APRIL 2011 |
www.opp.org.uk WORDS | George Sell Exit strategy vital
Because the fractional resale market in Europe is still in its infancy, it is vital that developers provide their buyers with the most appropriate exit strategies for their schemes, says OPP’s fractional expert and columnist George Sell.
W
hether you are selling fractional ownership as an investment or a lifestyle
purchase, the customer needs to know that he or she has an exit strategy. It’s important that provision is made for this when planning a development. The legal structure of your scheme can help greatly with this – purchasers, particularly in the UK are reassured that they are buying a share of a freehold, or an asset held in trust which can be sold or passed on in the family. Jerry Cobb of the Fractional Ownership Consultancy says that the key facets of a sound fractional offering are that the project should be “equitable, heritable, giveable awayable (sic), bricks and mortar, in perpetuity, saleable and exchangeable”. His company’s Ownershare product provides a framework for developers and initial buyers of fractions which sets out a process for resales, should it be needed, and FOC says that over the last eight or nine years it has no record of anyone losing money on the sale of a fraction. But, the lack of an established fractional resale market in Europe is regularly raised as an
objection. An examination of the US market – the birthplace of fractional real estate – reveals that resales play an important part in the lifecycle of a development, and can offer a revenue stream long after construction has fi nished. In upmarket US ski resorts such as Aspen, the kind of places which saw the very fi rst fractional projects and private residence clubs, the resale market represents a signifi cant chunk of the total volume of fractional sales. R J Gallagher, who looks after sales
and marketing for the Residences at The Little Nell (RLN) in Aspen says: “RLN experienced huge sales success in 2010, with 40 closed transactions representing more than $42 million in gross revenues generated. We also managed nine resales resulting in more than $13 million in revenue generation.” At this development, resales represented nearly 25 percent of volume sales and more than 30 per cent of value sales. Tom Carr, co-owner of Aspen realtors Leverich & Carr, says that the lack of developer fi nance across the US property sector means that there will be relatively few new projects launching in the next couple of years, leading to
“quite a bit of activity” in the resale market. This sector of the market, while still not reaching anywhere near the heights of 2006 and 2007, is defi nitely witnessing a signifi cant recovery, and this lack of new project starts will only increase resale activity. According to analysis of the Aspen market by the Land Title Guarantee Company, in January 2011, fractional sales saw the
“In an upscale resort like Aspen, the resale market respresents a signifi cant chunk of the total sales”
highest dollar volume since June 2010 and the highest transaction activity since February 2009. Fractional sales value totalled $10,149,554 – an increase of 77% from January 2010, while fractional transactions reached 41 – an increase of 310% from January 2010. Joel Greene, a broker with Condo Hotel Center says: “Generally speaking, these properties do very well upon resale. Part of their value is that the demand is currently far greater than the supply. However, more importantly, the whole concept of fractionals and the success of fractionals revolve around their exclusive location.”
Way out | Knowing that there is a proper resales market is essential for many buyers
Next, think about how to structure your product when it is made available on the market. Property lawyer Andy Sirkin of Sirkin & Associates says exit strategies are critical. “Make sure it’s clear to the owner how they can get out if they want to. This has to be systematic and predictable. In terms of resales - do you have to hold ownership for a certain amount of time before you resell?” Sirkin says there are a range of exit strategies to consider, including right of fi rst refusal (whereby other owners can buy and accumulate more interest
George Sell is the editor of Fractional Trade. Visit:
www.fractionaltrade.com
in the property if they want to), buyer approval (whereby the prospective buyer can be vetted by other owners) and guaranteed exit, whereby the property is sold on a defi ned date, or owners can vote to sell it at set dates in the ownership calendar.
This last option is the one used by some of the more investment driven fractional ownership funds such as Rocksure, which have a set date for selling the fund’s property portfolio and dividing the proceeds among shareholders.
Another model, which allows agents and developers a greater element of control of the number of resales available at any given time is to manage the release by formulating something along the lines of a “three in, one out” model, whereby every fourth sale will be a resale. In some instances the developer has fi rst refusal on resales – again this can help them manage the fl ow and pricing of resales so they aren’t competing against an unpredictable stream of resales. Under the Fractional Ownership Consultancy’s model the developer does not have fi rst refusal on resales – sellers must fi rst offer their fraction to the other co-owners. Should there be no interest then they would be allowed to sell in the open market. At this point the developer may choose to be involved. The range of exit strategies that can
be offered to a fractional buyer is almost as varied as the choice of usage programmes, and it is an equally important arrow in the sales quiver – make sure you do your research and choose the right one for your scheme and your buyers.
BUSINESS
Developer profi le
FRACTIONAL | 41
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