Florida Fractional Ownership

Condo hotels are condominium units operated in a hotel setting that are sold to individual investors. These units may be used as vacation homes or placed in the rental pool to generate income.

Condo hotels typically charge owner-investors a hefty split of any rental income: 50% is common. This limits potential rental income when the unit is unused by the owner.

A benefit of condo hotels is that condo owners enjoy access to the hotel’s amenities. This convenience factor is offset by the fees charged for these services.

Many large hoteliers are devoting space in their resort hotels to the condo concept. Prices vary widely, from $200,000 to $5,000,000. Top-tier hotel chains are aggressively entering this business: Trump, Ritz-Carlton, Hilton, Starwood, Four Seasons and St. Regis all have condo hotel products.Condos situated within hotels often command a 20% to 100% premium over comparable condominiums not in a hotel setting.

Hotel-based condos maintain easy liquidity as they can be sold on the open market. However, many condo hotel operators impose significant “sponsor fees” that can reduce the return realized on the sale of a condo property.

Private residence clubs offer shared ownership of a specific luxury vacation property that is typically located in a resort. Owners are allowed to place the unused portion of their time in a rental pool, which can generate some income. An additional benefit is that owners may rent available units to accommodate large numbers of guests for a family or business gathering.

The cost of residence club ownership varies with location and the size and type of property, as well as the size of the ownership interval: units can range from $60,000 to $650,000.

Annual maintenance and management fees are charged. Owners bear little responsibility for the maintenance and operation of their property, which is a significant advantage over full ownership of a vacation property.

Many of the major luxury hotel brands have or are developing private residence clubs at their resort properties. Those active in this market include The Timbers, St. Regis, Raffles, Fairmont Resorts, Regent, Marriott Grand Residence Clubs and Ritz-Carlton Clubs.

Private residence club owners pay a premium for the pride of ownership at a brand-name property. While it is possible to sell residence club units, there is no established secondary market, and sponsor fees can significantly reduce the net sales price realized.

As a member of a destination club, the buyer gains access to a portfolio of luxury vacation homes, often in a variety of resort locations. Access is generally for 30 days’ of vacation time per year, and each club has clear procedures for reserving times and locations.

Destination club membership works like the familiar country club model: members pay a one-time initial membership fee as well as annual membership dues. The membership fee may vary from $20,000 to $1.5 million, depending upon the caliber of the club and the quality, size and location of its properties. The average membership fee for upper-bracket destination clubs is $300,000 - $400,000.

Annual dues for high-end destination clubs range from $25,000 to $35,000. Some clubs charge a nightly residence fee as well.

Buyers of destination club memberships do not own equity in the property; rather they own a membership in the club. Generally this increases the liquidity of the owner’s investment; members withdrawing from a destination club may be refunded 80% to 100% of their membership fee. But clubs typically impose constraints on member withdrawals, often specifying that three new members must be added for every member withdrawing.

The largest destination club is Exclusive Resorts, with some 2500 members and 300 properties. Exclusive Resorts has a 65% market share in the destination club category. Other large players are Yellowstone Club World, Solstice, Crescendo and Quintess. There is some consolidation underway in this industry, with Ultimate Resort and Private Escapes recently announcing their merger.

The destination club membership buyer depends upon the health and stability of the Club’s business model for the continuing liquidity and value of his membership. Abercrombie and Kent Private Retreats was one of the pioneers of the destination club model. When they filed for Chapter 11 bankruptcy protection in 2006, the value of their 874 members’ investment was at risk. Generally, destination clubs have taken steps to assure sound business practices to protect the value of owner’s memberships.  

Timeshares offer the buyer the opportunity to purchase time at fully furnished vacation accommodations in weekly increments. The owner is then entitled to vacation at the timeshare location for the specified amount of time each year. Timeshare properties are typically located in a condominium or hotel setting.

Some timeshare plans offer owners the opportunity to exchange their time in one location for a similar amount of time in other locations managed by the timeshare company.

Timeshares are typically sold in 1-2 week increments so they have the appeal of affordability. Average price of a timeshare in 2005 was $16,000 per week.

Timeshare owners have no equity interest in the property; they have purchased the right to enjoy a specified amount of time annually at the timeshare.

Timeshare units may be sold or exchanged, though there is a small market for this. Owners selling timeshare units typically recognize only 20% - 35% of their original purchase price.

Major players in the timeshare market are RCI, Starwood, Marriott, Hilton and Hyatt. Timeshares have had a poor reputation in the past, for being low-quality properties. With consolidation in the sector and the participation of these large hospitality companies, the quality and reputation of timeshare properties have improved.

Timeshares are the low-cost entry point to shared ownership of a vacation property. Timeshare owners possess no equity, but do have the right of access to the property for the contracted-for time segment, generally 1-2 weeks per year. Liquidity and resale values are low.

If you’re looking for a shared ownership vacation home, you’re probably already alert to the primary benefit - reduced cost! Since vacation homes are, on average, used only 3-4 weeks per year, it is more cost-effective to share the ownership of a second home with a small group of owners. The benefit is that you are sharing the burden of the cost to purchase and maintain the home, as well as the duties of ownership, such as paying bills, scheduling maintenance, provisioning, etc.

But there is a wide array of shared ownership models to choose from: traditional timeshares, residence clubs, destination clubs, condo hotels, and shared ownership (sometimes called co-ownership) fractional properties.

These models of shared vacation home ownership represent a spectrum of equity ownership, from timeshares which are purely time-based rentals – to the shared ownership fractional where each owner owns a deeded share of the property. Residence clubs, destination clubs and condo hotels fall in the middle of this spectrum, with some ownership and some time-reserved aspects.

We will describe each of these more fully in future entries, comparing them to the shared ownership fractional model.

The National Association of Realtors reported on April 2 that sales of vacation homes in 2007 fell 30.6% from 2006, to 740,000 units. Sales of primary residences fell 10% to 4.34 million units; and sales of investment properties fell 18.1% to 1.35 million units in 2007.

This large drop in vacation home sales is in strong contrast to the performance of the fractional market. Ragatz Associates’ annual survey of fractional homes, private residence clubs and destination clubs found combined sales of $2.3 billion in 2007, up 8.3% over 2006.

This striking contrast in the market for fully-owned vacation homes as compared to shared ownership seems to indicate that what we’ve been thinking all along is true: fractional ownership makes sense! And it makes even more sense in a struggling economy.

Fractional ownership of luxury vacation properties, that on average are used less than one month per year, is cost-effective. Owners pay only for the amount of usage they desire, without the costs and headaches of full ownership.

Fractional ownership makes sense, as well, in environmental terms. With growing awareness of the longterm impacts of consumption on the environment, it’s certainly better to share large assets such as vacation homes. The environmental impact of twelve families sharing one luxury vacation residence is far less than that of maintaining twelve separate residences!

We believe the luxury fractional vacation home market will continue to grow, even in the current real estate market. It’s a product that makes good economic and environmental sense, and consumers are becoming more aware of fractional ownership as a viable alternative.

Hello - Welcome to my Florida Fractional Ownership blog!

It’s all about fractional ownership of luxury vacation homes in Florida. Where they are - what’s fractional ownership? - what are my choices? - and many more issues of interest to the discriminating luxury vacation home buyer who wants to get the most for his money.