As with any other type of investment opportunity, when investing in real estate, it is crucial to limit the risks as much as possible while maintaining maximum returns. Fractional ownership is a good option in this regard, regardless of whether a party wants to develop real estate or invest in personal real property. Often mistakenly compared with the timeshare model, under the fractional ownership model, investors receive equity in a property and become co-owner thereof. As such, fractional ownership bestows on the investor most of the rights, as well as the obligations, derived from owning property. A general upside of investing in real estate is that property value tends to appreciate or at least stay the same.
With fractional ownership, consideration must be given to liability. Given that an investor is liable only for the percentage of equity which it acquires in a property, it will be liable only for any loss of value which is proportional to that percentage. Further, fractional ownership can limit the cost of maintenance and taxes payable on a property, as they are shared among all co-owners in proportion to their percentage of equity therein. Ultimately, owning a share of a valuable asset, such as real estate, enables investors to maximise their returns through options such as leasing or subletting.
Although fractional ownership is not specifically regulated by Mexican law, the Federal Civil Code and the correlative articles of the Civil Codes of each state(1) regulate co-ownership, which exists when the title to an asset is jointly owned by various owners. In general, all participants own the title to a property in proportion to their investment and are thus entitled to receive any income or benefit derived therefrom. Co-owners may then sell, assign or create a lien or security interest in their share of the property. Co-owners also have a preferential right of first refusal where any of the other participants sell their share in the property.
Fractional ownership has become a popular investment strategy in the holiday home market as it provides alternative options which can accommodate more specific preferences regarding property type and location. Trust agreements and fiduciary institutions(2) have therefore become quintessential elements of the fractional property model, as they act as vehicles to holding legal title to a property. Further, as these institutions are highly regulated, they greatly reduce investors' exposure to liability.
Given its nature, fractional ownership is unlikely to be considered by parties investing in real estate for the first time or for residential purposes. However, it is an attractive investment option when considering whether to purchase a second property or holiday home. Although similar to the timeshare model in terms of investment structure (ie, time allotments – whereby the investor is entitled to enjoy the property for a specific period each year), given that fractional ownership gives an investor actual title to a property, the investor can use it as they please (which includes leasing it to others). In other words, an investor can benefit from their investment over and above the returns that they receive from the property's appreciation. Such liberties are generally not permitted for timeshares.
Certain caveats should be considered when investing under a fractional ownership model, including with regard to an investor's share of the title and the extent of the liberties that this provides. Although investors under a fractional ownership model co-own a property and can enjoy it at their discretion, many decisions pertaining to the property must be approved by the majority of the owners (and often by more than a simple majority). The sale, lease or subletting of the property, as well as any changes, may be subject to the prior approval of the co-owners and the specific terms and conditions of the trust agreement on which the fractional ownership model is based. Administrative, maintenance and homeowner's fees must also be considered when organising a fractional ownership model. These matters tend not to be an issue when dealing with established developers (eg, vacation resorts or homeowner's associations), as such terms and conditions are usually already set out in the fractional ownership agreement. Nonetheless, they must be kept in mind when exploring this type of investment.
Other formalities of ownership exist, particularly for foreign investors in property located on the coast or near Mexico's national borders (commonly known as the 'restricted zone'). Given that foreigners are prohibited from directly owning property in such areas for residential purposes, certain instruments or investment vehicles (eg, real estate trust agreements or Mexican corporations) which allow foreign participation may be required.
Mexico is and will continue to be an attractive destination for investment of any kind. Whether investing in real estate for personal enjoyment or a business opportunity, fractional ownership has unique characteristics which can make investing in real estate more feasible and manageable.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.