Fractional Ownership, Private Residence Clubs, Condo Hotels and More: Second Home Buying Report

Fractional Ownership, Private Residence Clubs, Condo Hotels and More: Second Home Buying Report
By John Kazanjian for FractionalExchange.com

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 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:

The US economy recovered from a deep recession.

• Cash in money markets languished with the lowest interest rates in decades.
• Confidence in the stock market remained and continues to remain low with consumers seeking out alternative investment opportunities.
• Consumers in the US and Canada saw second home real estate as a safe haven for investment appreciation with the opportunity to also enjoy the use of their new asset.
• Second homes also provide investment diversification, which has become a critical concern among consumers since the stock market crash in 2000 and 2001.

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.”

I like to emphasize that 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.

For more information on fractional ownership in private residence clubs and on condo hotels, including listings and photos of available properties, visit the Star Resort Group website at www.starresortgroup.com

About the Author:

John R. Kazanjian is the Managing Director for RTK Resort Group. He is concurrently serving as Project Director for Piazza San Lorenzo, a luxury high-lifestyle mixed-use community on San Antonio’s famed Riverwalk. Mr. Kazanjian most recently served as Executive Vice President of Star Resort Group, was a co-founder of The World’s Finest Resorts and concurrently served as CEO of Resort Development & Advisors.  http://www.rtkresorts.com/RTK%20Principals%20Bios-Kazanjian.htm