Fractional Ownership Contract: Everything You Need to Know
Fractional ownership contract is one that is common is certain industries, including the aviation industry, vacation homes, timeshares, and other properties.3 min read
A fractional ownership contract is one that is common is certain industries, including the aviation industry, vacation homes, timeshares, and other rental properties. Particularly, parties will divide an expensive asset into shares, thus allowing each owner to receive an interest in the asset for a fraction of the price. This gives the owners several privileges, including certain time to using the asset. The contract itself will allow multiple parties to share in the ownership of the asset.
Are Fractional Ownership Contracts Legal?
Yes, fractional ownership contracts are entirely legal so long as a written contract is entered into by and between the parties owning the asset. However, keep in mind that certain jurisdictions might not allow it; therefore, you should first check with the state where you want to enter into such a contract to find out if a particularly city or town would allow it. States can’t prohibit it outright, but certain cities might. For such contracts, there is certain language that should be included. You can check with the state’s website to find out if it offers such language. Note that California doesn’t offer it. Rather, the California Association of Realtors offers the language that can be used in a fractional ownership contract.
When writing this type of contract, you will need to clearly and concisely identify how the asset or piece of property will be distributed among owners, and the proportionate share each owner has over the asset or property. Additional information should be included in the contract as follows:
- Owner names/addresses
- Percentage of ownership
- The amount of capital each owner put into purchasing the asset
- Expenses, including who must pay what
- When and how long each owner has access to the asset
- Will access to it change every year?
- What other policies are included, i.e., one of the owners might not be able to use that asset on the allowable date during any given year
- Will the owners be allowed to further rent out the asset to another party? i.e., vacation home, whereby one of the owners wishes to rent out the home to unknown third parties during the time when which he can use the home
For example, let’s assume that 3 people purchased a vacation home in Florida. The contract states that John has use of the vacation home from January through April; Sue has access to it from May through August; and Mary has access to it from September through December. Now let’s assume that John is unable to use the vacation home at any point during January, February, March, or April due to personal issues. How can all three of them find a solution to this? They should include such issues in the contract, for how they will handle this type of matter.
How Are Ownership Costs Determined?
The costs will be divided among owners throughout the year. Such costs can include repairs, services, cleaning, etc. Since the costs will vary year after year, the owners should fully understand the cost variables while owning the asset. If the costs are to be predetermined in the fractional ownership contract, the parties should understand that the costs associated with upkeep and maintenance of the asset will increase over the years. Therefore, they should include language in the contract to address modification of the contract to meet the increase in costs.
How Does a Resale Occur?
Generally, when someone owns a piece of property, he or she will earn a profit once that property is resold; at least, that is the hope. If one of the owners to a fractional ownership asset wants to sell his or her share in the asset, there must be a process in place for approving the sale. Will the other owners require that he or she sell the ownership share to the other current owners? Or will the owners require that they first meet and interview the potential new owner before selling that ownership share to the new owner? These are all issues that should be addressed among owners before entering into a fractional ownership contract, as this will prevent legal issues down the line.
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