FAQ’s About Fractional Ownership

:: Read Current Honolulu Advertiser article on Fractional Ownership

:: View Current Fractional/Partial Ownership Listings in South Maui

What is Fractional Ownership?
Fractional ownership is simply “co-tenancy,” meaning the owner is one of two or more total owners in a group that share the costs and use of property. This form of ownership has been around longer than our country has existed. Historically, cotenants operated under a “co-tenancy agreement”. A fraction is a portion of something, and fractional ownership simply divides an expensive asset into percentage shares, resulting in an ownership of between one-half and one-sixth of the asset. With vacation homes, it is accompanied by the exclusive right to use the property for no less than that percentage of the year owned.

Fractional ownership is entirely normal ownership of property, but only for a portion of the time. 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. To see the various categories of items that can be fractionalized go to www.fractionallife.com. To further research or review fractional ownership opportunities go to www.heliumreport.com.

Why co-own and share a vacation home?
While many dream of owning a vacation home, most either can’t afford the type of property they want, or they reason that they would not use the vacation home enough to justify the expense. Fractional ownership is the solution to these problems by allowing you to only pay a fraction of the costs and ongoing expenses of vacation home ownership, and sharing the risks of unforeseen maintenance problems and/or value depreciation with others. Of course, in exchange for spreading the costs and risks, you give up some of the usage rights and freedoms that you would have if you owned the whole property by yourself. But life’s commitments prevent most people from using a vacation home more than just a few weeks or months each year anyway. For many, some loss of freedom and control is an acceptable sacrifice for the huge cost savings that fractional ownership offers.

Fractional vacation home ownership is also becoming increasingly popular among those who already own a vacation home but feel burdened by the expense, upkeep and management of a property they use infrequently or are regularly absent from. Rather than sell a vacation home they love, these people opt to sell one or more fractional ownership interests to others who will use the home when they won’t be using it, and will help share the costs and burdens of it.

How is Fractional Ownership different from normal ownership?
“Normal” owners own all of the property by themselves and pay all of the taxes, insurance, maintenance fees, repairs, utilities and so on by themselves. If it is a condominium then you only own the airspace inside the condominium, including the furniture, fixtures and equipment inside, as well as a right to use all of the shared amenities of the project.

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). This special kind of co-tenancy was created so multiple people could share a usually small piece of land or one of many boxes of air space stacked up along beaches, rivers, canyons or ski mountains where more people wanted to be than could fit on the land in any other way. It allows people to deed, finance and use their interests almost like fee simple ownership.

People can own condominiums in fractions just as they can own fractions of houses, jet planes and boats. “Fractional” owners legally divide up time and space and share all expenses and uses according to the amount of the fraction owned. A one-sixth owner usually gets to use one-sixth of the days of the year and pays one-sixth of the taxes, insurance, maintenance fees, repairs and remodeling of the property. Fractional owners share the management and decision-making for the property.

return to top

How is Fractional Ownership different from timeshares?
There are significant differences between the arrangements historically referred to as “timeshares”, and most modern fractional ownership arrangements. Put simply, the meaningful difference between old-fashioned timeshares and modern fractional ownership is the extent of ownership and control given to the users of the Property. Old-fashioned timeshares typically did not involve direct ownership of real estate, meaning that the users of the property did not actually own or control it. Modern fractional ownership almost always involves direct ownership, meaning that each user has a deeded interest, and this means greater owner control. Even in instances where a fractional ownership arrangement does not involve direct ownership, the users own and control the entirety of the small company or association that was formed to hold title.

But generalizations about the distinction between timeshares and fractional ownership can be misleading. Having deeded ownership does not necessarily mean you have any particular level of control over how the property will be managed, what your ownership costs will be in the future, or whether you have any meaningful prospects of making money based on increasing property value. These issues must be examined based solely on the documents governing the project. Here are the key questions to ask yourself about a fractional ownership arrangement:

  • What is my per-night cost when I add up all of my annual costs (including management fees and dues) and divide them by the number of days I can use the property each year?
  • Will I have any control over how my costs (particularly management fees and dues) increase over time and how the property is managed and maintained?
  • To what extent am I free to rent out the vacation home and control the rent charged?
  • What restrictions apply to resale, what competition will I face within the property and in the immediate area, and what financing will be available to my buyer?

How popular is Fractional Ownership?
Total sales volume in the Fractional Ownership industry was over $2 billion in 2006, and is 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 noticed the increase in questions and overall 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.

What are the advantages of Fractional Ownership?
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:

  • Ease of mortgaging, selling or transferring your ownership interest.
  • No maintenance worries since the asset is managed for you.
  • 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.

What are the disadvantages of Fractional Ownership?
Fractional ownership involves the risk of sharing property use with others and relying on them to fulfill their obligations. Sharing use means that you will not be able to do what you want when you want, and that others may do things that displease you. Sharing obligations means that necessary maintenance and management might not be completed. There is no way to eliminate these risks, but there are ways to lower them. Perhaps the single most important thing you can do to lower the risk of fractional ownership is to have a thorough, written, signed ownership agreement that deals with all of the issues, including events you don't expect to happen, the possibility that people you don't know will be in the group as the result of a death or a resale, and the reality that people change and you might not get along with the other co-owners as well as you do now.

Besides having an agreement, these steps will help diminish the risk of fractional co-ownership:

  • Carefully investigate the background and financial qualification of potential co-owners.
  • Use a monthly assessment system for collecting payments from the group, and pay all bills from a group account.
  • Assign each of the essential management tasks to a specific person either within or outside the group.
  • Have each co-owner contribute to a default reserve fund that will be used to pay mortgage interest (if there is a group mortgage), property tax or insurance if a co-owner fails to contribute his/her share, and make sure you don’t accidentally spend the money on maintenance or repairs.
  • Give the group the power to quickly force out a co-owner who is not fulfilling his/her obligations, and use that power before the group is in serious financial trouble.

return to top

Is Fractional Ownership in Hawaii different than on the mainland?
Yes. Different locations have different laws relating to the legal division of property in this manner. The state of Hawaii requires that a fractional owner have an exclusive right to use the property for no less than sixty days per year. Anything less is a considered a “timeshare” as defined in Hawaii Revised Statutes, Chapter 514E.

For that reason, most fractional offerings in Hawaii will be in intervals of sixty days or more, or one-sixth of a year. 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.

Is a Fractional Owner different than a Tenant In Common (TIC)?
Yes. Although both are forms of co-tenancy, there is a substantial difference between them. Tenants in common 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. Each 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.

Are there zoning or other restrictions to Fractional Ownership?
Yes. It varies within the state of Hawaii but Maui county has a law called the “illegal transient owner” law which applies to all residentially zoned property. This is an outdated and unenforceable law but until it is changed it means that any residentially zoned property has to be leased or otherwise occupied by the owner for no less than six months of the year. This law limits fractional ownership on residentially zoned properties to no less than six months a year or a one-half fractional ownership interest.

Hotel zoned property can allow up to six fractional owners to have an exclusive right to use the property for no less than sixty days per year without being considered a “timeshare” as defined in Hawaii Revised Statutes, Chapter 514E. For that reason, most fractional offerings in Hawaii will be in hotel zoned properties and will be in intervals of sixty days or one-sixth of a year.

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.

How are Fractional Ownership plans managed?
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.

What is McEntire Realty’s involvement in Fractional Ownership?
McEntire Realty is a specialist in the fractional industry, and offers 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 even fractional property management.

McEntire Realty has handled more fractional transactions than any other full service real estate brokerage in South Maui and has hands-on experience in fractional setup, ownership, sales, financing and management. Even other real estate brokers and brokerages contact us when considering fractional transactions.

McEntire Realty also maintains active lists of fractional purchase opportunities (many that are unlisted) as well as fractional-friendly condo locations on Maui. If you already have your other co-tenants selected, McEntire Realty 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. McEntire Realty also keeps 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 a specialist at McEntire Realty for more information.

 

return to top