by Lew Sichelman on October 15, 2010
Ownership Types Are Confusing
In the world of fractional real estate ownership, nothing could be more, err, fractured. There are so many forms of ownership that it's extremely difficult for potential purchasers to get their arms around what they are actually buying - not to mention the advantages and disadvantages each one has to offer.
"Most people are not equipped with even a basic knowledge of the various ownership structures, let alone the pros and cons of the various types that will help them make an intelligent buying decision," says Lil Miller-Fox of PrivateCommunities.com.
Between whole ownership, which, as the name implies, means you own the whole enchilada, and timeshares in which you buy a week at a time, there is practically no end to the number of ways someone can purchase vacation real estate. There's quarter-shares, fractional interests and clubs, just to name a few.
Even within those broad categories, there are various ownership regimes. But if there ever was a possibility for misunderstanding, or perhaps even misconception, it is within the realm of clubs.
Types of Clubs
There are destination clubs, private residence clubs, association clubs, equity clubs, non-equity clubs and even convertible equity clubs. Dennis Hiller, an attorney who specializes in resort ownership for the Boca Raton, Fla., law firm of Greenberg Traurig, thinks that yet another category is on the rise.
"I think we're going to see a lot more half-equity clubs as the business continues to evolve," says Hillier, an industry pioneer who has written the ruling documents for more than 1,800 membership programs throughout the world over his 30-year career.
While there is lots of overlap between the various governance programs, the terminology - and the nuances - can be confusing. With private residence clubs, for example, you typically are buying into one property at one location. Destination clubs, on the other hand, usually consist of a number of properties in a number of different locations. That's simple enough. But a key point to consider is the ratio of members (owners) to the property.
Generally, the ratio is lower for destination clubs and higher for private residence clubs. But that's not always the case, nor is there is a standard ratio like 6:1 or 8:1. The ratio is important because the lower it is, the greater flexibility an owner will have to book the property when he wants to use it.
There are other important considerations, too, such as membership caps and what they might mean to value, how owners can sell their memberships back to the club (and how much money the get back in return), whether or not children, grandchildren and even the owner's parents are covered as members and whether you can transfer your membership to a subsequent purchaser of your interest.
Hillier's firm., Greenberg Traurig, has published a much-needed comparison of alternative membership structures. While the differences between them are minute, not to mention myriad, here's a basic overview of each of the four main types as cribbed from the GT comparison:
Association Club - In this form of ownership, which is sometimes known as a "bundled community," the community association is organized as a non-profit corporation to own and operate the club's facilities. All owners have access to the facilities. For that privilege, members pay for their operation and maintenance. Mandatory participation allows the club to be operated at a relatively low level of dues and fees because the costs are spread over a larger universe.
Non-Equity Membership - Here, you are not an owner. Rather you are a member of a club in which the developer retains ownership and management. Members pay a deposit to join the club and have a revocable license to use the facilities. The deposit is repaid at the end of 30-years - or sooner under "certain specified circumstances." Sometimes within this category, members are required to pay a non-refundable initiation fee. In these cases, the cost of membership is usually lower.
Convertible Equity - Very similar to the non-equity refundable regime described above, except that the developer specifically reserves the right to change the club into an equity, member-owned club in the future. Members are guaranteed the right to acquire an equity position if and when the club is converted. And there may or may not be an additional fee to do so.
Equity Membership - Upon realizing certain, pre-determined membership levels, the club's facilities are ultimately sold to members. At that time, members take over the management and operation of the club's facilities and have the right to vote on matters relative to running the show.
In considering any one of these, here are some other things to look into: Use of the facilities by guests and tenants, playing privileges (golf and tennis), your right to upgrade to a higher membership category, how any repayment program works, and of course, your exchange possibilities with other resorts.
About the Author
Lew Sichelman is a nationally syndicated columnist who first started writing about housing in 1969. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors.
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