More Than the Sum of the Parts
BY Bill Walsh
Inflation has been quietly skimming along at just a few percent for the past several years low enough to skirt beneath the radar. Inflation has been largely unnoticed that is to say unless you are paying for health care or contemplating the purchase of a grown-up toy.
Luxury items have gotten pricey enough that the old adage “If you have to ask how much you can’t afford it ” has outlived its truthfulness. Couple that with 21st-century schedules that have put free time on an endangered list and you have a marketplace that is ripe for fractional ownership.
The typical business model of fractional ownership takes that grown-up toy divides it into percentage shares and sells those shares to individual owners. Participation gives an owner certain privileges such as a number of hours days or weeks of use and may also offer a portion of income if there is any and a percentage of the revenue when and if the asset is sold. Typically a company manages the asset — an airplane yacht high-dollar automobile — on behalf of the shareholders who pay fixed fees for the service plus any variable fees that may apply — fuel is a perfect example.
Fractional ownership of aircraft has been around for a good many years and started to really take off about a quarter-century ago. “The thing about aviation that you don’t see in other big-ticket items is that it comes with a lot of rules and regulations and that was a big factor in the development of fractionals ” says Watson Felts who handles aircraft acquisitions for Air Wilmington.
By his rule-of-thumb reckoning chartering is the best route for someone who flies 25 hours or less per year. Fractional ownership makes the most sense from that point up to 50 to 100 hours depending on the type of aircraft in which a share is bought. If you fly more than that you need to go solo Felts advises.
There are a few critical considerations Felts says in determining if fractional ownership is right for you. “First of all you have to assess the mission so to speak. Where are you trying to go how often are you trying to go and what are you trying to take with you? Speed is an afterthought; they are all fast they all enable you to do a day’s work and get home for dinner.”
Above all safety is a factor to consider. “Charter companies submit themselves to constant scrutiny and the FAA determines whether or not they are up to the task ” Felts says. “Shared ownerships or other arrangements … don’t have to submit themselves to that same scrutiny so you don’t really know what you’ve got. Scrutiny comes with a cost and a lot of people don’t understand that.”
Fractional ownership of recreational vehicles has become an established practice John Howard says but his Howard RV Center on
“Most people want to personalize an RV ” he says “more so than a car more than an airplane.” Co-ownership doesn’t really allow for that kind of embellishment Howard says and while the business model has carved a niche for itself it won’t take on the presence that fractional ownership of other assets has assumed.
That said RVs have certainly reached the tipping point in terms of cost — luxurious coaches outfitted with all the amenities start at well over $1 million — and as Internet sites touting shared ownership point out most owners use their vehicles only a few weeks out of the year. Expense and vehicle idleness are the two conditions that generally make fractional ownership attractive.
The standard deal is three to five years and shares range from a 1/10 for five weeks of use to quarter shares entitling you to 13 weeks per year. Should you want to use it more often you can generally buy more time.
The companies take care of maintenance and prepping the RV for each use. They provide 24-hour emergency roadside assistance driver training and usually concierge service. For an additional fee you can have the kitchen stocked or have the RV delivered to your residence or near your travel destination.
One company advertises that it makes sure everything is perfect for you right down to the personalization that Howard mentioned. “We monogram your sheets and towels set them up in the coach before each trip and launder them afterwards ” according to the Web site. “We can even stock your refrigerator with your favorite foods and beverages to make your trip more enjoyable.”
The typical family now has both spouses working ” Reliant Marine’s Pete Babinski says. “They’ve got soccer; they’ve got charitable commitments civic commitments and church commitments. They really can’t use a boat enough to justify it unless they are at an income level where it doesn’t make any difference. And even those people ” he adds “are generally money-savvy enough that they are just not going to waste it.”
Reliant Marine has been putting together fractional ownerships of boats for about six years. “You can subdivide any way you want as long as it makes all the partners happy ” Babinski says “and it can be changed for each LLC (limited liability company) that we set up.”
Usually there are two or three owners and scheduling has not been a problem Babinski says mostly because owners are generally not local and “it’s not like the boat is in their backyard. If you had a situation where all the owners were from here you would never want to have more than four because of the possibility of scheduling constraints and conflicts ” he says.
“Typically as we start the LLC we call the owners and ask what weekends or weeks have extreme importance to you? You go through and book the important dates then they are able to go to a secure online site and book use of the boat for themselves.”
The asset is capable of producing income too. Fractional owners who are not using the boat very much might charter it out when it would otherwise sit at the pier.
Fractional ownership arrangements usually end in two or three years Babinski says as agreed to by the owners going in. “At the end of that time frame they can vote to do one of two things. They can simply renew it and duplicate another two or three-year time span or dissolve it. If fractional ownership of the boat is dissolved the boat is put on the market sold and the proceeds of the sale come back to the owners by their percentage of ownership.”
Homes and vacation condos are generally much longer-term investments an observation that is not negated by owning 1/10 of the dwelling rather than the whole shebang.
Others have found shared ownership to be a solid investment opportunity McCormick notes “but let me clarify that to say that I don’t sell this based on appreciation and investment potential. Investors have a tendency to want to put the least amount in and take the most out. This is about families who want to use the property take care of it change the lightbulbs clean up any mess they might make repair or replace anything they might damage and make contributions to the property not take away from it.”
That said homes that are shared among owners have appreciated at the same or greater rate than other beach properties.
W. Smith Mill which already has fractionally owned homes on Oak Island and Ocean Isle Beach and is seeking property here sets up deals so that each participant gets a deeded ownership as does McCormick and there are several other local real estate agents who have experience in the market.
“These are for owners only and deeded is a key phrase ” McCormick explains; “the ownership is by general warranty deed. In an LLC or corporation or limited partnership or something like that you are subject to one deed and you are subject to contingent liability from your other partners. If someone wants to sell their share there is no distinctive measure of ownership. With what I do I am able to convey a deeded ownership and each 1/10 deeded ownership is bulletproof from the other nine shares in the unit.”
Each 1/10 share gets its buyer five weeks per year — two weeks are set aside each January for maintenance and repairs — and the calendar is set up on a rotating basis so that at the end of 10 years each owner has had access to the home every week of the year.
Owning an asset on a part-time basis is not the same as using an asset through a club membership and while there are plenty of people for whom fractional ownership makes sense there are plenty more who can find what they want through club membership.
Members of Freedom Boat Club headquartered in
“Our typical customer has owned boats before they have the discretionary income they just don’t want to maintain the boat ” he says. “They don’t want to stow it they don’t want to tow it they don’t want to winterize it. The service end of the club is great.”
Club members have unlimited use of the boats and can keep four reservations on the books at any one time making them up to six months in advance.
“We take away all the cost and overhead and allow more efficient use of the boat ” Swiatkowski says.
What better way to arrive at one of the numerous social events or fund-raisers than in a Bentley? Or an Aston Martin?
“This is a project that I started working on about a year ago ” John Gaffney says of Bentley’s Elite Motoring Club. “The idea is to afford people the opportunity to drive really exclusive cars for a fraction of the cost of regular ownership. We have a Bentley Arnage in the fleet an Aston Martin DB7 and we had a Ferrari 348 Spyder but one of our clients just purchased that.”
Like boat clubs this is not fractional ownership. “You are purchasing a membership in the club and the club owns the vehicles ” Gaffney explains. “Fractional ownership of cars will come — and there is some of that right now. But typically you’re talking about an initial investment of between $60 000 and $100 000 to take part in fractional ownership of exclusive cars.
“The basic idea is that you pay an annual membership and there are three different levels and that gives you X number of days motoring. The cars are cleaned maintained full of fuel ready to go. People can use them for special occasions or a weekend away or a trip down the coast ” says Gaffney whose day job is with Marine Max.
Club ownerships of various descriptions are springing up all over. There is an online club for instance — www.bagborroworsteal.com — that provides club membership in expensive handbags and jewelry. There is another club in
If it is something that you don’t do or use everyday — and if it is pricey enough — there is probably a club that can provide the service.
Time and money. Money and time. They are the two most important factors driving both club membership and fractional ownership. We are willing to spend a gracious plenty on objects if we have the time to enjoy them but time is increasingly the currency on which we are short. If what goes on in the rest of your life dictates that you can’t enjoy your expensive toys for many weeks out of the year what is the benefit of owning them while they sit idle?
An increasing number of folks are finding that there is none.