Sectional Titles

What is fractional ownership?

Syndication or the Fractional Ownership of Property
Fractional ownership simply means the joint ownership of any asset by more than one individual or legal entity. The most commonly used form of fractional ownership on a global scale is when a luxurious leisure property is purchased by a group of shareholders, normally three to up to 13. The ownership is usually structured in a company whereby the property is the only asset. Shareholders thus own the property together and usage and all costs are shared in relation to percentage shareholding. Structures are put into place for both the utilisation as well as the management of the property, but ultimately shareholders are the owners of the property and have complete control over all aspects of the company and the property it owns.

What is registered?
A purchaser physically acquires a percentage (%) shareholding in a company, usually a private company that owns the property or an undivided share in the property. You receive a share certificate, or copy thereof. The ownership form allows you the use of the property on a certain number of allocated weeks depending on your shareholding. In most cases Fractional Ownership Opportunities provide for a 13th shareholding in the relevant property, thus allowing 4 weeks usage per annum, on a rotational basis.

Benefits of owning a share in a Fractional Property

  • Any increase in the value of the property accrues to the shareholders. This is the major differentiating factor between fractional ownership and timeshare;
  • Better value for money you only pay for your utilisation and not for the remainder of the year;
  • Affordable ownership in exclusive destinations;
  • The most exclusive addresses in South Africa normally increase in value faster than other residential properties;
  • Ability to rent out your unutilised weeks;
  • Lower maintenance costs as it is shared between all shareholders;
  • Less security concerns because of higher Occupancy and high estate security.
The Shareholders Agreement
This is an agreement signed by all shareholders that governs the relationship between shareholders and the company. The agreement in addition to the normal Company's Act. and governs the following, amongst others:
  • Meetings of shareholders
  • Voting rights
  • Sale of shares
  • Appointment of directors, auditors, etc.
Usage Agreement
The Usage Agreement governs the relationship between the shareholders and the property. Among others it includes:
  • Right of use
  • Property management
  • Maintenance
  • Levies, etc
Property Management
It is important for all shareholders to understand that both the property and the company that owns the property need to be managed.
  • The company needs to make payments, do annual audits, have annual general meetings. etc.
  • The property needs to be insured, maintained. cleaned, etc.
Usage Roster
Preferred usage is different for every resort and area and rosters are developed for the maximum utilisation of the owners. A specific roster is designed for each property before the effective date of the syndication. In most of the roster systems the usage weeks are rotated on an annual basis. This means that if "shareholder 1" uses the property for the first week in December, next year he will use the second week and week three the year after that. Therefore, all the shares have the same value and all shareholders will have equal opportunity to use the property in peak periods.

Every shareholder thus knows exactly in which periods he will have usage. Again, this is at the shareholders' discretion should they want to change the roster in future. Weeks can also be swapped on an individual basis.

Monthly rates and upkeep costs
The monthly levy varies from one leisure estate to the next and also according to the size of the residence. A budget is drawn up at the beginning of the project and the property manager will manage according to this budget. This will typically include estate levies, maintenance, cleaning. gas, electricity, water, sewer, property axes. DSTV, insurance, bookkeeping, audits, etc.

All the shareholders have full access to the midget and actual spending of the company. Monthly costs can be reduced should all the shareholders so decide, for example, not to employ a full-time cleaner, each owner will take his/her own "smart-cards" (DSTV), or not to employ the services of a property manager.

Transfer Duties
This will depend on the entity in which you prefer to buy and hold the share. When you buy the share in your individual capacity, no transfer duty is applicable from R0 to R500 000. Above R500 000 normal duties are payable according to the sliding scale. When you buy the share as a Close Corporation, Company or Trust, an 8% transfer duty will be applicable on the value of the property. Should you at a later stage decide to sell your shares in the company, the new buyer will have the same responsibilities.

Capital Gains Tax
All over the world shares in joint-ownership companies have increased significantly. Any increase in the value of your investment will constitute a taxable capital gain if you sell your share at a later stage.

If I can't use my scheduled weeks in the property, how could I let them?

It is important to remember that the property is owned by the joint-ownership company in which you own a share. The shareholders agreement that all shareholders enter into upon investing in a joint-ownership company stipulates that each shareholder has the right to let the weeks allotted to him. Accordingly, a shareholder could either let weeks in the property himself or request the property manager to let the weeks on his behalf.

If the shareholders of a specific property are not comfortable with the letting of the property, the right of a shareholder to let his weeks could be withdrawn by the amendment of the shareholders agreement. Obviously, the shareholders agreement can only be amended by the shareholders themselves in the manner prescribed by the shareholders agreement.

Republished with permission from SA Deeds Journal

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