An Outlook On Fractional Property Ownership In India
Fractional Ownership is a fast evolving concept, relatively unknown in India, where an asset is owned by many persons fractionally. Fractional means that the asset is split into fractions for the purposes of initial capital, use, expenditure for maintenance, management etc. Ownership means that the individuals who together form part of this fractional scheme, actually own an interest in the asset and can benefit or lose out from changes in the asset's value. Fractional ownership is an arrangement where a group of people shares the costs and use of a property.
Typically, each fractional owner owns a percentage or share of the property and is shown on the title and deed as an owner. In some cases, the deed actually specifies particular days, weeks or months when a co-owner may use the property, while in other cases, the usage arrangements will be set out in a separate document. A detailed co-ownership agreement or operating agreement is a recorded declaration of covenants, conditions and restrictions, or a combination of such documents which set out usage rights, costs and responsibilities among the co-owners.
Various model structures have been suggested by the author through whom the concept can be materialized. The author also makes an attempt to draw an analogy with the notion of Real Estate Mutual Fund.
Types of Usage of Fractional Property
Deciding on how the property will be used is usually the first step in structuring a co-ownership arrangement. Focusing on usage first, usually makes the rest of the organizational process easier. This is because a co-owner’s rights to use the property, and his right to earn rental income, are the most important and valuable benefits of fractional ownership.
There are two basic models for allocating usage rights.
1. “Pay-to-use Approach”
a) In this arrangement, co-owners pay a pre-agreed “usage fee” for each day or week of usage.
b) The usage fees, along with any rental income generated if the property is also rented to non-owners, are used to pay the expenses of ownership.
c) If the usage fees and rental income together exceed the expenses, the surplus is divided among the owners;
d) If there is a shortfall, each owner must contribute.
e) When the Pay-To-Use Approach is used, the purchase price and ownership of the property can be divided based on what each co-owner can afford, their investment goals, or any other criteria the group finds useful, but purchase price and ownership need not have any relationship to usage.
2. “Usage Assignment Approach”
The second model for allocating usage rights is the “Usage Assignment Approach”.
a) In the “Usage Assignment Approach”, each owner is assigned the exclusive right to use the property during a specified number of days, weeks or months each year.
b) The usage periods can be fixed, variable (they can change each year), or a combination of fixed and variable.
c) During each co-owner’s assigned usage period, he can use the property or allow family and friends to use it, rent it out, swap it, or leave it unoccupied.
d) When the Usage Assignment Approach is used, the purchase price of the property is generally shared among the co-owners based on the amount of usage allocated to each co-owner.
There are a large number of variations and hybrids on the basic usage rights allocation models, and each group needs to find an approach that works best for them and their property.
Tax Treatment on Fr