Star Tribune Article - June 2007
A getaway trend: shared ownership
By Kristina Shevory

Like many pre-retirement baby boomers, Marilyn and Pat Ryan of Woodbury wanted a lake place to go to for extended visits, but didn't want to pay for a place that was going to sit empty for the bulk of the year. In addition, they didn't want to waste that time mowing, raking the beach and trying to keep up with exterior maintenance.

That's why they bought into a 40-unit fractional townhouse development called Larsmont Cottages on Lake Superior that is maintained and leased by a professional management company. When the second phase of the project near Two Harbors, Minn., was done, they bought a second one because they like its view of the lake even better.

"This offered the best of both worlds," said Marilyn. "This is an ideal solution to ease into retirement."

Fractional real estate, or shared ownership, is growin! g rapidly, increasing to $1.65 billion in sales last year for the United States, Canada and the Caribbean, up more than 30 percent from 2005.

Such properties appeal to buyers such as the Ryans who want exclusive getaways, but who may be unwilling or unable to purchase a second home they will use for only a few weeks a year.

Unlike time shares, fractionals carry a title of ownership and are marketed as high-end vacation homes, typically costing an average of 10 times as much as a time share.

In addition, owners get a designated number of weeks of use each year based on their ownership.

"The younger generation of buyers is viewing it as an alternative to full ownership because of the ease. You're not paying for when the property is vacant," said John Melicharek, head of the tourism industry practice at the law firm Baker Hostetler in Orlando. "It's become a convenient way to own a second home without all of the problems."

For ex! ample, when Robert and Jeannie Hidey went to Bachelor Gulch in! Colorad o three years ago, they figured they would ski five days and see their daughter who attended college nearby. The last thing they expected to do was to buy a second home.

It was their first time at the ski resort, and they liked what they saw: slopes free of thousands of other skiers, plenty of things do off the mountain and close proximity to Vail and Aspen.

So when they walked by a sales office at the Ritz-Carlton hotel where they were staying, they decided to go in. Ritz-Carlton was selling fractional shares of its 54 residences next door.

For $280,000, the Hideys bought a 12th share in a two-bedroom residence, which includes daily housekeeping service and lift tickets, for three weeks a year. If they cannot make it one year, they may exchange their time for stays at one of Ritz's three other fractional properties in places like Jupiter, Fla., or the Virgin Islands.

"We could not afford to buy a home there for all the time. It would be ! a waste of our investment money," said Jeannie Hidey, 50, whose primary home is in San Juan Capistrano, Calif. "This is a long-term investment that we can pass onto our two daughters."

As of January, there were 249 fractional developments in the United States, Canada and the Caribbean, a 39 percent increase from 2005, according to NorthCourse Leisure Real Estate Solutions, a consulting group in Parsippany, N.J.

According to Ragatz Associates, a consulting and market research firm in Eugene, Ore., that tracks the resort industry, 40,000 households, or about 1 percent of all households in the country that earn more than $200,000 a year, have purchased fractionals.

Although sales of fractionals have declined in some areas, the overall housing slowdown doesn't seem to have had much impact on sales of fractionals in North America. (The market is still small compared with time-share sales, which were approximately $10 billion last year, up from $8.6 bi! llion in 2005, according to the American Resort Development As! sociatio n.)When buyers purchase fractionals, which are typically marketed to people who make at least $200,000, they are buying part of a condominium, a townhouse or a house and receive a deed to the property. A time share, by contrast, is shared among as many as 50 buyers, who pay for specific blocks of time and typically do not own a share of the property. Time is bought by the week and often costs between $10,000 and $30,000.

Shares in fractionals typically range from a quarter to a 13th, and buyers get as much as three months in their units. Depending on the project, owners get multiple weeks that are either fixed or rotate among owners. The units come furnished and carry annual dues, which can be as high as $18,000, for maintenance, insurance, utilities and property taxes.

Marilyn Ryan said that she hopes that rental income from the two units that they own half-shares covers the bulk of those maintenance costs, which are nearly $10,000 annually for each unit.! Management of those rentals is handled by an onsite company that takes a percentage of that income.

Fractionals are now found from Midtown Manhattan to Colorado ski resorts to the Arizona desert. They often come with expensive appliances, finishes and furniture and have staff members who can stock refrigerators, tune skis and place owners' personal gear in their units before they arrive. At Larsmont Cottages there's an onsite restaurant, indoor and outdoor swimming pools, a wood-fired sauna and other amenities.

"When you're selling these things, you don't want it to look, smell or act like a time-share," said Douglas O'Reilly, vice president for advisory services at NorthCourse.

Large hotel operators such as Starwood Hotels and Resorts, Marriott International, Wyndam Worldwide and Four Seasons Hotels and Resorts have taken note and rolled out dozens of new fractional projects the past four years under their own names or as Ritz-Carltons and St. R! egises.

Banks have also started offering specialized! loans f or fractionals in the last year, so buyers do not have to rely on home-equity loans, sell stocks or bonds, or cash in their bank accounts. Such loans can be more difficult to get than ones for primary residences, however.

It is difficult, however, to determine long-term appreciation in the fractional market. Sales histories are spotty because fractionals have been widely sold only the past four years.

Bob Ryan, president of Odyssey Development and developer of Larsmont Cottages, said that sales there were brisk and that the project quickly sold out. Ryan (no relation to Marilyn Ryan) attributes the success of the project to pent-up demand for more affordable lakeshore housing that's low-maintenance and has the potential to generate rental income.

At the same time, second-home buyers are more cautious these days, he said, because there's concern about the stability of the housing market.

"People today don't feel as rich with their real e! state as they did two years ago," he said.

Ryan said that the success of Larsmont Cottages helped persuade him to develop a similar project along Leech Lake near Walker, Minn., called Trapper's Landing Lodge.

The first phase of the project includes three-bedroom townhouses available in a variety of increments. A one-sixth share, for example, is listed at $119,000 for two weeks' use each season for a total of eight weeks every year. A whole share is $619,000.

Joe DeSilva, a real estate agent at the Luxury Real Estate Group International in Palm Beach Gardens, Fla., said there are fewer fractional buyers in his area because prices for wholly owned houses have dropped.

At its Altis development in Mammoth Lakes, the developer was unable to get a guaranteed construction price, a spokeswoman said.

Many buyers purchase fractionals not as an investment, but as a vacation alternative.

Chris Roden, 44, an investment manager in! Miami Beach, bought a fractional in Colorado because, he said! , he was fed up with expensive rentals that were far from the ski lifts.

Five years ago, he bought a three-bedroom fractional at the Timbers Club at Snowmass for $280,000 so he could be right on the mountain. A year later, he bought another three-bedroom fractional for the same price at the company's Rocks Luxury Residence Club in Scottsdale. He said the units are a way for his family to vacation in million-dollar homes without having to buy one.

"This is a way to have that lifestyle without the price," said Roden.

Star Tribune Staff Writer Jim Buchta contributed to this story.