Guide To Fractional Ownership Investments
Fractional assets are assets where the ownership can be held by many individuals in percentages. Assets are sold to prospective asset owners in small fractions or percentages. Thus, the cost of the total asset gets divided among the fractional asset owners. Accordingly, the benefit and revenue arising out of the asset are also split among these shareholders. This type of arrangement is used for purchasing expensive assets like commercial real estate properties
Thus, if you have fractional ownership of a holiday resort, you and other fractional owners will get a share of revenue arising out of the resort. Any appreciation in the value of the asset can be jointly enjoyed by all the fractional owners. They can also use the resort for their personal purposes in their capacity as fractional owners.
Fractional ownership assets are managed by property management firms and agencies. They are the ones who offer the investment opportunity to the prospective fractional owners. These firms may have a network of properties or a collection of assets across various locations.
Fractional ownership can be implemented through Special Purpose Vehicles (SPV). As we will discuss under the different fractional ownership models, investors may start a limited liability partnership, company, trust or cooperative. They will pool their funds in such an entity, within which the SPV will function. You become a fractional owner through the SPV.
The management of fractional assets has to be done with adherence to applicable laws and statutes, like RERA, Companies Act, Income Tax Act and so on.
Ownership models – If you are looking to invest in a fractional ownership proposition, there may be a few different ownership models to look at. Depending on the model the taxation will differ, and as would the benefit that you derive from it. Here are four of the feasible ownership models of fractional assets.
Cooperative model – In this arrangement, the investors can form a cooperative society. The asset is purchased by the Shared Opportunity 34Q&A Guide To Fractional Ownership Investments cooperative society, in which all the investors are members and shareholders. Each fractional asset-owning member can sell off his or her share in the cooperative, which is then transferred to the new fractional owner. In India, such societies are regulated under the Cooperative Societies Act.
Company model – A fractional asset can also be owned by a company. The Companies Act rules and regulations will apply to such companies in terms of taxation and compliance. The company in turn has to be formed by the investors, who will be its shareholders. As shareholders, they will have fractional ownership of the asset(s) that the company purchases and owns.
Joint ownership model – It is a simpler model where all the joint owners co-own the asset. They enjoy the right to use as long as they donʼt prejudice the rights of other co-owners. As a joint owner of the fractional asset, you can sell your fractional ownership with the consent of the joint owners.
Trust model – Under this model, firstly all the interested investors have to create a trust. The seller of the asset acts as the author of the trust, who executes the trust deed in favour of the to-be fractional owners. The exact contents of the trust deed would vary, depending on the agreement between the trust author and the asset buyers. The trust model offers tax benefits as fractional owners create offshore trust in countries with which India has a tax agreement.
When you become the fractional owner of an asset, you and all other fractional owners can agree on the nature or type of fractional ownership. Broadly, there can be two ways of agreeing to this, the pay-to-use approach and the usage assignment approach.
In the pay-to-use arrangement, the fractional owners pay an agreed sum at the regular interval against their use of the property. Besides, the property can be used to generate revenue, as a rental income, as well. The usage fee collected from the fractional owners along with the rental income is used to meet the expenses related to the asset. Any surplus therefrom is distributed among the fractional owners, while deficits are apportioned among them as well. Although the investment proportion may vary from one fractional owner to another, all of them will have their usage rights.
The usage assignment approach is more specific about the use of the asset by the fractional owners. These owners would have exclusive usage rights for a fixed number of days in a year, which may be a fixed number of days or variable. The amount of investment and the usage rights of the fractional owners are decided proportionately, but they can choose to exercise or not exercise their usage rights.
Fractional ownership of an asset is gaining popularity because of a variety of reasons.
As mentioned, these are assets which are otherwise difficult to purchase for an average investor. Once owned, these assets cannot be bought and sold as a whole in the market easily, unlike stocks or digital gold. Being less liquid and expensive assets, these are also difficult to manage, particularly for one person. However, fractional ownership of these assets has made it easier to invest in them.
These assets can yield a regular income for the asset owner which could be higher than most debt instruments. Market trends and interest rates can lead to income fluctuations but regular earnings are a part of fractional ownership.
This ownership structure adheres to compliances and risk management frameworks. Like mutual funds, the risks and liabilities are actively managed by professionals.
Lastly, it allows the investors to diversify their portfolio and invest in an otherwise unattainable asset class. Diversification is a risk management tactic that must be used by all investors to manage their investment risks better.
While the stock market can be volatile and fixed deposits offer comparatively low returns, investment in fractional assets can be an ideal middle ground. Your investment is backed by a tangible underlying asset that generates revenue and also preserves capital. And yet it is an emerging mode of investment. Therefore,
Analyze - Study the companies that are offering fractional ownership opportunities. Market research on the different options available, the background of the companies and their founders, the strength of their investor network etc. will help you make a mature decision.
Pricing - Since you are buying a slice of the property, you should ensure that you are paying the best price. It is a vital step as the future appreciation of the property and resale value would be affected if the property is overpriced.
Prospects - If you are investing in a fractional asset, you should research if the asset stands to offer high rental income and a good resale value. These two are the basic criteria which should influence your purchase decision when you look among the available options of fractional ownership.
With the fractional asset concept, now you can co-own quite expensive assets. However, as an investment, the income generated from a fractional asset is not assured, unlike a debt instrument like PPF or government security. While considering fractional ownership, you must consider the prospect of the asset from a long-term commercial standpoint. You have to look beyond the brochures and presentations and study the propertyʼs worth with some research.
As an asset, the fractional asset would also involve maintenance costs. Being an expensive asset, its proper maintenance would be vital. You have to ascertain that the income generated by the asset exceeds the maintenance cost, at the very least. Taking it all together, the maintenance cost, the income prospects and the maintenance cost must be considered in unison.
Being an asset, it will undergo natural wear and tear just like any asset. Maintenance expenses can delay the weathering, but it is a long-term eventuality. Your investment should have the scope of being sufficiently recovered within the lifespan of the property.
Lastly, the veracity of the claims made by the fractional asset investment company. There is still room for further statutory control and monitoring of this investment mode. Till then, you must exercise your due diligence before going ahead with an investment in a fractional asset.