year, choosing from a number of upscale properties in the club list.

Club members cannot typically re-sell their memberships, but usually can sell their memberships (but not their dues and costs) back to the club, sometimes for 100% of the original cost, sometimes less. Making a profit is usually not the case with memberships, although some newer program models will raise the membership return as the new membership fee grows over time.

The club is responsible for all property requirements, including employee costs, general overhead, maintenance, taxes, utilities, upgrading, remodeling, etc.

Target Customers

The traditional timeshares typically focus on customers in the $50 to $100 thousand income range. Fractionals are typically targeting customers with incomes north of $150,000, and luxury fractional programs target customers above a minimum of $250,000 annual income, with $500,000 and above often preferred. The luxury fractional programs also accommodate wealthy customers whose assets outweigh their income. Customers of luxury fractional programs are motivated more by the ‘soft factors’ such as amenities, luxurious appointments, privacy and exclusivity as opposed to the cost of the program.

There are other issues and topics that would complete this assessment, including pricing, types of properties, legal issues, market information, performance of luxury fractional properties, and industry developments. If you are interested in learning more, please email me at charlesbacon (at) superdiligence (dot) com.

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon (at) superdiligence (dot) com
Due Diligence, Inc.
www. superdiligence (dot) com