The Fractional Market: The Pros and Cons

William Kissel

01/01/2004

Equity In, Nothing Out
Like the old-fashioned, much-maligned time-share, fractional home ownership is easy to get into and harder to exit from gracefully. Members suffering financial hardships, getting divorced or moving to another continent may find it tough to recoup their investment. The economic reality is that these are fee-simple ownership deeds in a fraction of a house, and real estate agents claim that they are difficult to sell at a profit in the secondary market while the industry is still in its infancy. Plus, there is no built-in profit incentive for the developer to resell it on your behalf.

On the other hand, limited-membership clubs like Exclusive Resorts and Private Retreats offer no equity but will gladly refund 80 to 100 percent of your membership fee. The reason is simple: These clubs work because they limit the number of members, generally to about 400. When members opt to leave, fees to new members typically increase and the club can resell your membership bond at a profit. This profit, as well as interest earned from your investment and money from annual membership dues, allows them to acquire properties, which in turn generate additional equity.  (Click image to enlarge)

It’s Getting Complicated Out There
To maximize their investments, a number of hotel properties have signed management deals with developers, offering homebuyers the opportunity to use hotel services as another benefit of their deeds. For instance, the Residences at the Ritz-Carlton, a seven-story condominium development opening soon on Seven Mile Beach in Grand Cayman, is not connected to the Ritz-Carlton Club. Nevertheless, these wholly owned residential properties are managed by the luxury hotel chain, and members have the option to purchase hotel services and amenities on an à la carte basis.

And, unlike the Ritz-Carlton Club, the Residences offers members the option of using its Endless Service Program. For a one-time fee of $350,000 to $500,000, depending on the size of the home, the Residences will completely furnish the home with everything from Frette linens and Christofle silver, Versace dinner plates and Baccarat crystal to the use of a Mercedes 500SL and a diving boat with a private captain while you are in residence. “If you furnish it yourself at retail, it would cost more than $1 million,” says developer Michael Ryan. “And we maintain it forever. So when a lamp breaks, we just replace it. You never have to worry.”


More Factors To Factor In
Guaranteed weeks at hotel fractionals and most travel clubs like Exclusive Resorts are based on Saturday-to-Saturday or Sunday-to-Sunday travel with a 14-day maximum stay. Few business or vacation travelers plan their time this way anymore. Statistics show that 85 percent of travel is less than five days and centers around long weekends.

Most fractionals and vacation clubs require reservations 90 days in advance for guaranteed usage of properties. Last-minute reservations are usually on a space-available basis.

Travel, food, beverages and spa treatments are not included in any fractional or private club plan. Car service to and from the properties is generally not included, either.

If, for any reason, a vacation club is forced to liquidate or “wind down,” fair market value on all club properties would be assessed. Members would then receive the assets from their deposits on a pro-rata calculation until all are returned.

Connections Are Everything
To further compete with vacation clubs and extend more services to its members, the Ritz-Carlton Club recently partnered with Marquis Jet Partners and the African Collection to provide short-term fractional jet leases (sold in 25-hour increments on a prepaid basis for a single year) and individually tailored safari adventures, respectively. These benefits are offered for an additional fee.

Meanwhile, Private Retreats by Abercrombie & Kent has added Quintessentially, a London-based concierge service, to its list of partners. Quintessentially offers complete concierge services at the club’s apartments in London, Miami, New York, Paris, Rome, San Diego and San Francisco, and promises tickets to top shows and access to restaurants, nightclubs and sporting events that are typically impossible to get into. It helps that Quintessentially cofounder Ben Elliot is the nephew of Camilla Parker-Bowles.

Abercrombie & Kent’s new Distinctive Retreats, which opens for membership in January, operates on the same basis as Private Retreats but will cost twice the price to join and will offer homes in the superluxury category. If Private Retreats is geared to the young millionaire, referred to as the “New Economy Class” by The New York Times, Distinctive Retreats is modeled to appeal to the more seasoned billionaire. 

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