Securing A Share Of Paradise

Fractional ownership is a swankier option than time-sharing, but buyers shouldn't view it as a real estate investment

It was a leaky faucet that soured Ken and Nova Matheson of Buffalo on owning a vacation house from afar. The leak persisted during a six-month absence from their Whistler, B.C., house, causing the kitchen floor to cave in and requiring a $60,000 repair. They don't have such worries now that they are members of The Markers, a destination club that caters to golfers. For $195,000 up-front, plus $14,500 a year in dues, they get 21 days a year of use at properties owned by The Markers such as the four-bedroom, Southwestern-style home at the Rocks Residence Club, a resort community at the base of Pinnacle Peak in Scottsdale, Ariz. The arrangement also entitles them to playing privileges at eight golf courses, access to a private spa, concierge services -- and the peace of mind that the management company, The Markers, takes responsibility for all upkeep. "We've been so pleased, we're thinking about selling our home in Whistler," Nova says.

Known as fractional-ownership resorts, private-residence clubs or destination clubs, such vacation properties operated by the likes of Ritz-Carlton and Exclusive Resorts (whose majority owner is former America Online CEO Steve Case) are gaining fans among well-to-do buyers. Individuals spent more than $2 billion on these shared-ownership communities in 2005, a 25 percent jump over 2004 and four times the amount spent in 2003, according to Ragatz Associates, a Eugene, Ore., real-estate research firm.

As might be expected, these resorts put a premium on service. At the Ritz-Carlton Golf Club & Spa in Jupiter, Fla., members can keep their belongings in storage. If they call ahead before a visit, Ritz's concierge staff will hang their clothes in the closets, arrange personal photos around the rooms, and even stock the refrigerator with milk and other staples. That pleases Norm Agran, 59, a franchising consultant from Warren Township, N.J., who travels to the Jupiter club several times a year with his wife, Deb, to relax and play golf. "They have a level of customer service that is unparalleled," says Agran. "The Ritz-Carlton Golf Club is the best golf experience I've ever had."

The fractional concept opens the market to buyers who covet a home in a prime resort town like Palm Springs, Calif., or Naples, Fla., but who cannot -- or don't care to -- pay the $1.5 million or more it costs to buy a place outright. From the developers' standpoint, selling partial shares brings a new pool of customers into areas that might be overbuilt. "They're abundant in places like Florida and Vail [Colo.], where the market has softened," says Richard Coughlan, former director of resort sales at Pebble Beach, who now directs the MBA program at the University of Richmond in Virginia.

When you buy a share in a vacation villa, typically you have an up-front purchase price that can run into hundreds of thousands of dollars on top of an annual maintenance and service fee of $3,000 to $17,000. Then, there are the extra charges for golf. At places that have special arrangements with local golf clubs, you might have to pay a cart or guest fee to play a round. The Ritz-Carlton requires a separate golf membership. You must pay $47,000 in initiation fees to join the resort's private Jack Nicklaus-designed course, plus $3,100 in annual dues.

You might also face unexpected "cash calls" to cover capital improvements, such as new furniture or a new roof. "You either pay it, or they could [put a lien on] your interest and sue you," says Boca Raton (Fla.), lawyer Dennis Hillier. To see whether the sponsor is keeping enough cash in a rainy-day fund, ask for a financial statement. Some states, such as North Carolina, have laws requiring the operators of time shares and residence clubs to provide members with a budget upon request.

Real-estate experts caution that people thinking of fractional ownership in a home should not view it as an investment. Granted, the property could appreciate: Steve Dering, a principal in Utah's Destination Club Partners, says that early buyers in the company's Park City development have doubled their money. But there's little hard data to show whether fractionals are a good deal, particularly given the hefty fees that get tacked on. "The resale price of a fractional does not go up at the same rate as a single property," says David Sampson, a real estate expert in the Los Angeles office of the Baker &Hostetler law firm.

Fractional ownership sounds a bit like time sharing, but the properties are more exclusive and often come with the benefit of an equity stake. If the concept interests you, you have three options. Residence clubs let you buy a deeded part interest in a specific resort home. A destination club simply gives you the right to vacation at the various homes and villas in its portfolio. Hybrids such as The Markers operate much like a country club:You buy equity in the club, which in turn gives you an ownership stake in Markers' homes and other assets.

With residence clubs, you buy between a one-third and one-fifteenth interest in a single-family home or villa, a stake that can be purchased outright or financed through a bank. The fractional interests come with all the benefits of a second home, including inheritance rights and the ability to deduct mortgage interest and property taxes. In return, you get to use the property for a number of days or weeks each year proportional to your stake: The owner of a one-tenth interest, for instance, gets access for roughly five weeks. Most clubs give each part-time owner an equal turn at highly sought weeks such as Christmas and an equal amount of time in the offseason. Some operators let members trade part of their time for stays at homes in other resort areas, either at no extra charge or at a discounted rate. For instance, if you purchase a share in a home at ClubCorp's Barton Creek golf resort in Austin, you can also use your allotted time in Hilton Head Island or at the Homestead resort in Hot Springs, Va. However, it's often tough to take advantage of these "exchange rights" during peak season.

Experts recommend that before you buy a part interest, check with real-estate agents about sales of comparable homes in the area. Most residence clubs charge a hefty markup on fractional sales -- selling 10 percent interests in a $2 million home for, say, a collective $2.8 million. That markup usually covers the cost of furnishings and sales and marketing expenses, as well as a tidy profit for the developer. But Hillier says he has seen markups that work out to as much as twice what a single buyer might have paid for a similar house down the street.

Destination clubs mimic attributes of residence clubs, but without direct real-estate ownership. They provide the right to vacation at the various homes and condos the operators have bought or leased. The largest of the destination clubs is Exclusive Resorts. Two thousand members share access to 300 homes and villas at 40 resorts worldwide. Like the residence clubs, Exclusive Resorts charges an up-front fee -- from $195,000 for 15 days of lodging each year to $395,000 for 45 days -- and annual fees from $9,500 to $25,000. (Members paying the higher amount get priority in reservations.) ceo Donn Davis says that Exclusive Resorts members get access to popular golf locales such as Kiawah Island, S.C.; Los Cabos, Mexico; and Scottsdale, without exposing them to the vagaries of local real-estate markets.

But beyond the glossy brochures are a host of issues prospective buyers should consider. If a member wants to leave, some destination clubs refund only part of the up-front initiation fee; at Exclusive Resorts, you receive 80 percent of your initial investment. Also, since you aren't buying real estate, you don't hold legal claim to any assets, so you don't have the same security an owner in a residence club does.Richard Davis, a lawyer who heads Greenberg Traurig's real-estate practice in Los Angeles, says this could be an issue in the event the operator defaults on its loans. The banks would have first claim on the properties, leaving club members without recourse.

What's more, Davis says destination clubs have no obligation to maintain the same roster of properties over the long term. "If they decide they're going to sell that place you love and buy another, there's nothing you can do about it," he notes. Most important, destination-club members aren't covered by the same consumer-protection laws that apply to buyers of time-share and private-residence clubs in many states. They require developers to provide far more disclosure on terms and fees, and allow buyers the right to rescind their purchase up to seven days after signing a contract. States such as New York, are considering extending existing rules to destination clubs.

Fractional ownership, when it works right, gives you the best of all worlds: a luxurious vacation place to call your own without the hassles of home ownership. As Nova Matheson learned, that means when you close the door after each visit, you leave all the troubles behind.

By Dean Foust

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