Here’s another national publication that apparently sees fractional real estate ownership as being smart on a couple of levels:

“Remodeling the Notion of Green to Include Not Just New, but Pre-Existing Homes with Concept of Fractional Real Estate”  - April 2008

In the United States the concept of green building is still relatively new, especially as it relates to residential construction, development, and real estate markets. Momentum is building, though, with the growing adoption of Energy Star certification, the GreenPoint Rated program, as well as LEED for Homes rating. The recently-released LEED for Homes brings the U.S. Green Building Council’s emerging commercial sustainable building standards to the residential market. This move is viewed as a watershed for driving the construction industry to more eco-friendly residential home-building practices.

      Moving forward, green design is decidedly in the mindset, as home-builders, architects, project managers and the like study energy conservation topics, attend seminars, and learn-as-they proverbially go. This movement helps change the culture in an industry with a PR challenge looming: How to adapt a still-profitable core strategy—build more, sell more—amid a climate where yesterday’s McMansions engender negative public opinion akin to the single-digit gas-guzzling Hummers that were the rage earlier this decade?

      GM reinvented. The newer-model Hummers are almost twice as gas-efficient as the initial bling-era models. Instead of being perceived as part of the inconvenient-truth—again, build more, sell more—the real estate industry can reinvent itself green by not only endorsing green-building initiatives but by finding greener ways to practice.

      Enter the concept of fractional real estate

 

 

FRACTIONAL REAL ESTATE:

NEW, LEVERAGEABLE CONCEPT FOR RESIDENTIAL MARKET

 

At the start of the decade, the resort market was transformed by groups such as Ritz-Carlton, Marriott, Disney and so on. These were companies that successfully converted transient hotel-goers to fractional purchasers of large-scale condominium projects. By 2017, experts agree, more than 30 percent of all resort real estate will emulate this wildly successful model, where price per square foot fetches 50 or even 100 percent more than the market value. While this dependent Transactional Real Estate model was interesting to watch. “Watch” expressed the whole opportunity for any party other than the hoteliers, as opportunities for agents were limited or non-existent; invariably, the owners kept all profits close to the vest, managing contracts themselves.

 

Instead of “fractionalizing” hotel-scale mega-properties, imagine fractionalized sales of homes. To best illustrate the point, envision second homes—being sold in two, three, or even four shares. Essentially, fractionals are properties where several, not necessarily affiliated, parties share ownership and use of a second home or vacation property. (Technically, a fractional-deed co-ownership interest is a tenant-in-common deal on a property.) Thinking fast-forward, instead of business-as-usual, is how savvy agents can now take advantage of the emerging Independent Fractional Real Estate opportunity.

 

Practically any home, condo or cabin can be fractionalized, subject to a few criteria. An individual owner obtains his or her own title, representing fractional interest. For example, if four people fractionally own a property, each would own a quarter interest. As opposed to a “buy-into club,” this is a real estate transaction, entitling fractional owners to assume a mortgage, pay in cash, or sell upon attractive appreciation, just as they would with any other investment property.

 

Consumers are making the logical shift to fractional ownership. A person owning a second home or vacation property which cannot be used more than a few weeks per year is still responsible for the upkeep and management of the property throughout the year. It makes sense to fractionalize, not only to allow investors to recoup financially, but also to relieve the burden of sole ownership by distributing maintenance and management to many, versus one..

 

Since all owners have a common interest, they need to know how to share the use of the property in a way that is fair, equitable and even friendly. They need to know how the multitudes of operating expenses are going to be made and what the enforcements are among them. A formal fractional operating agreement answers these questions. This back-end management is the logistical “secret sauce” that enables Independent Fractional Real Estate for the residential market to be a win-win for all involved.

 

The win-win relationship extends to the sales infrastructure. Realizing greater per-deal profitability through fractional deals, agents can ease off the temptation to engage in high-pressure up-selling and know that their customers are, truly, ending up with right-sized properties. With independent fractional sales, handsome profit is available for real estate agents—in fact, more proceeds are available on a fractional deal than on a single-family property. Business-as-usual math might leave realty agents salivating at the chance to earn as much as six or seven percent. With Independent Fractional Real Estate, agents can earn nine and up to 15 percent on a fractional deal.

 

This win-win outlook leverages realty agents’ core competencies such as marketing, customer engagement and networking. Real estate agents’ customer-oriented front-end offer is paired with an administrative partner’s turnkey back-end to close high-yielding fractional real estate deals. In such a model, due diligence, co-ownership operating agreements, property-use schedules are handled under an operating agreement that delivers accessibility to what otherwise would be an unapproachable logistical issue..

 

In the past, funding options have been limited for fractional deals, and anyone wanting to purchase a fractional interest in a property was stuck paying cash. Now, more and more lenders are warming up to the concept and with recently developed financing products built specifically for the fractional marketplace, buyers and sellers alike have a number of financing possibilities.

 

The signals for setting values for fractional ownership are beginning to emerge. Lenders making fractional loans are establishing lending policies that allow for loan amounts based on values greater than traditional appraised values. These potentially present opportunities to capture an “equity premium” as traditional properties begin to be more often bought and sold fractionally.

 

As with many transactions, the real estate professional is at the center of the action. With resources from lenders and operating agreement providers, the fractional real estate industry has evolved to a point where everyone can walk away with a great deal.

 

 

GREEN PAYOFF FROM FRACTIONAL REAL ESTATE

America, due in no small part to the storied success of the construction, development, and real estate industries, has a global brand of a culture of excess.

 

In the 1950’s—single-family home floor plans constituted 290 square feet for each resident. Fast-forward another 50 years, and new homes yield almost exactly three times that for each resident—a remarkable 900 square feet.[i]

On a worldwide perspective, the US tendency toward excess is even more striking, according to environmental watchdog and blogger Stan Cox (AlterNet), who reports that the American home plans provision two whole rooms, per person, in each residence, compared to countries like Pakistan or Nicaragua only doling out 1/3-room-per-person[ii] But most shocking from Cox is his referencing Americans’ owning 5.7 million non-rental vacation homes—homes which he contends could house the nation’s homeless population 10 times over.[iii] While it is not the real estate industry’s responsibility to house the homeless, there is an important opportunity for ethical action and encouragement through Fractional Real Estate.

 

So the only “Joneses” Americans keep up with on this world pace is other Americans. In this vein, Jonesian math has encouraged Americans to own second—or, in the case of Inconvenient Truth cause celebrity filmmaker and global citizen Al Gore—third homes. A full 25 percent of American second homes are for seasonal purposes only, virtually guaranteeing wasted space one-half to three-fourths of the year.[iv] As to the utility of the remaining 75 percent of second homes, the U.S. Census Bureau’s American Housing Survey (AHS) indicates that a full 17 percent of Americans’ second homes are only “occasionally” used. On face value, that may not sound like too much wasted utility. However, digging a bit deeper one is left to puzzle the AHS’s definition of “occasional.” Its survey report defines occasional as being equivalent to less than eight days’ use per year![v] Certainly not a very green  definition.

 

Americans are not going to stop coveting second homes anytime soon. Nor are they going to want those second homes to be exceptionally petite. To effectively leverage the very large inventory of existing homes, the concept of Fractional Real Estate is, indeed, green where there may be no green to be found. But, as noted at the outset of this article, regarding new construction,  there are a number of green-building initiatives that are gaining traction with architects, builders, and community planners. These green standards do not allow for McMansions in green clothing. Case in point: The Los Altos, California community exerted extreme pushback when an enterprising “green” builder brought forth plans for a 9,000-square foot home, accompanied by a three-car garage and pool. Point? There are enough pre-existing large-scale homes, regardless of their use of energy-saving or recycled materials. “Big” homes should be pre-existing versus new construction; LEED penalizes large-scaled homes, noting that “a 100 percent increase in home size yields an increase in annual energy usage of 15-50 percent.”**

 

Green-think will shy from large-scale development. And, with government-mandated “open land” requirements, limiting development with the notion of preservation of austere space, there is a finite amount of new-development opportunity in America’s most coveted areas. From Maine to California, on both sides of the Rockies in Utah and Colorado alike, state and county governments and other interested parties are passionately at work to head off what the American Farmland Trust estimates is an annual loss of a million acres of productive farmland. The loss is chocked up to a six-letter word leaving distaste in all green-committed partiers’ mouths: sprawl. Aggressive state-wide initiatives in tourist- and resort-rich areas (read: second home) like Maryland, Florida, Oregon, Utah and Colorado are echoed by independent works of more than 1,600 documented volunteer groups to declare lands permanent open spaces, unavailable for buildout. Volunteer groups’ efforts alone account for 37 million acres.[vi] This September more than 2,000 government and individual leaders in the open land movement will convene at “Rally 2008:” the National Land Conservation Conference.[vii] Former United States Senator Jake Garn, who traveled into space in 1985, considered two of his greatest achievements in government securing enduring, unalienable rights for non-development of prime mountain wilderness above 2002 Olympic host city Salt Lake City and its neighbor to the South, home of Brigham Young University, Provo.[viii] 

 

 

 

GREEN-FORWARD AND GREEN-RETRO WITH PRE-EXISTING PROJECTS

 

The fix is finally in: It’s time to go green with construction, development, and real estate practices. Comprising less than five percent of the world’s population, the United States., nonetheless, has an energy-hog brand to overcome. As professionals in the real estate industry, the ninth-hour opportunity is nigh: Become expert in green building design and energy-saving home maintenance—both for self-managed projects as well as for represented projects going forward As to management of pre-existing, non-green opportunities? Look to leverage the profitable, very green concept of fractional real estate to help mitigate the regrettable McMansion era’s impact on our ecological footprint.

 

Cities in states as diverse as Virginia, South Carolina, New Jersey, California, and Texas have converted mid- or turn-of-the century (meaning 19^th to 20^th century progression) Victorians to a variety of multi-use projects. Hotels, multiple family apartment dwellings, or luxury condominiums are the delightful, useful translation of a once-opulant structures made green through reinvention. On a broader scale, municipalities from Salt Lake City to Austin have engaged in breakthrough ways for communities to more fully leverage resources like schools and libraries, brainstorming structure-possible activities such as evening day-care, computer lab usage and the like; all ways, again, of maximizing a building’s ecological footprint.

 

In this same mindset, fractional real estate seeks to maximize use of otherwise rare-visited residential properties, providing the real estate industry with an option that is a green double-entendre in terms of being both ecological and profitable.

 

Mark Chesney has participated in real estate investing for much of his professional life. He is the founder of GrandShare, which assists real estate professionals by providing a comprehensive, all encompassing system for buying and selling fractional real estate.

 

 

 

 

 

References:

LEED for HOMES—

http://www.greenhomeguide.org

 

Build it Green—

http://www.builditgreen.org/greenpointrated

 

Energy Star—

http://www.energystar.gov

 

US Green Building Council—

http://usgbc.org

This entry was posted on Friday, April 25th, 2008 at 3:45 pm and is filed under Buyers, Developers, Real Estate Professionals. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.