Q: I am hearing more and more about TIC arrangements involving shared usage of a vacation home or condo. Why do people do this and how does it work?
A: Vacation home co-ownership (sometimes also known as fractional ownership) is an arrangement where several individuals or families co-own and share use of a vacation home or condo. Compared to owning the entire property, fractional ownership offers lower acquisition and carrying costs and eliminates the burden and expense or renting the property when it is not being used by the owner. Compared to renting a vacation property on an as-needed basis, fractional ownership offers the emotional rewards, control and tax benefits of ownership, the potential for market appreciation, and the opportunity to diversify an investment portfolio (perhaps even internationally) without taking on the burdens of a landlord.
Form a seller’s perspective, selling fractional interests can often yield a higher total sale price than selling to a single buyer. In addition, fractional sales offer the possibility of retaining a partial interest so that the seller can continue to use and enjoy the property for at least part of each year.
There are two basic models for allocating usage rights in Vacation home co-ownership arrangements. In the “Usage Assignment Approach”, each owner is assigned the exclusive right to use the home during a specified number of days, weeks or months each year. The usage periods can be fixed (such as “the month of February” or “the first two weeks of February and July”) or variable (meaning they are selected each year based on a rotation system adjusted for holidays and seasonal variations). During each co-owner’s assigned usage period, he/she can live in the home, allow family and friends to use it, rent it out (and keep the rental income), swap it, or leave it empty. When the Usage Assignment Approach is used, the purchase price of the home is generally shared among the co-owners based on the amount of usage allocated to each co-owner. When usage periods are permanently fixed, price allocation may also be influenced by the quality of each owner’s assigned usage dates.
The second basic model for allocating usage rights is the ’“Pay-To-Use Approach”. In this arrangement, co-owners pay a pre-agreed “usage fee” for each day or week of usage. The usage fees, along with any rental income generated if the home is also rented to non-owners, are used to pay the expenses of ownership. If the usage fees and rental income together exceed the expenses, the surplus is divided among the owners; if there is a shortfall, each owner must contribute. Here again, there are a variety of methods (discussed below) for determining when and how often each owner will be permitted use the home, and how usage will be allocated if two or more owners wish to use the home at the same time. When the Pay-To-Use Approach is used, the purchase price and ownership of the home can be divided based on what each co-owner can afford, their investment goals, or any other criteria the group finds useful, but purchase price and ownership need not have any relationship to usage.
There are a large number of variations and hybrids on these basic usage rights allocation models. For example, it is possible to employ the Usage Assignment Approach, but still allocate a certain number of weeks each year as “Pay-To-Use” weeks, meaning that during those times the home will be rented out to owners or to non-owners and the resulting income split among the owners in proportion to ownership. In another variation, it is possible to employ the Pay-To-Use Approach but still give co-owners preferences or discounts for a certain number of weeks each year.
ABOUT THE AUTHOR
D. Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership arrangements including shared vacation homes, TICs, equity sharing, co-housing, and legal subdivisions such as condominiums. His practice areas include transaction planning, offering materials, co-ownership agreements and CC&Rs, entity formations, regulatory approvals, fractional lending and mediation. From offices in San Francisco California, Evergreen Colorado, and Paris France, he has worked on projects all over the World, including most U.S. States, as well as Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, Nicaragua, Belize and Mexico. Since 1985, he has prepared fractional ownership documentation for over 6,000 clients. He is an accredited instructor with the California Department of Real Estate, and frequently conducts co-ownership workshops for attorneys, real estate agents, corporations, and prospective home buyers. Andy is the co-author of The Condominium Bluebook, published annually by Piedmont Press, and The Equity Sharing Manual, first published by John Wiley and Sons in November 1994 (order the book). He has written numerous articles on related topics, including "Fractional Ownership" and "Questions and Answers on Tenancy In Common", all of which are available at www.andysirkin.com. Mr. Sirkin can be contacted via email at DASirkin@earthlink.net. Mr. Sirkin can be reached by telephone at 415-738-8545.