Fractionalized

Bill and Rhea Kotlar of Laguna Beach, California, have divvied up the ownership of their 6,500-square-foot vacation home. They can’t be happier with this legal arrangement that splits maintenance and loan costs four ways, giving the antique dealer and his wife access to the home every fourth week throughout the year.

“What are the expenses to keep a home of this size?” Bill Kotlar asks in a recent telephone conversation. “Ten thousand bucks a month? Who can pay $10,000 a month to use a house four or five weeks a year? But you can pay $2,500 a month.”

The Kotlars bought the brand new Deer Mountain home two and a half years ago. Another Long Beach resident actually found the house, so the Kotlars agreed to split ownership of the home with him. They called in a California attorney to draw up the necessary documents and set about looking for a third party to share the home with them.

Now that third party is bringing a fourth member to the ownership team. He’ll have to agree to all that’s included in a 30-page document that spells out everything from restricting use of the home to owners only, to barring pets, to giving the other owners first right of refusal to buy him out if he ever decides to sell his share of the home.

Groups of friends have been fractionalizing the ownership of vacation homes for years. But the tenants in common arrangement among complete strangers seems to be gaining traction in a number of markets — notably Phoenix, Tahoe and even Mexico, says Hong McDonald, Jess Reid Real Estate agent.

“There’s a book out there called “Fractionalize to Maximize,” encouraging people to take their homes and divide them by four, six or eight ways. That way they can get 150 percent of the value of their homes,” McDonald says. “There’s a new trend where people are fractionalizing what they’re already in.”

It’s a practice, she says, that’s fraught with financial pitfalls. “The legal side, that’s the sticky side. This is not something that’s been proven over and over again. I would advise buyers to beware.”

McDonald has turned down fractionalized listings here locally, only to see them listed by other real estate agents. None of these homes, thus far, has sold, she says.

“All of my questions were not answered sufficiently for me to take on the liability of listing six or eight units in one property,” McDonald says. Stephen Dering pioneered the private Equity Residence Club concept more than 15 years ago in Deer Valley when he created the Deer Valley Club. After working for two years as Deer Valley Resort’s first marketing director, he started his own advertising agency. “The agency’s bread and butter was Deer Valley real estate,” he explains.

“I discovered that most of Deer Valley owners only used their homes two or three weeks in winter and one to two weeks in summer. They didn’t put their homes in a rental pool because they had too much invested in the furniture. Do the math, and it became apparent that it was a very expensive ski day.”

Dering set out to create a new Deer Valley real estate product positioned somewhere between a time share and whole ownership.” The premise was to build luxury real estate, providing owners with the same amount of vacation time, more services and amenities and at a purchase price commensurate with use. The result was the Deer Valley Club, the first private residence club in America.”

Dering, who is now one of three principals in DCP International, has gone on to create Equity Residence Clubs throughout the world. “When we started the Deer Valley Club, we used to joke that this is just like buy-ing a vacation home with friends, only we find your friends for you, explains Dering. “DCP International also provides a legal team that assures owners a deeded interest in the pro-perty. If someone wants out, it’s like selling any other piece of real estate,” says Dering. Dering advises buyers and sellers in the fractionalized home market to get “pretty air-tight documents.”

Documents are precisely what Bill Kotlar says he was able to craft, with the help of an attorney who specializes in tenants in common arrangements. “We drew up a document that really spells out the details of what can and can’t be done. It was set up before the other [partners] came in. [The other partners] have to agree to what is already established,” he says. “[The partners] are liable for one quarter of the mortgage each, but the truth is, if they walked away, nobody would be going after them. They’d only be coming after me. But it doesn’t keep me awake at night, because the loan isn’t that big.”

Kotlar predicts fractionalized ownership will get simpler down the road, as attorneys become more familiar with the concept. He surmises that eventually there will be forms that address all the scenarios of owning vacation homes in common with others, much like drawing up a standard will today and selecting from a list of alternatives.

“This is a great deal for three or four people,” Kotlar says without hesitation. “It’s a thing of the future. It makes a lot of sense financially.”

Ann Johnson has been a Park City area resident for nearly 14 years. She has written for several national publications and presently produces KPCW Mountain Money, a local business report.