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A House Divided: Exploring the Rise of Fractional Ownership

Image: A sprawling five-bedroom, 10-bathroom mansion at 558 Fox Hill Road in Chatham, perched along picturesque Crows Pond, offers a prime example of a growing real estate trend known as fractional ownership that is unsettling...

Image: A sprawling five-bedroom, 10-bathroom mansion at 558 Fox Hill Road in Chatham, perched along picturesque Crows Pond, offers a prime example of a growing real estate trend known as fractional ownership that is unsettling Cape officials. The house, photographed on Feb. 2, is being offered for sale as one-eighth ownership shares.

The real estate market is witnessing an intriguing trend that is causing a stir among officials on Cape Cod and the Islands. Fractional home ownership, spearheaded by companies like Pacaso and Lifestyle Asset Group, is changing the way people approach second home ownership. This innovative concept allows multiple buyers to purchase fractional ownership shares of luxurious properties that would otherwise be out of reach.

What is Fractional Ownership?

Fractional ownership entails purchasing a share of an expensive property, typically in a resort destination, through a limited liability company (LLC) created by the owning company. Pacaso and Lifestyle Asset Group buy these exclusive homes and divide them into fractional ownership shares sold to interested buyers. This model opens up opportunities for individuals who cannot afford traditional second home ownership.

During their stay, owners have full occupancy rights, enjoying the privileges of owning a luxury home for up to 44 days per year, with a limit of 14 consecutive days. Pacaso, for example, acts as a property manager and ensures that owners have a seamless experience during their stays.

Unique Exit Strategies

One significant difference between Lifestyle Asset Group and Pacaso is the exit strategy. Lifestyle Asset Group offers co-ownership for a defined period, typically between five and ten years. At the end of this term, the property is sold, either in the market or to one of the co-owners, and the sale proceeds are distributed among them.

On the other hand, Pacaso allows owners to sell their ownership interest at any time. If there are still pending ownership shares, owners can sell their interest after a year of ownership. Each owner has independent control over the sale of their share.

Streamlining Second Home Ownership

While the concept of co-ownership is not new, Pacaso and Lifestyle Asset Group aim to streamline the process by providing property management services. These companies address maintenance issues, cleaning, and even furnish the homes with the help of professional design teams. The goal is to offer a hassle-free experience to fractional owners.

Pacaso takes pride in alleviating the housing crisis by reducing competition for middle-tier homes and directing buyers towards luxury properties. According to Whitney Curry, Pacaso's Chief Marketing Officer, most second homeowners only use their properties for a few weeks each year. In contrast, Pacaso properties have nearly 90% occupancy, benefitting the local economy and job market.

Timeshares or Co-Ownership?

The distinction between fractional ownership and timeshares is crucial. Timeshares grant individuals the right to use a property for a specific period, whereas fractional ownership allows buyers to own shares of the property, including real estate ownership rights. Companies like Pacaso emphasize this distinction, stating that they facilitate real estate property ownership. However, concerns have been raised regarding the impact of fractional ownership on residential neighborhoods.

Image: A growing real estate trend that is unsettling Cape officials is fractional ownership. A house, shown here on Jan. 17, at 16 Captains Cove in Chatham is a fractional ownership property.

Municipalities React to Fractional Ownership

Local officials are taking steps to regulate and restrict commercial fractional ownership through zoning bylaws. Municipalities such as Tisbury and Provincetown have amended their zoning bylaws to confine fractional ownership to business districts. Edgartown and Nantucket are also contemplating similar changes. These communities aim to set restrictions before the trend accelerates and further impacts the housing market.

Additionally, the business model of fractional ownership allows it to evade the short-term rental tax since it is not considered a rental but rather a co-ownership arrangement.

Balancing Opportunity and Concerns

While fractional ownership provides new opportunities for aspiring second homeowners, it also raises concerns. State Senator Julian Cyr highlights how this trend could exacerbate the housing crisis and drive up real estate costs, which are already skyrocketing. Currently, more than half of the properties in Cape Cod and the Islands are second homes or investment properties, making it challenging for locals to compete. Some residents also express worries about the potential loss of community and neighborhood dynamics.

As the popularity of fractional ownership continues to grow, it is crucial for officials and communities to strike a balance that protects residents' interests while allowing for innovation and economic growth.

Zane Razzaq writes about housing and real estate. Reach her at [email protected]. Follow her on X @zanerazz.

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