At the Ragatz Fractional Conference earlier in March, I moderated a panel called “What is Needed to Stimulate a Return to the Glory Days (or Close To)?” The panel’s premise was that the “glory days” of the fractional segment of the shared ownership industry was the period from 2006 through mid-2008, and the panelists were asked to speculate whether and how that segment could return to its best times.
The panelists – including Gregg Anderson of The Registry Collection; Carl Berry from Star Resorts; Mark Harmon of Auberge Resorts; and Howard Nusbaum, CEO of the American Resort Development Association (ARDA) – had several excellent insights on the challenges facing the fractional industry. Interestingly, there was not unanimity on whether those “glory days” were actually good times at all. The panelist pointed out that much of the overall U.S. real estate boom that ebbed and ultimately collapsed during that period was fed by rampant speculation and mortgage fraud, and given that a significant number of the fractional interest purchases during that time were made by so-called destination clubs, which were unregistered high-end timeshare plans that in turn sold memberships and (in many cases) ended up in bankruptcy.
There was a great deal of panel discussion about the fundamental value proposition presented by the fractional product, which we posited could be trifurcated into three aspects: (i) real estate value, (ii) service value, and (iii) use value:
- Real estate value is commonly viewed as the comparison of the price of fractional real estate to that of whole ownership in the same leisure market. Given that most leisure real estate values are severely depressed, and that they will be for the foreseeable future, our conclusion was that fractional regimes may be employed in certain circumstances to help sell leisure real estate at its pre-crash value, but certainly not at 2x or 2.5x multiples as was the case in the “glory days.”
- Service value is the perceived value of the ancillary services provided by a fractional product in the context of its price; in today’s market, this aspect of value is increasingly important to the successful fractional sale since the real estate value proposition is largely lacking.
- Use value—or the convenience and lifestyle enjoyment value of the product to the purchaser—is actualized by the creation and management of a use plan that provides the purchaser with flexible, year-round access to fractional accommodations while also monetizing unused time for the benefit of all fractional owners.
Everyone on the panel agreed that the fractional industry offers a lifestyle product primarily focused on service and convenience. But not everyone agreed that fractional products should or must be real-estate-based. Although fractional products have traditionally been deeded, some observers believe that the current decrease in importance of real estate value as a purchase driver may provide an opportunity for the employment of alternate structures for fractional products such as associations, trusts or clubs. However, most panelists believe that tax, regulatory and financing issues continue to dictate a real-estate-based fractional product structure, and that fractional interests should really be real-estate-based anyway in order to help differentiate them from points-focused timeshare products.
Notwithstanding the beginnings of a national movement towards some level of de-regulation of real estate offers in general (largely because of state government revenue deficits), the panel evidenced no real appetite for de-regulation of any kind of shared ownership, even by setting a regulatory exemption for high-end fractions based on product price or purchaser net worth. The panel did feel strongly that there is a great need for increased transparency in fractional product offerings: we should tell the customer the truth about what it will really cost to maintain and refurbish the product and to continue to provide the promised services at the expected quality level over the long haul. Howard Nusbaum also noted that many “fractional” offerings are decreasing the size of the fraction to respond to the marketplace and becoming much closer to high-end, multi-week timeshare products. He believes that this is a good thing, and he committed ARDA, the national shared ownership association, to continue to work with fractional developers to make the application of state timeshare laws to fractional products more palatable.
Ultimately, the panel looked into its collective crystal ball and predicted that the fractional industry is going to have to step up its game and emphasize the service, convenience and use value propositions associated with fractional products in order to weather the storm of decreased real estate values and return to its glory days.