Unlike timeshare associations where members buy a block of time, fractional ownership involves multiple owners of a single property. A company like Pacaso buys a single-family residence and then sells it to a number of buyers as a vacation home. It buys the property under an LLC established for that property and then sells it to eight buyers who become co-owners of the property-- each with a 12.5% fractional interest. Pacaso finds and vets co-owners and handles all the sales details. It makes money by charging an annual management fee to takes care of furnishings, maintenance, repairs, utilities, and reserves. The company also handles booking of stays for the owners of the property. Each owner enjoys six weeks' stay per year.
Downside of Fractional Ownership. The negative implications of this kind of arrangement are two-fold. First, it removes housing from the market that could be used for long-term occupancy either by an owner or a renter. Second, for associations it creates administrative and potential security issues.
Restricting Fractional Ownership. It seems unlikely that associations can prohibit this form of ownership. This issue was addressed by the courts in a 1981 case of Laguna Royale v. Darger where Mr. Darger sought to sell fractional interests in his unit to four other families. The board did not approve the sale because fractional ownership would be contrary to the single family character of the private residential purpose of the association. Darger proceeded with selling interests to other families and the association sued. At trial, testimony confirmed that no more than one family of defendants used the property at a time and that thirteen-week periods had been agreed upon for exclusive use by each of the four families. The court recognized that property rights are subject to reasonable regulation to promote the general welfare. In this case, however, the court held that the board's refusal to approve the transfers to the other defendants on the basis of the prospect of intensified use was unreasonable as a matter of law. (Laguna Royale v. Darger.)
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