I recently attended the 2008 Ragatz Fractional Interest Conference in San Francisco.  I was amazed at the number of people in attendance, it seemed like more than twice as many as last year.  I'm not sure just how many people were there, but it was impressive.  I shouldn't have been surprised, but I was by the sheer number of the big guys who where there.  Ritz Carlton, The Fairmont, Hyatt, Starwood, Marriott, they were all there, all with more and more fractional interest projects.  The industry is here to stay and growing, even given the slowdown in the ecomomy and real estate market.

For those of you new to the fractional interest market, let me first talk about the key differentiators between timeshare and fractional ownership interest.  Fractional interests are between 1/12 – 1/4 shares – timeshare can be as much as 1/52 share. 
With fractional ownership you own the property, it is deeded most commonly with a Tenants In Common agreement or  TIC.  You own the property and have all the rights of ownership, you can rent, sell your share, leave it to your heirs.  With timeshare you often own nothing more than a slice of time, you don’t own a given piece of property, and in many cases you  purchase time on a point system which allows you to trade your points in on time in different locations.  The challenge comes in getting a reservation in a location and at a time you most desire or deciding at the last minute you want to get away from it all.

Fractionals also differ in their level of amenities.  Fractionals often come with concierge service which may include airport pickup, unpacking of your belongings that are store on property, a stocked bar and refrigerator with items you want, reservations made for golf, dinner, etc, in-house meal prep, once or twice daily maid service and much more.  Fractional properties have very high end appliances, granite, stone, and are located in the top resort locations in the world.

The following is a synopsis of what I thought were the key points coming out of the conference.  It see the official report visit  www.northcourse.com and download the 2008 North American Fractional Interest Report.  Special thanks to Dick Ragatz for his dedication to the industry and for sponsoring the Fractional Symposium year after year.  http://www.ragatzassociates.com/

Results for the year 2007
Fractional Interest Project vs Private Residence Clubs
According to the formal report, a Private Residence Clubs are those properties in which the cost per square foot exceeds $1000.  They typically have higher levels of amenities and are often associated or part of a luxury resort that also includes a hotel and full ownership properties.  For the purposes of this overview, I will not differentiate between PRC's and Fractional Interests because so many Fractional Interest Projects call themselves PRC’s anyway and I don’t see a significantly different buyer for one or the other.

PROJECTS
The number of Fractional projects has increased approximately 14% since 2006 from 135 projects to 153 projects.  There are a total of 300 projects of which 153 are in active sales. 

SALES
Sales has increased by 8.3% to almost $2.3 Billion  - note most of the growth occurred in the first 6 months of 2007. Not surprising given the economy and the mortgage crisis. 
Sales from 2005 – 2006 was 7.8%.  Interesting what the growth would have been if the economy and mortgage situation didn’t occur.

DESTINATION CLUBS
Destination Clubs are now 27% of the market with approximately 6000 members industry-wide.  Destination Clubs differ from Fractionals or PRC's in that they are non-equity clubs.  Typically you pay a large fee to join that buys you a set number of days in any of their resorts around the world.  the main difference is with a Destination Club, you do not own real property, just the right to use it.
Exclusive Resorts is the largest, others include Ultimate Resorts and Quintess. 

LOCATIONS
Fractional project geographic distribution looks like this:
  72%  of all fractional projects are in the US.  Within the US:
  13% are in Colorado
  8% are in California
  5%  are in Florida
  46% are in other areas

Outside the US:
15% are in Canada
5% are in Caribbean
8% are in Mexico

OBSERVATIONS
A couple of things that stood out to me that I found interesting. First being the size of the projects
Most (68%) of the Fractional projects have between 10 and 50 units.  With 36% of the projects building between 10 and 24 units.  I was a little surprised by how small the projects were.

It struck me just how long it takes to sell out a fractional project.   Some examples:

• Esperanza Resort in Cabo, 63 luxury villas offered at 1/8 and 1/6th shares began sales in 2003 and sold out in 2006
• The Timbers in Snowmass, Colorado had 36 three bedroom residences offered as 1/8th shares began sales in 2000 and sold out in 2004
• The Rocks in Scottsdale, AZ  40 Villas offered at 1/7th shares started sales in 2003, sold out 2007

Net net = expect the average share sales to be between 6 and 12 shares sold per month.

I believe the major factor effecting speed of sales today is lack of knowledge on the part of the consumer that this type of ownership option is even available.   Having been involved in this industry for over 2 years, it still surprises me how few people I meet understand or even know this option exists. The other main factor is the confusion between fractionals and timeshare.  People immediate associate fractionals with timeshare, get turned off and look no further.  The answer is awareness and education.

UNIT STATISTICS 
We are still seeing the popularity of two and three bedrooms between 1500 and 2000 square feet respectively.  
Normalizing prices to a per week cost allows us to compare differing sizes of shares.  The industry average price per week ranges from between $25k and $50k. 

MAINTENANCE
Average maintenance per week ranges from $750 to $2000.  Maintenance fees are up 9% from last year.The factors effecting price and maintenance are:
 Size of unit – ie number of bedrooms
 Location
 Level of amenities

SHARE SIZE 
Share sizes range from 1/12 or sometimes 1/13 to ¼ with 1/8th shares being the most common.  Share sizes tend to depend on the type of market being served by the project.  If the project is in a driving market, one in which most of the owners drive to the property, we tend to see larger shares such as ¼ shares where owners typically own one week a month.  For flying markets, ones where people tend to fly there and stay longer, 1/12, 1/10 and 1/8 shares are more typical.

USAGE PLANS
 There are many different types of ADD LINK TO USE PLAN ENTRYse Plans, from fixed, rotating, floating, hybrids, space available and many variations of these.  Use Plans are key to the success of a project so do a lot of homework on what works in the area you plan on fractionalizing. 

COSTS
Operating costs are much less expensive than your typical timeshare operating costs.
For fractionals costs breakdown:
 54% Product Costs
 17% Operating Costs

 For time share the operating costs are about 55%

THE BUYER
A few words about the prospective buyer survey done of 500 subscribers to the Robb Report:
 45% already own a single family vacation home
 19% own are resort timeshare
 18% own a resort condo
 14% own a condo hotel

 91% had heard of the concept
 22% own or are looking
 52% would consider

 Beach resort most attractive at 83%
 Purchase motivations:
  Own a second home at much lower cost
  Pay only for what they would use
  Good value
  Appreciation
  Level of services
 Purchase hesitations:
  Can I resell?
  Will I get the time I want?
  Rental income?
  Sounds like a timeshare
  Prefer whole ownership

From existing  owners
 68% said were very satisfied
 89% said they would purchase in hindsight

THE MARKET
There are almost 4 million people in the US who earn over $200k annually. They are the potential market for this product.   To date there are approximately 50,000 existing owners of Fractional properties.  The potential market is huge. I think the market for Fractional ownership is steadily growing, but I also believe the single biggest factor preventing even faster growth is the lack of awareness or the misunderstanding of what fractional ownership really is.  As fractional ownership becomes more mainstream, baby boomers with high net worth retire and look for that second and third home and as the market recovers from the recent downturn the market for fractionals ownership is poised to explode.