Article

By David M. Disick.

In Part I of this paper, we summarized the powerful case for Luxury Fractional real estate investment.  In this part, we will summarize several factors in the mindset of capital sources currently and how to successfully address them. We will then summarize general guidelines for a successful financing presentation.

The Mindset of Today’s Capital Sources

The Competition for the Dollar from “Distress Properties”

Many in the financial community today are so focused on buying “distress properties” that they will not entertain alternative investments.  To be sure, Luxury Fractionals are not as “distressed” as the “distress properties.”  However, Luxury Fractionals have seen declines in market value and therefore can be bought quite favorably. 

We submit that Luxury Fractional investments can generate profit opportunities comparable to “buying distress” because: 

Of the ability to buy quality whole-ownership properties favorably; and

the greater revenue streams by reason of the Fractional Multiplier,
 
2009 Decline in Fractional Sales

Some in the financial community regard this decline as undercutting the investment value of fractionals.  The author subscribes to the following views well-expressed by Dick Ragatz:

“Like all real estate markets, the fractional market has taken a hit in the past 18 months.  The industry was growing extremely rapidly from 2000 through the first 9 months of 2008 and then the Lehman thing hit, the stock market went crazy and everything came to a standstill.  In 2006, we had our first $2 billion year, and in 2007, we hit the peak at about $2.4 billion.  But in 2008 it went down to about $1.5 billion, and in 2009….[it went down to $860 million as described in Part I of this paper].”

[The 2008 and 2009 fractional decline] “has nothing to do with the concept of fractionals—it’s just all these extraneous parameters that are affecting everything out there in real estate:  lack of consumer financing, people not having the equity in their homes anymore to take out the equity loan to pay for it, lack of marketing dollars because developers just don’t have the money…a bunch of things relating to the economy [but not to the validity of fractionals].”  Perspective Magazine, North American Edition, March, 2010, page 46.

Fractional “Complexity”

Some in the financial community regard fractionals as highly complex and conclude therefore that the “complexity” can impede sales.  I respectfully differ.

This complexity certainly has not impeded sales to date. 

Moreover, I do not buy the notion of complexity.  The deed to a fractional is the same as a deed to a whole-ownership—except, of course, that it defines the property owned as a fraction.  To be sure, marketing and sales of fractionals involves programs and initiatives specifically related to fractionals—but that is irrelevant.  This is still a real estate marketing and sales program.  Similarly, project management and concierge services to owners involve elements specifically related to fractionals.  But again, that is irrelevant.  They are still project management and concierge services for absentee owners.

Our potential buying universe is composed of experienced, affluent, intelligent people.  The fundamentals of fractionals can be simplified and expressed in a clear, concise and user-friendly manner. 

Guidelines for a Successful Financing Presentation

From the author’s experience in representing capital sources as counsel and in seeking financing for my own projects and those of consulting clients, I would recommend the following as some particularly important guidelines to follow:

Project projections must do more than simply set forth numbers.  They must also   include detailed assumptions for each of the line items and show the underlying reasoning.

Projections should analyze the ratios among the line items to demonstrate how they compare with industry experience.

The business plan should show how pricing and velocity assumptions compare to such assumptions in relevant Luxury Fractional projects.  Comparisons may be based on price per guaranteed week of use; price per square foot or other relevant materials such as comparing total fractional revenues to residence to the whole-ownership cost of the residence. 

The business plans must show that the developer and its team has anticipated nearly everything that might go wrong and has provided contingencies in the event that such items do go wrong.

The business plan should also detail the programs to measure ongoing project performance and thus enable the developer to adapt to actual market input.  This includes items such as monitoring the cost effectiveness of all marketing and sales programs, the effectiveness of project personnel and buyer response to project features, benefits and pricing.  These programs should be conducted throughout the project.

The business plan should emphasize the experience and quality of the Development Team.  Project management is critical.

Communication between the developer and its advisors and the capital source should be frequent and cordial.  If the chemistry and communication are not good, that is like dust building up under the carpet—it will come back to haunt the developer.

Conclusion

In sum:

Capital is available.  It can be accessed by showing the powerful case for Luxury Fractionals as a sound investment; namely:

• Growth of the Fractional segment
• Performance of Fractionals in the current economic climate
• Expected continuing growth of Fractionals
• Reasons for growth
• Expectations for Fractional rebound

The financing presentation should address factors in the mindset of capital sources today           
and set forth a comprehensive business plan and the underlying analyses for the plan.


Mr. Disick and his team continually monitor developments in the financing climate and will update this Article as developments warrant.

28/05/10