Ten Things to Know About Fractional Ownership BEFORE You Invest

By Darrell Halverson

Cigna International Health Insurance

Summary: What is fractional ownership and is it a good option for you if you're interested in Paris real estate?

Paris Real Estate - Fractional Ownership

FRACTIONAL SHARES

Opinion: Fractional shares in France is simply a general partnership of strangers put together by a syndicator / developer who may have little or no experience in real estate market evaluation and renovation.

PREF's Advice: Do careful due diligence on the syndicator and his/her backers. Do the same (if you can) for potential co-owners.

ORIGIN

Opinion: The weak Dollar and general global, economic uncertainty have caused the "buy" side of Paris real estate to "dry up." Fractional shares is a way of stimulating the market for developers and under-employed realtors. With a distinctive American entrepreneurial ring to it, the concept has the feel of a real estate "flavor of the month."

PREF's Advice: The Euro is strong and European economic policies are conservative and well regulated: now is a reasonable time to buy in Paris, but you must buy well (and, certainly, NOT at twice the going price in the marketplace).

ALL CASH PURCHASE

Opinion: If you own a weak currency (e.g., Dollar) it is financially advisable to diversify into a stronger currency (e.g., Euro). However, a lump sum purchase immediately locks you in for all time into the (presently unfavorable) exchange rate. Currency fluctuations over time (e.g., Dollar up and Euro down) could cause you to lose value on both the buy side and the sell side of a fractional shares purchase.

PREF's Advice: Take out a low interest French mortgage and gradually ease ("average") into Euros using regular monthly payments. One bank, BPI, will even loan on a fractional shares purchase and renovation in certain circumstances. Contact: Stephane Denner, BPI International

ORGANIZATION OF CO-OWNERS

Opinion: Often organized as an American Limited Liability Corporation or "LLC" (shields you in USA, but not in France), you may have as few as two partners or as many as twenty-four (i.e., 12 couples sign up for one month each). The syndicator may be seeking to have you do marketing to your friends to fill out the purchaser group.

The LLC will often create and own another sheltered entity in France called an SCI or Societe Civile Immobiliere. This simple type of French company protects the owners from some tax disadvantages, but it also makes it illegal to rent out the property.

PREF's Advice: Find out as much as you feasibly can about the people who will be your overseas partners. The likelihood that you will know your other "partners" is slight. Is that the best basis for making a sizeable real estate commitment in a partner format?

French banks will usually not routinely lend to real estate entities shielded behind both an LLC and an SCI.

INVESTMENT

Opinion: Fractional shares may perform poorly as an investment because the property is purchased at or above market rates and then renovated to haute de gamme standard for a cost that cannot be recouped at the time of a future planned or unplanned sale. Direct and indirect syndicator fees may escalate the cost basis to the point that the property is not readily saleable at a profit.

To capture charm elements these projects favor ground (garden) and top (view) floors, the ones with the most security issues in old buildings.

PREF's Advice: Always track Paris real estate in terms of Euros per m2 costs. Be wary of syndication fees in excess of 30% of the property value plus renovation. Insist on regular "return on investment" (ROI) reporting.

Be security conscious of the property's situation (as the French are -- avoiding ground and top floors) to protect your investment. Find out as much as you feasibly can about the people who will be your overseas partners.

LIQUIDITY

Opinion: How saleable would an owner's interest be if they decided to drop out of the partnership? Co-owners and or the syndicator might have first right of refusal, but they usually are not compelled to buy back shares. Does that mean new buyers join the group or are ongoing expenses allocated across the remaining co-owners?

PREF's Advice: Getting in is always easier than getting out. Have your legal or financial adviser evaluate your risk at the time of any withdrawal of a partner. Generally, a fractional share purchase will be a very illiquid investment. Always track Paris real estate in terms of Euros per m2 costs. Insist on regular "return on investment" (ROI) reporting.

MARKET RISK

Opinion: Properties in Paris have appreciated at the rate of at least 1% per month (yes, per MONTH) over the past 5+ years. The Euro has appreciated >50% against the Dollar since its inception in 2002. While no one can predict the future here, there is a risk of "buying at the top" and placing yourself in jeopardy should either the housing market or the Euro falter.

PREF's Advice: "Buying at the top" is a risk for any kind of Paris real estate investment. That said, there is no "bubble" in Paris prices as the market is driven directly by limited supply and strong demand and not speculation.

A problem with fractional share properties is that they often contain sky-high syndicator fees that are not obviously labeled as such and which can, effectively, price your purchase far above the prevailing market (as figured in Euros per m2).

LEGAL / INHERITANCE

Opinion: Under French law "no child is left behind" --i.e., cannot be disinherited. Upon the death of the first spouse the fractional shares ownership group will have at least one new member and s(he) could be in diapers.

PREF's Advice: French inheritance law is different from many other countries. Get expert advice from your Notaire on your particular situation BEFORE you sign.

FRENCH EXPERIENCE

Opinion: It seems that fractional share syndicators only recognize a few arrondissements (3, 4, 6, 7) as suitable for their activities. That may be because they draw their clients from the upper reaches of the Investor Pyramid, those who wish to be in an "exclusive" situation and who believe that there are only a few "best" neighborhoods in Paris. A litany of luxe services (concierge, flowers, champagne) are offered, some at additional cost.

PREF's Advice: PREF recommends buying and living in a "real French neighborhood," simply defined as a place where the people who work there can afford to live there. The high end locations may attract at first, but the real charm of Paris lies in its >300 small neighborhoods, at least one of which would be right for you.

TAXES

Opinion: Most countries' tax laws favor a buy-to-let situation with a mortgage. Fractional shares is more of a personal, affluent, lifestyle indulgence rather than a viable investment with high profit potential. Few, if any, benefits of a fractional shares purchase would be deductible against French or home country taxes.

PREF's Advice: Indulge yourself with a fractional share purchase if you want turn-key luxury at a high price, Invest yourself with an individual or small partnership purchase of a buy-to let apartment with a mortgage in a real French neighborhood if you want to do well financially over time.

File your forms and pay your taxes (and take your deductions) in both France and your home country.

About the Author

Stephanie Freedman is one of the founders of PARIS Real Estate Finders (PREF). She is a former US lawyer with a passion for things French. She finds herself busy as a buyer's rep in Paris helping non-French to find the pied-a-terre of their dreams.

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Comments about this Article

guest
Oct 3, 2011 19:24

Darrell(and Stephanie), Having "researched", years ago, the merits of our embarking into fractional shares in French r.e., your current article affirms that a judicious "must" in this arena may definitely be in the best interest of potential buyers. Later regrets can be(financially) costly. Thanks for another, updated insight(s). Bernard G.

Vanessa362
Sep 7, 2013 04:14

Almost everyone recognizes that owning a vacation property fractionally is a good idea. But that recognition is generally not enough to generate a signed contract and a closed sale. For sales prospects to really assess their level of interest, they need specifics. The fractional ownership sale least likely to close is the one where a group of prospective co-owners gets together and then tries to figure out how to structure their co-ownership. If the main elements of the offering are not fully developed, it is impossible to distinguish real buyers from those who are simply intrigued by the concept. As a consequence, you will end up wasting time on prospects that will not close, and paying insufficient attention to others because you mistakenly believe you have more interest than you really do. Paris Fractional Ownership

First Published: Jul 20, 2008

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