Article

David Disick takes the first of a three-part look at sourcing fractional finacing.

Let’s say you’re a fractional real estate developer.  You have investors supplying seed capital.  You’ve tied up the property you want to develop.  You have your permits and architect’s plans.  Your development team is assembled and raring to go.

Only one more vital piece of the puzzle still needs to fall into place:  You need to find equity and debt financing and consumer financing.

Admittedly, finding sources of this financing can be challenging in today’s tight credit markets.  Nevertheless, there is always capital on the lookout for good, solid investment deals.  And, real estate can be especially attractive during times of roller-coaster stock performance.

So, even in challenging times, developers with well-conceived projects can succeed in obtaining the institutional funding they require. 

Following are some tips on what you may do to enhance your chances for obtaining the financing you seek.
The road to success is divided into three parts:

I.Getting in the Door—Arousing Your Bankers’ Interest in Your Deal

II.Getting to the Negotiating Table—Presenting Your Business Plan

III.Getting to the Vault—Negotiating Your Deal Successfully 

Following is the first of the three-part series.
I.Getting in the Door—Arousing Your Bankers’  Interest in Your Deal

A.    Overcome any natural fears you may have of bankers.  (Most people have these fears too.)
If you think about it, bankers are, in a sense, sales people. It just happens that what they sell—money—is something that many people, including developers, get very emotional about.  And the more developers need a bank’s money, the more emotional they tend to become.

But, bankers, after all, are human too.  They also have needs, though most succeed in concealing this fact:    Bankers need to put their money to work so that it earns profits for their institution. 
Therefore, your challenge is not just about finding the money for your development.  It's about persuading the money that your project merits financing because it will make money for their bank.
Even in today's economy, there is always capital interested in soundly conceived developments that are properly planned and are staffed with an experienced team with a track record of success.

So, make sure you have a well-thought-out business plan that clearly sets forth the facts related to your development.  (Details will be presented in Part II.) Your plan will give you a sense of confidence that will improve your negotiating ability.  (Details will be presented in Part III.) 

B.    Thoroughly educate your capital sources about the fractional real estate ownership industry.
Though fractional real estate ownership may be decades old in your country, many otherwise sophisticated lenders may not yet be familiar with the concept and the state of the industry and are not fully aware of the profit opportunities it presents.

So, your presentation needs to include an explanation of why fractional ownership of vacation homes is the most rapidly growing segment of the vacation home industry and is exciting the interest of purchasers and real estate developers alike.

Fractional ownership of vacation homes provides numerous benefits: 

1. Fractional vacation home ownership is a financially prudent investment.  Even in challenging economic times, people still want to vacation.  Owning a vacation home is preferable to renting because it allows one to build equity in real estate.

2. Fractional ownership makes good economic sense. Fractional vacation home ownership makes more sense than whole ownership of an entire home that sits empty most of the year or needs to take in renters.    For vacation use during just a fraction of the year, it makes more sense to pay only a fraction of the cost and upkeep of the home.  This is especially appealing in a time when even the wealthy want to cut back on spending..

3. Fractional ownership’s lower price points mean more people can qualify as purchasers.  Lower fractional price points can broaden and deepen a developer’s potential market.  This can enable more people to purchase a luxury vacation home that would otherwise be inadvisable or unaffordable for them. Thus, developers can make sales that would otherwise have been lost.

4. Fractional ownership sales can result in higher revenues to developers.  Fractional sales may potentially generate more profit than whole ownership.  Think of it this way—a pizza sold by the slice sells for more than sale of the whole pie to a single customer.  (For a discussion of this topic, go to:  http://www.thefractionalconsultant.com/fractional-ownership-sales-ideas/fractional-multiplier/. )

5. Fractional ownership can provide the effortless vacationing that today’s travelers are seeking.  Most high-end fractional ownership properties offer personalized, club-like vacation experiences with on-site property management and concierge services that free owners to spend more time vacationing.  Fractional ownership is more of a lifestyle investment than a strict “bricks and sticks” real estate investment.

6. Fractional ownership helps conserve natural resources.  People are becoming increasingly aware that natural resources are finite.  They understand that fractional ownership places less of a burden on the natural environment and are therefore more willing to share ownership of their vacation home.
In sum, fractional ownership of vacation homes is an idea whose time has come, and now is the right time for your potential lending sources to understand this.

C.  Document fractional industry growth and future growth potential. 
Make your bankers aware of the history and growth of fractional vacation home ownership in your area—even if the growth has not been on a straight upward path in recent years. 
Most experts in the field agree that fractional ownership will be the first segment of the vacation home industry to rebound and will rebound most rapidly from current economic challenges.  In some countries, industry professionals  believe that fractional ownership will ultimately surpass whole ownership as the preferred way to own a vacation home—or even several vacation homes!
Document your presentation of this burgeoning industry with relevant articles from authoritative newspapers, magazines and websites attesting to the growing popularity and acceptance of fractional vacation home ownership.

D.  Distinguish between fractional ownership and timeshare. 

It is important that you make clear to your financial sources the differences between fractional ownership and timeshare.    Many members of the public—bankers included—still confuse the two.  Despite being treated as the same legally, the differences between these two ownership types in terms of location, quality and service are far more numerous than their one legal similarity.       (To learn more, go to http://www.thefractionalconsultant.com/fractional-ownership-vs-timeshare/fractionals-vs-timeshares-ten-differences-and-one-similarity/.)

Though the timeshare industry has done much to dispel the negative image of its early years, some people today still avoid timeshare or anything they believe remotely resembles it.  So, you need to make clear to your capital sources that fractional ownership properties cater to a far more affluent clientele than does timeshare.  Fractional properties offer a significantly more luxurious vacation experience and attract buyers who are more qualified and more credit-worthy.

Parts Two and Three will follow

What reasons do you offer to lenders to consider entering the fractional arena?  Please share a sentence or two with fellow site visitors.

David M. Disick, Esq. is president of The Fractional Consultant.  His company helps developers in the U.S. and abroad secure financing.  He is an internationally recognized authority on fractional real estate and has written a book on the subject. Disick will chair the fractional panel of OPP’s Property Investor Show in London on October 13-15, 2011.  He will also take part in panels on investors and on the U.S. economy.
He can be reached at www.TheFractionalConsultant.com, where his book may be ordered.