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The management of time-sharing units.

Time-sharing of real estate first appeared in Europe in the early 1960s. The concept was adopted in the United States in the early 1970s, but took several years to catch on as a popular idea. When interest rates and inflation soared in this country, ownership of a second home for vacation purposes became an "impossible dream" for most people.

A generation of "yuppies" (young, upwardly mobile consumers) latched onto the idea of vertical division of a condominium unit into time intervals (each costing less than a new car) as a logical extension of the principle involved in condominiums themselves (that is, horizontal division of a building into multiple ownership units).

Legal forms of time-sharing

Two basic forms of time-sharing have evolved: fee ownership and right-to-use.

Fee ownership has taken two different paths. One is the traditional ownership interest as evidenced by a deed, title insurance, and so forth, which is known as a time-share estate. Individual use periods are set up through covenants, conditions, and restrictions which are separate from the deed itself. Early questions about the legality of waiver of the right to partition, which is necessary under this type of ownership, have been answered through enabling legislation in many states, making this form of ownership popular.

Another form of fee ownership has been developed to overcome early problems with the traditional method. Under this new form, known as interval ownership, a buyer acquires a recurring or revolving estate for years. At the end of the term of the estate (for example, 40 years), it goes over into a tenancy-in-common which can be partitioned. The disadvantage of being "locked in!' to a specific time period or interval has been overcome through exchange arrangements, some of which are informal and others which use easements across a fixed week of ownership.

Right-to-use time-sharing is usually a license, lease, or club membership-in other words, a contractual relationship which does not convey title to real estate. The developer retains title to the property, such as a hotel, and may combine vacation licenses with regular operation of the hotel.

Right-to-use contracts originally were thought to be free from regulation as real estate and could be sold by persons other than licensed real estate personnel. Misrepresentations to consumers in some cases led to confusion as to what was actually being sold, resulting in extensive regulation of this method of time-sharing in most states.

Real estate taxes

Liability for real estate taxes depends on the type of time-sharing program in which one participates.

In the right-to-use programs, the time-share buyer does not assume title to the real estate. Therefore, the developer or subsequent owner of the real estate itself receives the entire bill for the real estate taxes and may divide the assessment among interest holders as part of maintenance charges. If the interest holder fails to pay, the contract can be considered breached and the developer can terminate the interest. The developer is the one entitled to the income tax deduction for the real estate taxes in the right-to-use program.

On the other hand, if a time-share is purchased under one of the fee methods, the owner of the real estate is liable for a proportionate share of the real estate taxes, and may claim the income tax deduction for the expense.

Early in the development of time-share projects of the fee nature, questions arose as to how the real estate tax bill would be handled. In large projects, several hundred condominium units could be divided up into 12-, 26-,or even 52-time intervals. This would force the local real estate tax collector to send out thousands of tax bills, each so small in amount compared to the total property bill that collection procedures against delinquent taxpayers would be too expensive to pursue.

This problem has been solved in some projects by making provisions in the purchase agreement, itself, for management of the time-share project by an owners' association. The association receives the real estate tax bill for the entire project and has assessment powers against each time-share owner for his or her proportionate share of real estate taxes as well as for other common expenses of the project.

The next question that arose was how to divide the real estate tax bill among the owners. The total tax bill could not simply be divided by the number of time-share units; for holiday time periods would be considered more valuable than other times, and shares in two-bedroom units were more valuable than in one-bedroom units. This problem has been solved by assigning a percentage ownership to each interest based on differing values.

Appraising the time share

Traditionally, there have been three approaches to appraising real estate which can be considered when appraising time-share ownership. These include the cost, market, and income approaches.

To apply the cost approach, one must first estimate the value of the unit under single ownership, and then add expenditures for conversion (such as furniture, marketing expenses, and the sponsor's profit and overhead). Some appraisers argue that marketing costs of the project should not be included in the valuation of the real estate itself because they are so-called "soft" expenses unrelated to the real estate.

This cost method does not provide for allocation of the cost among individual time-share owners. However, the cost to an individual owner should bear some relationship to the cost of renting a similar unit for the same time period.

Under the market approach, many variables must be analyzed by use of multiple regression analysis. These variables include: season; location of resort (lake, ocean, mountain, and so forth); number of bedrooms; size of living area; location of unit in project (golf course, water, and so forth); quality of construction; quality of furniture; quality of resort (including recreational facilities); and financing.

The unit of comparison under the market approach is the sale price per square foot per one week interval in each season. The market approach is generally agreed to be the best appraisal method for time-share units, especially in light of the increasing number of time-share units available for comparison purposes.

The income approach, which is based on the income from the units, cannot be used in time-share estate appraisals, because the time-share units are purchased for personal use rather than for investment purposes. (The purchaser wants a vacation, not a rate of return.) However, it can be used in the appraisal of time-share use properties where the developer retains title to the real estate and sells leases or licenses to use. In these situations, the income method is appropriate because the developer is in the business to make a profit.

State treatment of the time-share issue

For purposes of illustration, some state laws of Virginia which relate to timesharing of real estate are examined. Virginia legislation, passed in 1981, provides for extensive regulation of timesharing arrangements and appears to deal adequately with the various problems that arose in early applications of the concept in this country.

Project instruments for time-sharing must include, in addition to location and legal description of the project, identification of time periods and time-shares, and the formula, fraction, or percentage of common expenses and voting rights assigned to each share.

A "time-share estate" is defined as a right to occupy a unit or any of several units during five or more separate time periods over a period of at least five years, including renewal options, coupled with a freehold estate, an estate for years in a time-share project, or a specified portion thereof.

"Time-share use" is defined as a right to occupy a time-share unit or any of several time-share units during five or more separate time periods over a period of at least five years. This includes renewal options, not coupled with a freehold estate or an estate for years, including, without limitation, a vacation license, prepaid hotel reservation, club membership, limited partnership, or vacation bond.

The time-share program instrument must provide for maintaining the interior of units including maid service, as well as adoption of rules governing use of time-share units by the owners. The developer must pay costs and expenses of operating the time-share use program and owning and maintaining the time-share use units comprising it. The developer must also provide for comprehensive general liability insurance in connection with use of time-share units by use owners.

According to the state statutes, each time-share is treated for purposes of title as a separate estate or interest in a unit. For purposes of local real property taxation, each time-share unit (other than a unit operated for time-share use) is to be valued in the same manner as if such a unit was owned by a single taxpayer.

The total cumulative purchase price paid by the time-share owners for a unit is not to be used as a factor in determining the assessed value of such a unit. However, a unit operated as a time-share use may be assessed the same as other income-producing and investment property. The Commissioner of Revenue or other assessing officer lists a time-share unit in the name of the managing agent.

Other state and local taxes to be considered

Depending on the state where the time-use property is located, there may be other state and local taxes which should be considered by time-use developers and managers.

Time-share licenses may be treated as a sales-taxable transfer, a commodity sold in retail trade by the developer, in some states. Where such transfers are subject to sales taxes, the cost to the developer may exceed the amount that would be paid as closing costs under a fee transfer.

With time-share use arrangements, one should check state and local laws regarding the transient occupancy tax. In Virginia, for instance, certain counties are authorized to levy transient occupancy tax on hotels, motels, boarding houses, and travel campgrounds which are not continuously occupied by the same individual or group for 30 days or more. Conceivably, time-share use interests of less than 30 days could be subject to this tax in these counties if time-share units were interpreted to fall into one of the above categories.

In most states, the constitutionality of taxing a person for occupying his or her own property has been questioned. In most cases, it appears that transient occupancy taxes are applied to time-share units only for days they are occupied by other than the owners (where the owner cannot use his or her time interval and rents it out).

Conclusion

Time-share ownership of vacation units became popular in this country in the late 1970s as high interest rates and inflation put ownership of individual vacation homes out of reach for most people. Popularity of this ownership form has continued to grow, with the result that most early problems were solved as a result of experience and by state enabling legislation. The development and management of time-sharing units requires specialized knowledge which should be sought before entering into this type of investment.
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Author:Clevenger, Novella Noland
Publication:Journal of Property Management
Date:May 1, 1990
Words:1821
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