Commercial Loans Blog

Commercial Loans and Fractional Ownership

Posted by George Blackburne on Mon, Oct 16, 2017

Ski chalet.jpgHave you ever gone snow skiing and rented for your family a gorgeous ski chalet near the slopes for a week?  What about the beach or the shore of some big, beautiful lake?  Did you ever rent a big, gorgeous home on the water for a week?

Often these ski chalets and waterfront homes are of fairly new construction, and they were built with five, six, and sometimes even seven bedrooms.  These giant homes are perfect for extended families, say, three brothers, their wives, and their children.  This is not just a happy coincidence.  These homes were built exactly for this use - to be rented out on a weekly basis to extended families.


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Sometimes these gorgeous vacation mansions are owned by a single, filthy-rich guy.  I don't even know the guy, but I hate him.  I'm so jealous.  Ha-ha!

Many times, however, these vacation mansions are owned by four to ten families in a concept known as fractional ownership.  Each family will own, say, a one-eighth of the mansion, giving them the right to six or seven weeks of the year in which to live in the property.


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In real life, the family owning one-eighth of the property will usually only stay in the property for one or two weeks per year.  The rest of the unused weeks owned by the eight families will all be rented out to vacationing families, typically a week at a time.

Essentially these vacation mansions will be run as hotel units - rented out and cleaned weekly by a management company originally selected by the developer-sponsor of the of the fractional vacation mansions.  The developer-sponsor will often develop a half-dozen to a dozen similar properties nearby, giving him enough fractional ownership units to sell to justify a decent-sized marketing budget, much like a large timeshare project.  In plain English, there may be ten of these beautiful vacation mansions right next to each other, all managed by the same management company.


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Now do you remember that filthy-rich guy that I hated?  He owned this entire vacation mansion by himself, so he would have no problem getting the property financed as a second home or as a rental home.  Remember, home loan rates are always much lower than commercial loan rates, so he wants this property characterized by his lender as a home, not as a commercial property.  He wants a garden-variety conventional home loan, NOT a commercial loan.


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But to those eight families who own their vacation mansion as fractional ownership units, financing may prove to be problematic.  First of all, each of them does not own the entire property by himself.  Unless all eight families miraculously agreed that they wanted to finance the property, they would never be able to get a conventional loan.  And who wants to guaranty a $1.8 million loan when he only owns 1/8th of the property???  The other owners could easily walk away in a financial pinch.

Secondly, the property is essentially a tiny hotel, with tenants coming and going every week.  Such a property would be viewed as a nightmare by most banks considering the property as a commercial loan.  Yikes!


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Is it therefore possible to even get a loan on a fractional ownership unit?  Blackburne & Sons, my own private money lending company, will make a 15-year fully-amortized commercial loan on fractional ownership interests.  Our loans have no prepayment penalty.  We have done several such loans, and they have performed well.


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I started out writing these commercial real estate finance training (CREF) articles to train my sons and my staff in the business.  Now over 5,200 commercial real estate professionals follow this blog.  And why not?  It's free training in commercial real estate finance, and I try to write two articles per week.


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