Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Hospitality & Tourism, May 2008
Many people dream of owning their own cottage as a getaway during the summer. However, this dream is increasingly moving out of reach as the most desirable and accessible areas for a cottage are becoming prohibitively expensive. In addition, there is the time, trouble and expense of opening, closing and maintaining the cottage. As a result, there is an increasing market for shared ownership and use of resort accommodation that a person can still call home. One of the more popular ways to do this is the fractional-share condominium.
What is a Fractional-Share Condominium?
A fractional-share condominium is a condominium with a twist. In a regular condominium, a buyer acquires absolute ownership of a specified unit together with the right, in common with other owners, to use common facilities (e.g, a club house, pool, access roads and utilities) and to benefit from security services. A condominium is established under the Condominium Act in Ontario, or similar legislation elsewhere in Canada. Generally, a board of directors is elected to oversee the affairs of the condominium. The board appoints officers who, in turn, usually retain a professional property management company to manage the affairs of the condominium.
Safeguards for Buyers
The developer must comply with the safeguards imposed under condominium legislation for the benefit of prospective buyers. For example, the developer must produce an extensive disclosure statement about the proposed condominium, including a description of:
- the project in general;
- the units and common facilities;
- the proposed budget for the first year;
- restrictions on use;
- the percentage contribution of each unit owner to common
expenses; and
- the parking facilities and rights.
In addition, the developer must comply with consumer protection legislation on timeshares which, among other things, may limit the right of the developer to extend the closing date unilaterally. The buyer generally has a statutory right to have second thoughts and walk away from the purchase within 10 days after receiving the disclosure material.
The Twist
In a fractional-share condominium, the buyer acquires only a right to use the unit for a fraction of the year. In most fractional-share condominiums, two weeks of the year are set aside for maintenance and repair, leaving 50 weeks to be divided among the owners. For example, an owner of a 10 per cent interest could have a right to occupy the unit for five weeks of the year. Exactly how the weeks are allocated is up to the developer. There may be a combination of fixed weeks (the same weeks every year) and floating weeks (weeks that are different every year). Often there are restrictions on the most desirable weeks of the year, so that a buyer may not be able to use the unit for more than one week consecutively during peak season.
Fractional-share condominiums tend to work best for resorts. Here, individuals are more attracted by the notion of securing a vacation destination or at least having a property that they can trade for another time-share elsewhere on a timeshare exchange. They are less concerned about it as an investment.
Financing the Project
The availability of funds from the sales of units (whether as straight condominiums or as fractional-share condominiums) offers an alternative to conventional financing, particularly take-out financing, to a developer. While additional marketing and administrative costs are involved in developing fractional-share, rather than straight, condominiums, in certain settings and markets, fractional-share condominiums will be an advantageous way to proceed.
Operating the Project
As with all condominiums, the board assesses and collects common expenses from each owner based on that owner's fractional interest in the particular condominium unit. This is set out in charts included in the condominium documents. In addition, a reserve fund must be established to cover future major repairs and replacements. The following points apply to fractional-share condominiums:
- A rental pool is more likely to be established
— that is, the units are made available to other
parties as if they were hotel rooms, but the rents paid are
pooled among those owners participating in the pool.
- The units are usually furnished in a standard way. The
personal effects of an owner are removed when the owner
leaves and may be put into storage.
- The rooms are cleaned at the end of each period of use by
an owner under arrangements made by the condominium
management.
- Condominium owners may participate in exchange programmes
internally with other owners in the same condominium or
externally in international timeshare programmes.
- Compliance with or an exemption from applicable security
legislation, such as by having to produce a modified
information memorandum, may be required (this particularly
applies if there is a rental pool).
- All or part of the project may be operated as a resort
hotel. The developer may enter into a management agreement
with a brand-hotel operator.
Control
In some developments, the developer wants to retain control over the development even after the units have been sold. This may be in order to continue to have a source of profit, or to be able to entice a brand-hotel operator to take on the job.
Control could be maintained in various ways, such as by leaving parts of the project or buildings in the control of the developer or other parties (through ownership or under a separate condominium).
For example, the lobby, front desk, elevators and parking, as well as the fitness facility and pool, meeting rooms and mechanical and other service areas, may be owned outright by the developer or held in a separate condominium controlled by the developer.
The developer may also want to separate the components of the project into pieces to maximize value and facilitate development. For example, the restaurant may be free-standing and owned separately by the developer or another party. This suits the owner of a condominium unit or the lender, who may not want the risk of the restaurant at the resort.
Conversely, a specialized restaurant lender or operator knows the restaurant business and may want to deal only with the restaurant. The restaurant could remain under the ownership of the developer and be leased to a restaurant operator. However, the restaurant would be tied to the project by reciprocal easements, licences, leases or contractual arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.