What is fractional ownership?

Fractional Ownership is a relatively simple and comparatively affordable ownership arrangement in which two to six individuals or entities hold shared legal title to a single parcel of real estate or a condominium unit. Each owner has a "fraction" of the total ownership. The owners obtain the right to use specific periods of time each calendar year, called "Intervals". Sometimes people refer to the owners as "Interval Owners" in the same way as they do to "Fractional Owners." The Fractional Owners are called "cotenants". This means you share all aspects of ownership and responsibility for the property according to how much of the title you have purchased. Once you acquire title, your interest in your property legally is an interest in REAL property. You, along with the other Interval Owners, enjoy all the usual benefits of ownership of the property: renting, managing the property, and handling payment of taxes and maintenance costs and so on.

A Fractional Declaration determines how the property is used and operated by multiple owners. It is called a Co tenancy Agreement or “Plan”. The declaration is frequently a general document designed to address day to day issues and problems.

As cotenants you share responsibility for the care and condition of the property. Each year you will pay in advance for the expected costs of ownership. The agreement you sign about how your ownership works sets out all your rights and responsibilities to each other and to the laws of the State of Hawaii.

To allow financing of individual purchases, only "co tenancy" ownership can be used. If none of the fractional interests is financed, however, ownership may be converted to a Limited Liability Company ("LLC") or Partnership ("LLP") or another ownership entity for further protection from some liabilities.

Some of the distinctive features of fractional interest projects are: Every ownership interest is fee simple. The interests are “undivided”, meaning that the division of ownership is not described as ownership of a particular part or piece of land or buildings, but the division is by periods of time of use of the property. A single owner may purchase more than one fractional unit.

Fractional ownership gives owners specific advantages: each owner bears only the responsibility of their fraction of the expenses; including taxes, utilities, insurance, management and other expenses. The owners all share equal concern and responsibility for the property.

Fractional ownership also comes with limitations on the rights of owners to use and operate their property interests. Each owner must respect the rights of the other to do no unusual damage to the property. There is a committee of up to 6 interests to make every relevant decision about such things as furnishings, insurance, upgrades and remodeling, maintaining a standard of care in upkeep of the property and regulation of the unit. The “association” of the owners may delegate decisions about various aspects of ownership, renting, furnishing and use of the property. The group must also interact with the Association of Apartment Owners of any condo project or subdivision association if a single family dwelling.

As a group, the owners of intervals form an “association,” which may be incorporated, unincorporated, an LLP or LLC.

Fractional owners may elect to have private management by the owners or hire a third party to manage the property. Each owner can rent, exchange or otherwise use their time period as they see fit.

Only individual owners can execute deeds, mortgages, & leases of their time period and all other legal documents affecting legal title to the property.

Fractional owners will be required to keep the property in the same condition as it starts, except as the group may unanimously decide to make changes. Each owner will be responsible for damages caused by them or their guests or tenants. Unexpected repairs may come up at any time, and it may limit or hinder use for the repair time. This is a risk everyone must take and may affect one or more intervals more than others. Deferred maintenance and scheduled repairs that are not urgent will be completed during the two to three days per year that the property is not occupied and during the time between checkout and check in for the interval users. In some cases insurance can be purchased to cover the costs of losing occupancy due to natural causes and casualties.

Owners can use their interval time for themselves or as they see fit for family, friends, etc., including leaving the unit vacant for any part of their time.

Owners may place all or any part of their share of time into vacation rental.

Fractional time intervals are generally fixed and permanent for every year, unless all interests vote for another plan. Without changing the period of ownership you may trade all or part of your time with other interval owners or you may find another owner who would want to trade with you to come twice in a year for a one-month period, etc.

Your interval may qualify under the IRS rulings as a second home and therefore mortgage interest might be tax deductible. See your tax adviser to find out if you can deduct part of your expenses either as a second home or rental property.

What are the benefits of fractional ownership?

The idea of buying only a piece of a vacation residence makes a lot of sense. Why buy 100 percent of something you’ll only use a few times a year? It’s this logic that was behind the creation of timeshares back in the 1970s. In the 1990s the concept was taken one step further and “fractional” real estate was born.

So what’s the difference between fractional real estate and timeshares? In the simplest terms, fractionals can be seen as a step up from timeshare. You get “more” of everything. More time, more space, more services, and more luxury. Of course the downside is, there is more cost – but not as much as you might think.

More Time
Fractional vacation ownership in Hawaii is generally sold in shares of 1/6 to 1/4, giving owners between 8 and 12 weeks a year at their residence. These weeks are generally spread throughout the year, so owners get a chance to enjoy all the various seasons have to offer. Each fractional property’s “use plan” is different. Some properties offer “fixed” weeks so you have the same weeks each year, others have “rotating” weeks. Some offer a combination of both.

More Space
Fractional vacation homes are often stand-alone homes, which gives a level of privacy that can’t be matched. And even when the residences are hotel suites or condos, they are generally more spacious. The typical fractional has 3 bedrooms and 3 bathrooms. This allows you to bring plenty of family and friends along with you on vacation.

More Luxury
Fractional residences have amenities and décor similar to that of luxury hotels. The typical fractional residence has amenities like flat-screen TVs, granite countertops and high-end appliances in the kitchen, and whirlpool baths. And most fractional residences are located close to beaches, shopping and night life.

You Get What You Pay For
Yes, fractional home ownership costs more than your typical timeshare, but you retain the full benefits of fee simple ownership. And the range of fractional pricing is extremely broad -- from $250,000 up to $1 million or more – so it can suit a range of budgets and tastes. When you consider the added time, space and amenities, it may end up being just what you’re looking for.

Fractional Ownership Q&A’s:

Q: WHAT IS A FRACTIONAL OWNERSHIP OR FRACTIONAL INTEREST? WHAT IS INTERVAL OWNERSHIP OR INTERVAL INTEREST?

A: Fractional Ownership and Interval Ownership is the same thing, said two different ways. A fraction means a part of something, such as one-half, one-third or one-quarter. You can have from one to 6 owners before a project becomes a timeshare. A timeshare does not have the same benefits as fractional ownership. An “interval” is a period of time, such as a day, a week, a month or a year. Generally for 6 owners you use intervals of sixty days or more, approximately one-sixth of a year. Each “fraction” of one-sixth gets the use of sixty or sixty-one days every year (allowing a few days for maintenance and repair) reflecting that 365 days does not divide exactly into six equal intervals of a number of days.

Q: HOW IS THIS TYPE OF OWNERSHIP DIFFERENT FROM NORMAL OWNERSHIP?

A: “Normal” ownership is what we call “fee simple.” That means you own all of the property by yourself. If it is a house and lot, you own the land and the building(s) on the lot, forever. If it is a typical condominium, you own the airspace inside the condominium, including all the furniture, fixtures and equipment inside, as well as the right to use all the shared amenities (pool, sidewalks, parking lot, beach access, tennis courts, etcetera) of the particular project, the same an any other condominium owner. There are many variations on this, such as leasehold condominiums (where you get to use the property for a specific number of years) and some have assigned parking for each unit, some have cars or boats owned by several owners together, some allow businesses to operate, such as a restaurant or shop, some have specific things for part of the project and different things for other parts of the project. Fee simple owners pay all the taxes, insurance, maintenance, repairs, utilities and so on by themselves. All expenses and all uses are by a single owner, even if it is a partnership, LLC, family trust, etcetera. You cannot divide up time or space legally in most cases.

“Fractional” owners share all expenses and uses according to how big a fraction you own. A one-sixth owner usually gets to use one-sixth of the days of the year and pays one-sixth of the taxes, insurance, repairs and remodeling of the property. Fractional owners share the management and decision-making power for the property, so there is usually a committee of six that talks at least once a year to decide what to do with the property.

Q: WHAT ARE THE ANNUAL MAINTENANCE FEES PER 1/6TH INTERVAL? HOW OFTEN ARE THEY PAID? ARE THERE ANY OTHER FEES I DON’T KNOW ABOUT?

A: The regular annual fees will vary for the interval each year, depending on the value of the property, the quality of furnishings, whether there is a car or a boat, etcetera. The amount may change when there are changes in actual costs of the property. Additional charges you may see are for things that are not known now, including increases for increased taxes, insurance premiums, condominium maintenance fees, damages not covered by insurance and similar expenses. If an owner or their guest damages the property there may be additional expense to repair the damage. These are the same types of expenses you would incur in any type of property ownership.

Q: WHAT DO THE MAINTENANCE FEES PAY FOR?

A: The estimated fees pay for: monthly condo maintenance fees (if it is a condo), and for all projects, shared costs for grounds maintenance, utilities, project management, real property taxes, group Insurance, building maintenance, common utilities, TV cable, reserve accounts created to pay for future furniture and building replacement.

Q: ARE THERE ANY OTHER MEMBER FEES?

A: Not usually, but when units are occupied by members or owners or guests in a resort rental program, there may be a modest check-in fee , a one-time key fee and periodic or end-of-occupancy cleaning service charge. Maid service is only for projects that already have maid service. Your unit may hire daily maid service. There may also be automobile and/or boat ownership expenses.

Q: WHAT ARE THE DIFFERENT INTERVAL PERIODS?

A: It varies but is usually approximately two months in one block of time for a 1/6 interval ownership.

Q: WHAT FINANCING IS AVAILABLE TO BUY AN INTERVAL?

A: Each project is different. Some lenders allow the developer to sell intervals with promissory notes and mortgages. If you have strong credit and good banking relationships you may be able to get a better rate.

Q: WHEN YOU BUY DO YOU BECOME A MEMBER OF ONE OR MORE ASSOCIATIONS? WHY?

A: YES, when it is a Condominium there is one membership for the Condominium and one for the Fractional Ownership. With a house there is only one association. 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.

Q: CAN I RENT MY OWN INTERVAL?

A: Yes, you can rent out your time or you can use a rental or property management company. However you cannot usually do both at the same time.

Q: CAN I TRADE MY WEEKS WITH OTHER OWNERS?

A: Yes, part of the ownership plan includes the right to trade time with other plans or you can do it yourself.

Q: AM I RESPONSIBLE FOR ANY KIND ROOM TAX?

A: Legally yes. But as a practical matter the taxes are paid by the guest renting the unit, including the General Excise Tax of 4.125% and a Transient accommodation tax of 7.25%, which you or your manager will collect and must be paid to the State of Hawaii. It is your personal responsibility, so that is why it is important to use qualified rental agents to collect and file the returns and make the payments for you.

Q: HOW ARE THE PROPERTY TAXES PAID?

A: All taxes are collected annually from the interval owners and paid by the Plan Manager or through the Fractional Ownership Plan. Each owner will receive a copy of tax bill showing the total and the calculation of the individual % of tax portion each interval must pay.

Q: HOW IS MY SHARE DETERMINED AND PAID?

A: Each interval pays based on the percent of interval ownership. For 6 owners each would pay 1/6^th, etc. Depending on how many units participate in the Plan, there can be some savings by dividing management costs between as many as six intervals in a single condominium unit. Payments are made from the Fractional Interest Ownership Plan accounts. Since all expenses are paid in advance there is little or no risk of penalties for late payment of any Plan expenses.

Q: DOES PROPERTY QUALIFY FOR A 1031 EXCHANGE? HOW ABOUT A SECOND HOME FOR TAX PURPOSES?

A: Generally speaking, any investment property can be used in a 1031 exchange. You could view this property as either an investment or a second home. The rules are different, and depending on your plans and your actual use of the property the answer might change. Each transaction is evaluated with a combination of factors, and you must consult with your tax professional on your personal situation. It is safe say in general that buying an interest in a Hawaii house or condominium is an appropriate investment and could also be a second home. There are exceptions.

Q: ARE OWNERS INDIVIDUALLY ASSESSED?

A: No, shared taxes only.

Q: WILL CONDO ASSOCIATION SEND ONE BILL FOR THE MONTHLY MAINTENANCE FEE?

A: Generally one bill, all maintenance fees are collect and paid annually by all owners.

Q: WHAT WILL BE THE VOTING RIGHTS FOR SIX OWNERS OF A CONDOMINIUM?

A: One vote for the unit, based on majority vote of the group.

Q: HOW ARE PROPETY TAXES HANDLED?

A: One of the shared expenses collected one year in advance. You will collect the prorated taxes for the current year at closing.