Fractional Property Ownership & its implications

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Fractional Property Ownership is a practice in which several related or unrelated parties can jointly own a high-value real estate property such as resorts, lands, private residences and commercial asset. The practice of joining together with family and friends to share ownership of vacation property or as an investment has been around for many years; however lately, even unrelated parties, and in some cases people from different countries, are pooling funds to jointly buy premium real estate. Fractional ownership not only helps people to buy & enjoy a premium property at lower equity investment & mitigate risks of owning property but also to share the costs of maintaining the asset.

How does Fractional Ownership Work?

In Fractional Ownership the property, which could be a single condominium or a commercial property or a hotel, is split into “fractions” and owned by a group of people (called co-owners). There is a sale deed executed in favour of individual buyers or a company owned by buyers. More on this in section “Structures for Fractional Ownership”below.

Rights of Co-Owners

A co-owner is entitled to three essentials of ownership:

  • Right to possession
  • Right to use
  • Right to dispose off his or her share of the property as mentioned in the sale deed

Time Share vs Fractional Ownership

Fractional Ownership should not be confused with Time Share. The main distinction between timeshare and fractional ownership is that with a timeshare you buy the right to use a property, but with fractional ownership, you are buying ownership in a real estate.  In Time Share each sharer is allotted a period of time in which he or she may use the property. The sharer has no rights of a co-owner as mentioned above i.e. holds no claim to ownership of the property.

Structures for Fractional Ownership

Fractional Ownership can be structured in Indian context either as:

  1. Jointly owned: In this structure a single sale deed is executed in favour of all buyers identifying their contribution and proportionate share in the property.
    1. Advantages:
      • There is no compliance work involved. The property can be used & managed as per the agreement reached between individual buyers.
    2. Disadvantges:
      • Inflexibility of adding new co-owner and / or removing existing co-owner as all other co-owners have to be physically present to sign & execute the sale deed agreement, which is quite cumbersome if investors are not based in the same city. Though General Power of Attorney can be given to address this issue, it may not be possible if parties are unrelated.
      • Every time any individual co-owner has to exit or add, a stamp duty has to be paid on the fresh registration of the property which is quite expensive & wasteful expense.
  2. Company owned: In this structure all the co-owners float a company, either a Pvt Ltd or LLP, which in turn acquires the property. In case of a Pvt. Ltd. all the co-owners become the shareholders of the company and execute a shareholders agreement identifying their contribution, share holding and rights. Similar structure is possible for Co-operative Societies and Trusts, which are not covered in this article.
    1. Advantages:
      • Flexibility of adding or removing co-owners i.e. shareholders, as only a new shareholding agreement has to be executed. There is no need for all the shareholders to be present at the same place to sign this agreement.
      • No need to pay additional stamp duty on the property in case there is any change in ownership.
    2. Disadvantages:
      • As the property owner is a company all required compliances such as annual audit of the company, ROC filings etc has to be performed.
      • Greater scrutiny of the company by the tax authorities if the property is significantly large or have high rental or business income.

Type of Properties & their usage models

Fractional Ownership can be across all real estate asset class such as residential, commercial, industrial and hotels / resorts. Usually people buy for rental income and / or capital appreciation. In fractional ownership people might buy assets such as service apartments, residential condos and resorts to use the property as well as earn business income. Usage models for such properties are:

  1. Pre-determined usage fees – Co-owners, just like any other customer, shall pay when they use their property. They might have preferential rates which shall be determined on a mutual basis.
  2. Pre-determined usage days – Each co-owner shall have specific number of days assigned in a year to use the property for his or her personal use without paying for their usage.

For rest of year the property can be let out to customers to earn rental or business income. If the Net income i.e. Total revenues minus Total cost of operating the property is positive the surplus is shared among the co-owners in proportion to their ownership. However, if the Net Income is negative, additional funds are infused by the co-owners in proportion to their ownership.

Recent Developments

A number of start-ups in the major developed economies are experimenting with this model to make real estate investment more “affordable” to people. They are allowing people to pool funds to buy high yield or high return assets such as under development or leased out residential or commercial property. Such companies manage the entire transaction from raising money from prospective co-owenrs to managing the assets till the exit. Thus ensuring real estate investment is not just limited to HNIs but accessible to middle income group as well.

In India, yours truly is working on a similar business model even though regulatory issues & compliances are quite prohibitive as compared to those in the developed world. More on this in my next article.

Comments are welcome.

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