An Innovative Way to Own a Vacation Home -- For the Privileged Few

The dilemma of owning a vacation home in a luxury resort is centered on the question - "Is the expense to maintain it justified when compared to its part-time use? The answer more often than not is "NO ". The solution to this dilemma has been found in various methods of shared ownership. Timesharing is one such method. However, the pitfalls to this method have been well publicized. As a result, more refined methods have evolved known as fractional ownership or residence clubs. These methods have found widespread acceptance.

Currently, the privileged few have discovered an even more innovative method of sharing vacation home ownership. Revolutionary in concept, it entails purchasing a shared ownership interest in a limited liability company whose singular asset is a singular deed to a vacation home.

This guide will draw a comparison of this new approach to traditional timesharing and fractional ownership. In a question and answer format it will give you a clear understanding as to why this approach is a more financially sound.. It will also address the economic benefits of owning a vacation home as opposed to renting hotel accommodations.

FREQUENTLY ASKED QUESTIONS

"What is an LLC?"

This is a legal entity which is created by registration with the Secretary of State in much the same way that a corporation is formed.

"How does this form of shared vacation home ownership differ from timesharing or fractional ownership?"

Timesharing and fractional ownership entail multiple deeds or leases to time periods for the right to use the same vacation home. In the case of residence clubs, the right to use is evidenced by a membership certificate. The limited liability company form of shared vacation home ownership entails only one deed.

"What is the advantage to having one deed held by the LLC as opposed to multiple deeds which are used in timesharing and fractional ownership?"

Having only one deed enables the seller to offer the ownership interests at a lower initial cost. Plus, when ownership of a piece of real estate is vested in one entity the ability to sell it at some point in the future is a good deal easier than trying to sell something which is encumbered with anywhere from 12 to 50 deeds, held by different owners. Typically, the timeshare owner discovers that their timeshare interest can only be sold at a deep discount from the original purchase price.

"Why does the sale of one deed give the seller of this concept the ability to sell at a lower price than a timeshare seller?"

The seller of this concept has significantly lower sales and marketing costs, resulting in a lower purchase price. Developers of upscale timeshare resorts are currently selling a timeshare week for approximately $18,000. Approximately, 35% to 40% of this cost is to cover sales and marketing expenses.

Someone has to pay for the incentives offered by the timeshare developer in order to lure you in to hear a sales presentation, i.e. free meals, free hotel accommodations, free tickets, etc. Plus the people standing in hotel lobbies and street corners, who are asking you to take advantage of these incentives, get paid a commission. Then, of course there is the commission paid to the onsite salesperson and salaries to the administrative support staff. Think about it. A 100 unit condominium, being sold on a deeded week basis, entails the sale of approximately 5,000 deeded weeks. The marketing expense to do this is substantial.

The marketing and administrative costs associated with this new concept are substantially lower. Using the same example of a 100 unit condominium, the seller now only needs 400 to 1,200 purchasers. The sales and marketing expense required to find these purchasers is far less expensive than trying to find 5,000 purchasers. The obvious benefit is that each shared ownership interest can be sold for a substantially lower price.

"In whose name is this deed held?"

The deed is held in the name of a limited liability company (LLC). This deed is the only asset that is owned by the LLC.

"If the deed is in the name of the LLC, what do I receive in order to show that I am an owner with a right to use the property?"

You will receive a certificate of ownership which shows that you own part of the LLC.

"If I don't have title to a specific time period, how do I know when I can occupy the condominium?"

The LLC is controlled by a document called an operating agreement. This document covers in full detail all aspects of how the holders of certificates of ownership inter-react with one another, i.e.: sharing of expenses and rules for reserving the condominium.

In order to reserve the condominium, you would contact your LLC manager. The reservation rules provide for annual rotation among the holders of certificates of ownership as to who gets to select first, second, third, etc. Reservations can be reserved for contiguous time periods or split up, subject to the reservation rules.

"How much time is allocated for my personal use?"

This depends on the number of shared ownership interests offered by the seller. Obviously the smaller the number of shared ownership interests, the greater the number of weeks each owner has for personal use. The number each owner receives also depends on whether or not the LLC's operating agreement provides an option for an income producing rental program which would have time allocated for this purpose.

"How many certificates of ownership are available?"

The number is flexible, depending on the seller. It typically ranges from 4 to 12.

"May I purchase more than one certificate?"

Yes, most sellers will permit you to purchase more than one certificate.

"Is it possible to restrict the ownership of the certificates to myself and other family members or friends?"

Yes, most sellers will permit you to restrict the ownership of the certificates to an exclusive group organized by you.

"How does a LLC differ from a corporation?"

The answer to this question is best addressed to your attorney or accountant. The simplistic answer is: a corporation has stockholders, a board of directors, and officers. A LLC has the individuals who hold certificates of ownership. A corporation's business is conducted by the board of directors and officers. A LLC's business is conducted by its certificate holders either as a group or by its manager. The LLC insulates your personal assets from creditors in a similar manner as provided by a corporation. The LLC has its own Federal tax ID number. Double taxation is avoided in much the same way as a subchapter S corporation. Income and expense are passed through to the certificate holder.

"How do I form a LLC and what is the cost?"

The seller will have already handled the formation of the LLC and paid the necessary legal and regulatory expenses.

"Does owning a vacation home make sound economic sense?"

The purchase of a vacation home should be viewed as an alternative use of your vacation room rent dollars. How much do you spend annually renting vacation accommodations? Multiply this number by the number of years you plan on continuing to take vacations. Adjust this result for inflation. Now think about this. At the end of the road, what do you have? You have fond memories and a stack of room rent receipts. How much can you sell these for on the open market? Doesn't it make sound economic sense to get a double benefit from your vacation room rent dollars and buy a vacation accommodation that has residual value?

"Do vacation homes appreciate in value?"

Vacation homes are subject to the same market influences as affects other real estate, the value could go up or it could go down. If the worse case scenario happens, whereby when you sell, you end up getting less than what you paid. This is still a better outcome than the value of your room rent receipts which is zero.

"Is there any other economic benefit to owning a vacation home?"

Another economic benefit is that you are getting more value for your room accommodation dollar. As a vacation home owner, you will be occupying your privately owned luxury suite at a significantly lower cost. Plus you're most likely staying in an accommodation that is a significant upgrade from what you would have rented.

"Who is responsible for maintaining the property?"

If you have ever owned a vacation home on an individual basis, you are well aware of the significance of this question. Absentee ownership of any type of real estate can sometimes be a nightmare. With this type of shared vacation home ownership you are completely removed from the worry of maintenance and repair. Your LLC manager will handle everything in this regard.