Words: Ashley Rigg
Published: 22/05/2009
Fractional Legal Perspective: Upsides and pointers for success
Guest Perspective by Eric Gummers, Partner at
Howard Kennedy I write this piece having recently returned from visiting a range of real estate developments and after speaking with a variety of people involved in real estate development and sales in the Middle East Region, Eastern Europe, the Americas, the UK and Western Europe.
A bright spot amidst the overall economic news
Amongst all the depressing negative economic news around the Globe, there seems to be one area where there is continued interested and activity: Fractions and shared ownership. This article seeks to examine some of the reasons for the attraction of fractionals.
Nothing New under the Sun
There are very few concepts which are truly new. There are, of course, many instances where families and friends share the use and enjoyment of second properties often as a holiday home. Such arrangements are often arranged on an informal basis.
The growth of fractionals
Using the figures from the recent Northcourse study there are currently some 90 fractional and private residence projects in Europe. Sales of fractional and shared ownership in 2008 in the US were in excess of USD1.5 billion (Ragatz Associates)
We have been advising a number of developers over the past decade who have very successfully added a fractional offering to their whole ownership real estate sales. This has enabled those developers to increase their completed sales by making additional fractional sales to consumers who do not wish to make the commitment of purchasing whole ownership.
Some warning words
The fractional approach will never be the solution for property where there is limited consumer attraction to the particular development and its location. Bluntly phrased, shared ownership will not rescue a poor development concept.
The successful fractional requires considerable thought and planning for the implementation of services and management - it is more complex than making a one-time sale.
5 key upsides
- There is a logic for many potential buyers that in purchasing a fraction they will be able to enjoy the use of a second property that they really need and they will accept paying a reasonable premium for this.
- Offering a fraction creates buyer interest and a number of potential buyers who consider buying a fraction eventually acquire a whole unit
- Fractional purchasers recommend and bring other buyers which is very cost effective marketing
- Fractions bring use and occupancy year round to a project which can enhance value.
- Ongoing management brings ancillary long term income.
Some five pointers from the lawyer's perspective
Correctly structuring a fractional product requires a commitment to investing the time and energy to create a suitable structure that is robust throughout the life of the project. As such a fractional structure is inherently more complex than a build and sell model.
Do not over promiseMake sure the service element offered can be delivered over the life of the projectWork out the financing for end users which may be developer financingPrepare for a longer sales process and have a solution for secondary sales. For those prepared to invest the effort, fractions may well prove to be one of the winning ways to do well in turbulent economic times. About Eric Gummers
Partner
Eric Gummers joined Howard Kennedy in September 2003 from Amhurst Brown Colombotti as part of the merger between the two firms. Eric is a corporate partner with 22 years´ experience. He is recognised for his specialised work in the hotel and leisure sector, particularly membership clubs, loyalty programmes, fractional, shared ownership and condo-hotels. A high proportion of his work is international.
Eric is consistently rated in the top tier for his work in the hospitality and leisure sectors by both Chambers and Legal 500. He is a fluent French speaker and a graduate from Cambridge University. Eric is also a committee member of City of London lawyers commercial law sub-committee.