Whole Ownership To Fractonal Conversions.0210

Fractional Focus Sarah Rezak Whole Ownership to Fractional Conversions—Tips & Pitfalls M any developers who brought whole ownership condos or second homes to market during this economic mire setbacks in 2008-2009 in markets all around the world. Add to this information the severe absence of acquisition and typically with hotel concierge level services. The flexibility available through rentals and exchange will continue to be attractive are barely staying afloat. In numerous development funding available for new for potential owners. situations, the lender has taken possession resort real estate projects right now, and As a developer having trouble selling a of such assets and is desperately trying we can assume that new purpose-built million-dollar home in today’s marketplace, to make them cash flow. A conversion fractional developments will likely be more it is easy to consider fractional conversion. of some whole ownership inventory to a limited in the immediate future. Why not try to sell fractions of each fractional offering may be a life preserver Despite this outlook, many industry home in $200,000 increments? It’s a great for some. For others, it will only worsen the experts believe the industry will come back product when it works, but it will not be financial distress. strong because of the value proposition it successful for every project. How do you As you consider offering fractional provides. Assuming that the credit crunch know if fractional ownership conversion is real estate, recognize that the industry eases and fractional consumer financing right for your whole ownership property? is not recession-proof. The fractional re-emerges in the next 12 to 24 months, There will be no demand for real estate industry grew rapidly in the it is expected that fractional real estate fractional real estate where there has been early 2000s, as documented by Ragatz sales volumes will ascend again. Existing no historical demand for vacation homes Associates. By 2004, the industry reached fractional offerings that have been able to in the past. Successful fractional offerings $1.5 billion in sales revenues and grew weather the downturn and well-planned in a healthy economy provided exclusive steadily for the next three years, reaching conversion offerings will have both appeal access to multi-million dollar experiences $2.3 billion in sales revenues in 2007. By and an advantageous market position. at rational and affordable prices. Scarcity 2008, however, total sales revenues were and market demand are key ingredients again estimated at the 2004 level of $1.5 to create the urgency needed to motivate billion. At print-time for this article, no purchases. If a development of whole industry-wide data was available for 2009; ownership condominiums includes 200 but by all anecdotal accounts among homes, do not expect that fractional is the industry insiders, 2009 will show further answer to sell out the community. It might declines. The latest update on 2009 sales provide a complementary offering for a activity will be presented at the Ragatz handful of homes, but it could easily not be Associates Fractional Interest Conference a good fit for the market. in March 2010. A healthy tourist market with a Despite all these changes, however, vast tourist infrastructure nearby is also the industry’s decline between 2007 and critical. Potential consumers should want 2008 was less dramatic other industries’ to visit the area often at a variety of times that are vying for discretionary consumer Tips throughout the year, and tourism demand dollars. As Dick Ragatz pointed out In our current economy, speculation overall should be fairly stable. Access to during the Ragatz Associates Fractional coupled with unsustainable yearly the fractional home should be relatively Interest Conference in March 2009, appreciation is gone. It follows that easy and typically less than five hours total fractional real estate sales were down 34% when second home purchases are made, travel time from the primary residence in 2008—compared to the stock market, consumers will buy for their own use and of the consumer. Within a tourism-based which was down 38%, whole ownership will want only the amount of time they can community, fractional offerings must offer vacation home sales (down 41%), boat sales use (i.e., fractional). The general desire to A+ proximity to appealing amenities (down 39%), and motor home sales (down preserve wealth will certainly not dissipate (ski hills, beaches, golf courses) and/or 35%). As discretionary spending goes, soon, and it follows that consumers will remarkable views. maybe fractional real estate offers slightly buy what they can afford and justify. The less gloom during a recession. desire to spend time with family while Notes of Caution Major developer players in the Putting all of these location issues on vacations lends itself to the product fractional field albeit did suffer significant aside, some additional challenges for because it provides hassle-free ownership, 30 Developments February 2010

fractional real estate include marketing and housekeeping, maintenance, sales concerns, operational complexities, capital reserve funding for thee built-product conversion problems, interiors of the homes, on-sitee consumer financing restrictions, and staff, etc. One of the biggest regulatory issues. challenges for fractional Your sales team is going to have to offerings is creating a use sell each home several more times once plan that provides fair and they are fractionalized. Be sure to think equitable use to all owners about how you will generate the additional without a great deal of effort leads to do this. You will need talented and on their part. Do not mimic trained sales representatives who can build what others have done relationships, explain the product and why in other markets; rather, it makes sense, and close sales. Be prepared consider tourism patterns to have significantly higher marketing specific to your market, think k and sales expenses than you would with outside the box, and seek help reception desk for on-site employees will traditional whole ownership offerings. from experts. be required. Unit configurations may Your operational product also Consider how your built inventory need to be re-thought; one-bedroom and should make sense. Consider the will work for fractional ownership. You’ll studio condos are very difficult to sell as differences between whole ownership need operational storage space for back-up homes and fractionalized homes, in inventory of housewares and housekeeping terms of reservations, exchange, rental, and maintenance supplies. Offices and a Continues on page 49 February 2010 Developments 31

Fractiona Focus Fractionall Focus Whole Ownership to Fractional Conversions cont fractional real estate because they do not accommodate typical vacation travel parties. s. Fractional real estate is regulated as timeshare and therefore requires a significant legal investment before you can begin selling it. Steve Peterson of Ballard Spahr LLP notes, “It is critical to look at local zoning regulations and the Covenants, Conditions and Restrictions recorded against the property to determine if fractional ownership is permitted in the otherwise whole ownership project.” There e are numerous skilled attorneys who can assist, but make sure you’ve analyzed the feasibility of the offering before you make this financial investment. Finally, the credit crunch is dramatically impacting fractional real estate. While some institutional lenders provided consumer financing in the past, there are none doing it now on a national scale. Local banks/branches in some communities are offering small amounts of funding resources but typically with limited capacity and relatively unfavorable terms. only cash buyers is daunting and can Sarah Rezak is founder of Rezak Resort According to Dustin Carfield of NextStar devastate the bottom line returns of Consulting, an international resort consulting and Funding, “a developer has to be creative a project.” market research firm; she has 12 years of industry in the current environment—this may Recognize as well that offering experience in most U.S. states and over 12 countries. fractional interests in your whole ownership She also acts as business development director community may limit whole ownership for LaTour Hotels and Resorts. Her e-mail is consumers’ ability to get approval for sarahrezak@gmail.com. There will be case studies FMAC or FNMA conforming loans depending on the overall legal structure of of great success stories, and the project. these will be due to careful Finding Success strategic planning and None of these challenges are insurmountable, but each should be involvement of fractional analyzed well in advance of proceeding with a decision to convert whole ownership industry experts. This industry homes or condos to a fractional offering. steadily grew until last year, There will be case studies of great success stories, and these will be due to careful and it will grow again. strategic planning and involvement of fractional industry experts. This industry steadily grew until last year, and it will grow again. Take advantage of the opportunity to learn from the mistakes already made involve a developer guarantee or perhaps a by others as you plan for any fractional consumer financing facility offered as seller conversion of whole ownership second financing by the developer in conjunction home real estate. D with the construction lender. However, the alternative of competing in this market with February 2010 Developments 49

Whole Ownership To Fractonal Conversions.0210

by Sarah Glasgow on Feb 11, 2010

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Whole Ownership To Fractonal Conversions.0210 — Document Transcript