About Fractional Ownership
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What is fractional ownership?
Fractional ownership is the legal sharing of a second property with multiple owners under an arrangement which allocates usage rights of the property to each owner. It can offer a significant lifestyle enhancement because it gives an owner access to a luxury property (or properties) at a fraction of the full cost.
A range of structures have been developed whereby title to the property is divided in a way that enables each owner to have a “deeded” interest which can be sold, bequeathed or mortgaged without affecting or requiring approval from the other owners.
Main features of fractional ownership
With most (but not all) fractional arrangements, the shared property will be owned by the participants, either by being named on the legal title or by owning the property via a trust, nominee or company structure.
Differentiating fractional ownership from timeshare
Since fractional arrangements allocates use of a property based on time, fractional ownership is subject to many of the same rules and regulations as timeshare, including new regulations introduced in the EU in February 2011. Most (but not all) fractional schemes give each owner a form of deeded interest in the property and timeshare rarely does. The main difference is the quality of the property and the facilities, the number of owners of each property, each owner’s control over management of the property and the exit routes -
Determining how the property will be used by the owners is a vital step when setting up a fractional ownership arrangement, and can have a big impact on its marketability to potential buyers. A fair usage arrangement will strike a balance between certainty and flexibility for the owners. The most appropriate structure will depend on the target market, type and location of the property and the number of fractional owners. Usage rights may be based on a fixed calendar, a rotating calendar, a reservation system or a combination of these.
Operating expenses such as maintenance, repairs, furniture replacement, insurance and management of the property will usually be divided in proportion to ownership, so a 25% owner will pay 25% of these expenses. Sharing the ownership costs in this way is a major attraction of fractional ownership.
Fractional documentation will need to set out clearly how much power the individuals will have and how various types of owner decisions will be made. Certain obligations (such as payment of maintenance charges and occupying the property in accordance with the usage rights) should be mandatory so as to prevent a majority of owners taking actions which may prejudice the arrangement.
Prospective fractional owners will want to be sure that the property will be effectively managed. These duties include managing the usage rights, cleaning, maintaining and insuring the property and corporate administration of the fractional arrangements. Whilst these functions can be handled by the owners, it is normally more convenient for them to be carried out or arranged by a professional fractional administrator.
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