The 5 W’s of Fractional Ownership
Fractional ownerships is a percentage of ownership in real estate property. On Maui, this can range from ½ share to a 1/6 share (or 60 days, the minimum number of consecutive days that the County allows in fractional ownership) otherwise it will be considered as “time-share”, as defined in Hawaii Revised Statutes, Chapter 514E, a totally different type of ownership. Please note that every State has different rules & regulations on the minimum size of the fraction.
As long as the fractional ownership-use period is not less than sixty days per year then the State of Hawaii cannot define it as a “timeshare”. This is important because many Associations will not allow timeshares, but a fractional cannot be denied to owners as a form of co-tenancy unless the association documents specifically prohibit it or the homeowner’s association votes to amend their project Declaration.
The size of the fraction a person owns corresponds to the amount of time he/she is entitled to use the property, for example if a ½ share is purchased, the buyers is entitled to use the property 26 weeks a year.
This form of ownership has been around longer than our country has existed. Historically, cotenants operated under a “co-tenancy agreement” or “Hui” in Hawaiian.
It not only applies to beachfront condo projects and luxury golf course homes, but also to hotel rooms, jet planes, boats, cars and as many other kinds of property as can be used by multiple owners who only need the property part of the time and can be used by others the rest of the time.
“Fractional” owners versus “single owners” legally divide up time and space and share all expenses like the real estate property taxes, insurance, maintenance fees, repairs, utilities, the purchase of furniture, fixtures and equipment inside, as well as a right to use all of the shared amenities of the project according to the amount of the fraction owned.
“Fractional ownership” is different from “condominium ownership” in that condominiums are a different form of co-tenancy with rules set up by developers and controlled by the condominium law (either Chapter 514A or 514B, Hawaii Revised Statutes). It allows people to deed, finance and use their interests almost like fee simple ownership. Fractional owners also share the individual management and decision-making for the specific property.
How does Fractional Ownership differ from Tenant In Common (TIC)?
Although both are forms of co-tenancy, there is a substantial difference between them. TIC will usually have two or more owners that all own an undivided ownership portion but share the same deed and rely upon each other to govern the property and manage the partnership. Hawaii seems to have long been a perfect place for this type of ownership idea, but while partners have been buying property with undivided ownership portions as tenants in common for decades, fractional ownership now seems to be moving to the forefront as the preferred method of purchase.
The reason for this is because fractional real estate ownership provides a legal and owner use structure that makes sharing a property easier and with more autonomy from the other owners. Fractional ownership is an ownership arrangement in which two to six individuals, or entities, hold shared legal title to a single parcel of real estate or condominium unit, but they each have separate deeds. E ach deed provides unfettered access and use during a set period of time, with full rights of fee simple ownership during that time.
In a property with six fractional owners, each owner would clear title for his or her legal one-sixth interest. That fractional owner can then mortgage it or sell it without having to consult with the other fractional owners. You can even 1031 exchange into or out of a fractional ownership. So, unlike tenants in common, you can operate with much greater independence and autonomy. If someone defaults on their fractional mortgage, the lender can foreclose on the fraction but the other owners are unaffected. That is not the case with tenants in common where there is only one deed with all mortgages on it.
To see some of the various categories of items that can be fractionalized go to: www.FractionalLife.com.
2nd Home, 3rd Home, 4th Home Buyers are purchasing Fractionals. CEO’s,CFO’s, COO’s, VIP’s … Fractionals are the modern version of the 2nd home
People have been purchasing real property in the fractional style for hundreds of years. Historically, co-tenants operated under a “co-tenancy agreement”. Only recently have we been able to legally separate the shares of ownership so as to protect the rights of all the owners. Along with this separation comes the ability to mortgage individual fractional.
Resort destinations all over the world. Fractionals are commonly located in popular vacation destinations. Locations typically include direct access to a lifestyle attraction such as oceans, golf courses, ski resorts, etc.
Fractional ownership use must also comply with the CC&R’s for that property’s homeowner’s association. If the County zoning allows vacation rentals but the homeowner’s association does not, then fractional ownership does not change that restriction. All restrictions on the property remain the same when fractions are applied. Other than that, the fractional owner may do whatever any other fee simple owner can do with their property during their use period.
It is estimated that total sales volume in the Fractional Ownership industry is over $2 billion per year, and growing rapidly. It is also estimated that 40,000 households have purchased fractional ownership in resort real estate. This represents about 1% of all households in the U.S. with incomes over $200,000. Even if a penetration rate of only 10% is reached, that would leave about 90% of the market at this level untapped.
There is, in fact, a strong and growing public awareness, acceptance and interest in purchasing fractional ownership interests. McEntire Realty has recently been flooded with questions and interest in fractional ownership. It appears that this trend has already taken hold in many resort areas on the mainland and is now finally making it's way to Maui. It is McEntire Realty’s opinion that as Maui’s resort real estate prices continue to rise, and with most property owners only staying in their properties for a few weeks a year anyway, fractional ownership purchases will undoubtedly become more and more popular.
Obviously, the prime advantage of fractional ownership is: cost - you get an interest in an asset for a portion of the price you would have to pay to buy the same asset outright. There are other benefits as well, including:
1) ease of mortgaging, selling or transferring your ownership interest;
2) no maintenance worries since the asset is managed for you; and
3) improving your lifestyle.
For many buyers, fractional real estate may be their only option if they want to buy into the Maui market. For others, it may mean that they can enter the Maui market sooner and in a much better location, and stop having to wait to be able to afford a beachfront condo in a premium location (often in an appreciating market). Because of fractional ownership’s simplicity and affordability it is quickly becoming one of the fastest growing ownership alternatives in resort destinations such as Maui.
Most fractional ownership purchases require you to become a member of two associations. One is the homeowner’s association for the condominium project, and the other is the association for the fractional ownership project. Each association takes care of the things that are the unique concern of either the entire condo project or just the group of fractional owners. A third-party manager is usually employed by the fractional ownership project to maintain the property, and collect from all of the fractional owners who contribute equally to the cost of maintenance, management, and a fund for future replacement of furnishings and normal repairs.
Why am I involved in Fractional Ownership?
I have become known as specialists in the fractional industry, and offer an array of fractional ownership services on Maui such as assistance with a whole ownership acquisition in a fractional-friendly condo association, a fractional purchase, a fractional sale, the setup and conversion of a whole ownership interest into a fractional ownership plan, various types of fractional financing and fractional property management.
I maintain active lists of fractional purchase opportunities (many that are unlisted) as well as fractional-friendly condo locations on Maui. Even if you already have your other co-tenants selected, I will assist you in structuring a fractional ownership plan that takes into consideration the Maui County code, Hawaii Revised Statutes and the individual condominium project’s declarations on multiple ownership.
Sometimes several interested fractional buyers are looking for something specific and would like to find their other fractional owners first so that they can reduce their risk when attempting to buy a specific property or in a specific location. I also keep lists of these future fractional owners and the locations that they want to purchase in. So if this exciting new ownership method interests you then contact your specialist Fabienne Gandall for more information.
Call or e-mail me at
808-280-8167 or fabienne@RelocateOnMaui.com
To get my FREE Consumer’s Guide to Purchasing Fractionals on Maui
and about properties available for sale as fractional ownerships
As of January 2012, I did not find any lender who would loan for a fraction.
The only solution would be to either have the Seller financing it or buying it cash.
I keep looking for the right lender though and I'm not giving up on that