Halogen Guides consulted financial legal experts Mel Weinberger and Danica Kubick to break down two popular luxury home ownership alternatives: fractionals and destination clubs. Both have benefits and pitfalls, read on to see what they found.

Luxury fractionals and destination clubs offer vacation home benefits at a fraction of the cost of owning an entire vacation home. The decision to purchase a fractional or destination club membership is nonetheless significant, as fractional prices range from under $50,000 to several million dollars, depending upon the size of the fraction, the location of the resort, and the degree of luxury provided.

Additionally, membership deposits for destination clubs typically range from $30,000 to $3,000,000, not including annual dues. Consequently, your purchase of a fractional or destination club membership could prove to be a costly mistake unless you have sufficient information regarding a particular fractional or destination club.

Ownership Structure

A fractional purchaser typically receives an undivided percentage interest in fee simple in an individual residential accommodation and the related common areas of the applicable resort or other property, affording the purchaser the right to occupy such accommodation or one of similar size and type and use the property’s amenities for a certain number of days or weeks each year. A fractional accommodation is most often a condominium unit but can also be a town-home, detached single family home, or hotel suite. Some fractional projects participate in an exchange program, whereby purchasers have access to other properties of comparable quality located throughout the United States and abroad.

Purchasers of destination club memberships generally receive no interest in real property. Instead, they typically receive a non-equity interest in the destination club, which allows them access to high-end accommodations in highly desirable locations around the world for a certain number of days or weeks each year. In a few cases, purchasers receive an equity interest in the real estate portfolio of the club and share in a portion of the appreciation, if any, of such real estate portfolio, in addition to the right to occupy the club’s accommodations.

Purchase Price; Assessments and Dues

Fractional purchasers pay a one-time purchase price and yearly assessments that cover the expenses of operating and maintaining the fractional project. Destination club members pay an upfront, refundable membership deposit (sometimes payable in installments) and annual dues that cover the expenses of operating the club’s accommodations. Some destination clubs also impose a per diem occupancy charge in addition to such annual dues.

Financing

Although financing for the purchase of a deeded fractional interest isn’t nearly as prevalent as it is for the purchase of “whole” vacation homes, more and more lenders are treating the two purchases similarly for financing purposes. On the other hand, little, if any, financing is currently available for the purchase of a destination club membership, partly because no adequate collateral for the loan exists (it’s impossible to place a mortgage on a non-equity or equity club membership interest). As a result, virtually all destination club purchasers pay in cash or finance their purchases, whether through home equity loans or other independent means.

Resales; Deposit Refunds

You should only purchase your fractional or destination club membership for personal use, without any expectation of rental returns, appreciation, or other financial benefits – an exception is the very few destination clubs that are sold as investments and registered or exempt from registration under federal and state securities laws.

With respect to resales, you can sell your fractional just like you can sell a wholly-owned vacation home. Before purchasing a fractional, however, you should confirm that subsequent purchasers of your fractional would have the same use rights and privileges that you would have as the original purchaser. You should also determine the amount of any transfer fee, if any, that you or your purchaser must pay. In addition, the slowing real estate market and market saturation in certain locations may affect the resale potential of your fractional.

Destination club members typically can’t resell or otherwise transfer their memberships. However, most destination clubs allow members to withdraw from the club, whereupon the club refunds the membership deposit, in whole or in part (usually between 80% and 100%). Annual dues are never refundable. In addition, some destination clubs place restrictions on a member’s ability to withdraw from the club, including allowing such withdrawal only after a particular period of time or only after a certain number of new members have joined the club.

Accommodations

Fractional accommodations, usually condominium units, typically contain one to four bedrooms and are equipped with high-end furniture and finishes. Destination club accommodations typically range from three to five bedrooms, are most often detached single-family homes (except in urban settings), and are equipped with gourmet kitchens and top-of-the-line furniture and finishes.

Rentals

Fractional purchasers may or may not have the opportunity to rent their reserved accommodations. However, due to existing federal and state securities laws, the developer may be restricted in the specific information that it can discuss with you regarding an available rental pro-gram. You should consult with the rental program representatives, if any, for more details regarding the ability to rent your reserved accommodation.

Destination club members usually cannot “rent” their reserved accommodation in the traditional sense. Before purchasing a destination club membership, you should determine whether you are able to share your membership, the fees associated with sharing your membership, and any limitations on with whom you may share your membership.

Learn more about luxury fractionals

• Download Halogen Guides’s Decision Guide to Private Residence Clubs
• Directory of over 260 private residence clubs
• Glossary of fractional ownership terms

Learn more about destination clubs

• Download Halogen Guides’s Decision Guide to Destination Clubs
• Directory of destination clubs
• Glossary of destination club terms

Mel Weinberger is a partner and Danica Kubick is an associate in the Washington, D.C. office of Holland & Knight LLP. Mel and Danica, together with their colleagues in other Holland & Knight offices, have a well-earned national and international reputation for providing expert legal representation to developers of fractionals and destination clubs among others. They frequently counsel clients on compliance with the myriad of complex federal, state, and local laws that govern such development. They can be reached through hklaw.com.