Mark Leiner likes to think ahead. He has five kids and knows that time with them and his future grandchildren- will be difficult to come by. So what better way to bring everyone together than a luxurious vacation in St. Thomas? Or New York City? Or France? Two years ago, Leiner and his wife, who own a restaurant in Ocean City, Maryland, joined a destination club. Their membership gives them access to 100 homes in the United States, Mexico, the Caribbean, and Europe, and the residences are first class: $2 million homes with three to five bedrooms, gourmet kitchens, spa bathrooms, pools, hot tubs, and a concierge who will stock the wine cellar and make their theater reservations.
"I have a large family," he says. "If we go someplace, you're getting three hotel rooms. You're still separate, with none of the functionality or luxuries of home living, and basically paying the same money."
The Leiners' membership in a destination club is similar to fractional ownership, which can apply to just about any luxury item-vacation homes, private planes, luxury cars, yachts ... all the way down to designer handbags. The idea is to pay a fraction of the price for something you use only a fraction of the time. If you want your property for four weeks a year, done. Prefer two months? No problem. Your ownership (or membership, in the case of destination clubs) time is flexible and based on your needs.
Even five-star hotels in the best locations have their limitations, which is why many people opt for the second home. But while a vacation home in Aspen or Tuscany sounds good, sometimes it's difficult to justify spending the money and the time on a place you'll visit, say, two months a year. And sometimes it's just a hassle to own and be responsible for two homes.
So why not only pay for the time you'll be on holiday and let somebody else take on the burdens of ownership?
"This is an alternative to a second home," says Lawrence Hefler, owner of the Orlando-based Hefler International Group. "This all grew out of the fact that people like Aspen, but few people can afford to buy there. But they can afford to buy into a fractional."
In the late '90s, a group of young Colorado and Utah entrepreneurs added new dimensions to an old idea, creating what would become known as fractional ownership or shared residency. Over the years, the fractional industry experienced explosive growth, and today it's a $2 billion business. According to the 2007 Ragatz Associates survey of the industry in North America, sales volume went from $513 million in 2003 to $2.1 billion and growing in 2006.
The first generation of fractionals began by selling the romance of travel - the idea of anywhere, anytime access. "You could spend the rest of your life on vacation," said one young entrepreneur.
Today buyers can have the shared residence experience in a variety of ways. First, of course, are the fractional properties, which offer everything from vacation resort options to a true second-home experience. There are also private residence clubs and destination clubs, which are equity - or membership - based.
While fractional properties involve deeds, private residence clubs can take the form of a deeded interest or a membership purchase, and destination clubs are networks of resort homes in many locations for which you buy a membership. "The basic difference in the two models is in [fractional ownership], you get ownership of a real estate asset, which you could sell or give to your kids, but it's really only one location," says Greg Shove, founder and CEO of Helium Report, a San Francisco-based web site that provides fractional industry analysis. "With the destination clubs, you have access to, say, 300 homes in 30 locations.
"That's the trade-off," he says. "If you always want to go to Beaver Creek for ski week, always want to go to Aspen for Christmas, consider a private residence club or fractional property. If you're flexible - want to go skiing for ski week but are fine if it's California or Colorado - then a destination club might be a good choice."
While a second home may be an investment in real estate - with all the risks that entails - fractional ownership is an investment in a lifestyle.
Arriving at your traditional second home in Miami, for example, means being met with a hot beach house, between-trip dust, and an empty kitchen. Staff at fractional ownership properties, private residence clubs, or destination clubs will set the temperature to your preference, stock the refrigerator, put out your personal photographs, and leave a car at your disposal.
Jim Whitteron, co-founder of the Deer Valley Club, the first fractional club in the United States, says the lifestyle is what sells the product. And David Matheson, vice president of corporate communications for Starwood Vacation Ownership, agrees.
"Our industry has been most successful because it promotes a lifestyle," Matheson says. "The product - the residence or condo or unit - is sort of a byproduct of the lifestyle." For families like the Leiners, the size of the homes is another major benefit.
"As the kids get older, vacationing together becomes even harder," Leiner says. "With this, they can be off doing their own thing or we can be doing stuff together. With a large family, space is very important."
According to the Ragatz Associates survey, potential buyers consider fractional ownership for three main reasons: getting all the good of owning a second home without the bad (responsibility, costs, etc.), investment or equity appreciation, and the value. And it looks like fractional buyers are happy buyers. Of the owners surveyed, 95 percent say they are very satisfied or satisfied with their purchase.
"These products are really designed to appeal to people who are realizing that to own a second home and put up with all the heartache to use it three weeks a year may not be the best use of time," Shove says.
Shared ownership and membership is more a reflection of your way of life than it is your financial portfolio.
Just like the beach house you rented last summer, destination clubs won't bring a return on your money; the memberships can't be lent, given, or sold (although clubs generally pay you 80 percent of your membership fee if you let the membership go). And fractional ownerships are too new to predict.
"It's still too early to be able to say the resale market for these fractions is strong," Shove says. "You need to be comfortable that you will use the homes, enjoy the travel, and that this is not a pure investment. This is a decision about how to enjoy your downtime."
And that is an entirely different kind of investment. TC
The vacation resort experience. Usually offered through branded resorts that create fractional residences on their property, yet allow the residence owners to use the various resort/sport/spa facilities. Examples include Hyatt Main Street Station in Breckenridge, the St. Regis Residences, and The Ritz Carlton Club & Residences.
The true second-home experience. Shared residence collections such as Solstice and The Weybridge Collection offer multimillion-dollar residences and villas that aren't located near a resort but are in exceptional destinations with excellent amenities.
Destination clubs. Clubs such as Quintess and Ultimate Resort offer members access to various locations throughout the world.
Private residence clubs. Once called high-end fractionals, these clubs include both deeded and membership-based models. Examples include Epiphany Clubs' The Club at Solaris in Vail and The Club at Tristant in Telluride; Pond Bay on the island of St. John; and The Sky Lodge in Park City, Utah.
Deeded fractional properties. A true shared ownership model. Many include resort-like amenities. Examples are The Villas at The Grand Del Mar in California, Capella Pedregal Residences in Cabo San Lucas, Pelican Marina Residences in St. Maarten, Aventuras Club on the Mayan Riviera in Mexico, Calistoga Ranch in Napa Valley, and The Whiteface Lodge in upstate New York.
The Helium Report's Greg Shove predicts that fractional ownerships and private residence clubs will do more to incorporate one of the biggest selling points of destination clubs - location flexibility. "The future will reflect the fact that people like the destination club model because they like the flexibility and like to travel to new places," Shove says. "Residence clubs will respond by building more networks."
Although there are such properties in France, South Africa, Dubai, New Zealand, and other destinations, fractional ownership is mostly an American idea. Experts predict, however, that the industry will grow internationally.
In the United States, 4,000 households are members at destination clubs. Shove predicts that number will increase to 50,000 to 100,000 in the next decade with similar growth in the fractional ownership market.
Other fractional property works the same way as vacation property. With Miracle Yachts, you can own one-tenth of a 72-foot Cheoy Lee, ensuring 30 days of use per year for $240,000. NetJets offers one-sixteenth interest in a Hawker 400XP, giving you 50 hours of annual flying time for $412,500. And the Classic Car Club in Manhattan costs $7,500 for a standard membership, where you'll have access to the Porsche, Ferrari, or Maserati of your dreams.
Ask yourself these three questions when considering shared interest:
1. Does the club or resort have locations in the places you and your family want to vacation?
2. What amenities and services does the club or property offer?
3. What is the financial stability of the club or developer? For example, in the case of a destination club, be sure it has enough assets to refund all membership deposits (up to 100 percent of the membership price) if it were to close.