Fractional Ownership – What needs to be considered?
Especially in these days of global economical crisis, an investment concept like Fractional Ownership might benfit from buyers becoming more and more sensibel regarding the actual costs and the potential risks of their investment.
Whenever a buyer considers to invest in such fractional ownership structur, prior to signing of any legal document, understanding of the basic legal principles of this specific ownership structure is highly recommended.
Basically, fractional ownership is described as method of co-owning a single or several assets by more than one individual or entity - a group of investors. Usually a legal entity legally owns the asset, e.g. a residential holiday home, a leisure yacht or a private jet, wherby such legal entity is controlled through a number of investors who become shareholders and therefore indirect owners of the asset.
The costs and use of the asset is shared amongst the shareholders in relation to the percentage shareholding. The shareholders are the indirect owners of the asset, and therefore control all aspects of the property through a private company. Typically, the company grants its shareholders certain time periods to utilize the asset by means of a shareholders’ agreement.
Widely misunderstood is the difference between Fractional ownership and Time Share. Generally spoken, the major difference is that time share buyers buy time in an asset, whereby fractional owners actually indirectly own (a part) of the property, yacht or jet through their stake in the asset owning company.
A fractional owner may sell or bequeath its interest and even benefit from the appreciation of the asset´s value, whereby time share typicall does not offer the described advantages due to legal or market reasons. Basically time share buyers receive only a timely limited right to use a specific property which extinguishes after a certain period of time unless the buyer decides to „buy new time“.
Naturally, these considerable differences will be reflected in an higher price of fractional ownership compared to time share.
In regard to the legal documentation to be executed when buying fractional ownership interest, a buyer typically is required to sign a share sale and purchase agreement as well as a shareholders agreement under which important points as terms of payment for the shares in the asset owning company will be outlined as well as provisions stipulating under which conditions each and every shareholder shall be entitled to use the asset, what proportion of the occuring management and maintenance fees need to be paid and processing of a resale of individual share interest by single shareholders. In this context the agreements should also be carefully examined in regard to consequences which may occur in the event single shareholders are in default including but not limited to their payment obligations regarding management and maintenance of the company´s asset.
Summarizing, fractional ownership might gain in popularity as an economical way to enjoy and realize your personal dream also in times of a worldwide economic slowdown.
This article is written by Michael Greth, Consultant of the Phuket based law firm International Law Office Patong Beach Co., Ltd.,
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