The Fractional Market: The Pros and Cons
January 1, 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.; function voidFunc() { } voidFunc();)
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.”
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