Can HOAs Regulate Fractional Ownership?

Here's an interesting article where a Tahoe HOA makes remarks about regulating or eliminating fractional ownership in their development to preserve the status of the community. For some time now, HOAs in certain resort areas have put in place conditions, covenants and restrictions (CC&Rs) that prohibit the sale of timeshares within a development. However, the difference between timeshare and fractional is vast. In my opinion, HOA or municipality attempts to regulate fractional are erroneously rooted: (1) in a misunderstanding of the definition of fractional ownership (they think it's timeshare); and (2) in fear that the "caliber of the neighborhood" will degrade due to the influx of fractional buyers perceived as being lower class.



Of course, fractional ownership is NOT timeshare. See my post on March 12, 2008 and the article by fractional owner / attorney John Gosselin. I'm still formulating my reasons why I believe an HOA or municipality probably can not legally eliminate fractional ownership from a development. My initial thoughts are: (1) CC&Rs and zoning ordinances restrict the use of property, not the form of holding title; (2) If such a CC&R or zoning ordinance was passed, it would be overbroad and effect all co-owned property in the development; and (3) attempts to distinguish those fractional owners who have a formal co-ownership system for use from those who don't will be patently discriminatory. If your HOA is considering such amendments to its governing documents please contact me, as I'd be very curious to learn what their justification is. More on this in future posts as I predict that this will be a very hot topic when fractional projects continue to sprout in exclusive gated communities across the nation in resort areas.

As for the fear that here come the fractional buyers and "there goes the neighborhood" - I find this personally distasteful and factually baseless. What evidence is there that fractional ownership would in any way degrade a community? None. In fact, there is ample evidence to the contrary. Many fractional owners actually can afford a whole property in such developments but choose not to put all their eggs in one basket and instead buy multiple fractions in various geographic locales. In addition, fractional ownership has been shown to actually assist the local economy by keeping a second home occupied a higher percentage of the year and thereby keeping local merchants busier in the slow seasons. Remember, that the fractional owners are "owners" not renters or visitors. Owners, even of fractions, take pride of ownership because they have a significant investment at stake.

Fractional Ownership: Getting A Piece of the Pie

Attorney John Gosselin is the Managing Partner of Gosselin & Associates, PC in the Boston area. John recently purchased a fractional vacation home and wrote a brief article about what to consider on purchase. I find John's article to be generally well-written and recommend it to you. My thoughts on the article are below:

"They're Not Timeshares"
What's a Timeshare? The term "timeshare" has become somewhat a term of art in the nation's vernacular, it conjures up images of hard-selling elderly people on a $20,000 purchase at a crowded resort with a long buffet line and buyer's remorse when arriving back home and thinking "why did I just spend all that money to go back to a resort once a year when I could just pay at time of service?" Timeshares in the legal sense are merely pre-paid vacations at the resort. They give the timeshare owner the right to stay at the resort for a week or two per year for a fixed term such as 10 years. Once the ten years is over, the timeshare ceases to exist. Timeshares are legal "licenses" where the resort owner has merely given permission to the timeshare owner to stay. There is no ownership of real estate and therefore no hope of appreciation or significant resale value. This is not a slam on the timeshare industry because, by pre-paying, the timeshare has provided a significant savings for the timeshare owner over paying at time of stay.

How is the Fractional Vacation Home (FVH) Different? Night and Day. While there are many fractional resorts that now offer a very small share of ownership in the resort as an ownership alternative to timeshares, the following are key differences of a FVH:
1. FVH is a stand alone property;
2. FVH is owned with a few other people (generally less than 11 in California);
3. FVH is usually within 3 hr drive from your primary residence;
4. Owners receive a grant deed to a undivided fractional interest of the property;
5. Owners may resell their fraction (yes, as with every other piece of real estate there is a resale market);
6. Owners fraction value will track with the surrounding real estate market;
7. Owners may treat their fraction as an investment for tax purposes and utilize their expenses as deductions and even take advantage of Internal Revenue Code Section 1031 in certain situations (see your tax advisor obviously because situations differ);
8. Owners may borrow against their fraction without being on the same loan as other owners;
9. Owners have a voice in the management of the property;
10. Owners have responsibility for ongoing maintenance costs in proportion to their ownership interest;
11. Owners generally get a lot more usage of the property (at least 5 weeks per year and up to 12 weeks).

More on this soon...

Nice series of articles reviewing fractional vacation homes by Jennifer Openshaw

Jennifer Openshaw of CBS Marketwatch.com wrote a nice four piece series last August on fractional vacation homes. Check out Part 1, Part 2, Part 3 and Part 4.