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.