By Peter A. Rohr

Published February 2008

A couple of years ago, a group of 13 girlfriends from California made national headlines when they decided to buy and share a $37,000 diamond necklace set with 118 diamonds and a total weight of 16.25 carats. Because no one woman could afford the necklace on her own, the women agreed to share ownership, each taking possession and wearing the necklace for four weeks per year.

These women brought renewed energy into an ordinary phenomenon, fractional ownership. Fractional ownership is when individuals purchase a portion or share of an expensive asset that they otherwise may not be able to afford on their own. The buyers share the cost of the asset and, in some cases, they also share the costs of maintenance, fees, taxes and management costs for the asset.

For people who have only dreamed about being able to afford – and self-indulge – in luxury items in the past, shared ownership is a way for them to have their proverbial cake and eat it too. While traditionally fractional ownership has been used to describe timeshares, such as a condo or a resort property shared by several individuals in places like the Florida Keys or Rocky Mountains, it is now taking on a new life with the purchase of extraordinary items such as private jets, yachts or cars. For example, a company called Exotic Car Share in Illinois is parceling out partial ownership of a new Bentley Continental GT costing about $30,000 per one-fifth share plus a $10,000 per year maintenance fee. Marquis Jet is making ownership of a private jet within reach to moderately wealthy individuals and companies by enabling the purchase of incremental time to use its private jets. The company sells 25-hour time-block cards for private jet travel for around $109,000.

The purchase of a second home or a vacation home is perhaps the most popular category for fractional ownership. In recent years, the number of vacation or second homes has risen 25 percent to more than 5.1 million in recent years, according to the National Association of Realtors. This interest in second home ownership will likely continue to rise as fractional ownership makes the purchase of very expensive vacation homes an option.

There are several advantages to fractional ownership. For one, shared ownership provides the opportunity to take part in a luxurious hobby or interest that may otherwise not be an option. Many people cannot justify the high costs of owning a luxury item that may not be used 365 days a year, whereas they can own luxury item for just a few days, weeks or months and feel satisfied. Additionally, many find that they could own a bigger and better second home or yacht if they only owned part of it. Further, fractional owners typically outsource maintenance and upkeep to a third-party, so that means no worries about leaky roofs or busted pipes.

However, partnerships in luxury assets may not always be smooth sailing. It’s important that individuals have a full understanding of additional limitations and costs, and that they plan for potential problems. One of the most significant risks of shared ownership is unanticipated costs, including significant buy-in costs, maintenance and storage fees, property taxes, etc. Those who opt for a fractional ownership deal should enter into the transaction like any other substantial purchase. Talk to your tax attorney, seek the advice of your financial advisor and make sure you’re aware of, and understand the structure of the deal and any related fees.

Along with the personal satisfaction of partial ownership of an asset such as a private jet, shared ownership also can offer financial advantages. Real estate or vacation homes, for example, allow you to invest your money and enjoy yourself (although some items will depreciate in value such as a brand new car, which decreases in value as soon as you drive it out of the dealership).

Right now, the average cost of a timeshare in the U.S. is approximately $30,000 for two weeks of use per year. With 26 owners in one year, the group ends up paying $780,000 for a condo that is more expensive than the actual selling price and for less use. But with fractional ownership, investors maybe able to invest less money and get more use per year. For example, if the average cost of a condo is $258,500 to buy outright and you have 12 investors that pay $25,000 each, you have more than enough money combined to purchase the time share and cover maintenance costs, plus each investor has it for one month of the year for many years to come.

If fractional ownership is in your future, be sure to talk with your financial advisor about various financing options. When faced with a major expense, many people immediately think about taking on additional debt, such as personal loans or credit card debt, but a traditional loan may not be the best or most cost-effective option when entering into a fractional ownership deal. Consider the following traditional and alternative financing options and talk to your financial advisor about what investment options best fits your needs.

Securities-Based Lending. There are various securities-based financing options available today that enable you to leverage your eligible securities. Such financing options can be a tax-efficient source of funds, and often enable the borrower to benefit from a lower interest rate than they would receive through unsecured forms of debt. In many cases, securities-based lending shouldn’t disrupt your investment strategy. For example, there are loan accounts available where you can pledge a broad range of eligible assets as collateral, such as your managed assets accounts, exchange funds or even third-party assets. Pledging assets as collateral can be advantageous because you borrow against rather than sell your assets, helping you to keep your investment strategy on track. Securities-based financing involves special risks. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations, and investment time horizon. Your financial advisor can answer any questions or concerns you may have about securities-based loans.

Home Equity and Personal Lending. Your assets can be a powerful borrowing tool, providing you with ready access to financing at times you need it most. Some traditional home equity loans offer adjustable rates with revolving lines of credit secured by your home equity. In some cases, you are able to make interest-only payments during the initial period, allowing you to lower your monthly payments. While paying only interest won’t reduce your principal balance, most interest-only loans allow payment toward principal at any time without penalty, giving you cash flow flexibility and control.

Fractional ownership can provide flexibility, feasibility and all the pride of full ownership without all the full-time maintenance. Further, when strategically financed, it doesn’t have to deplete your cash or wreak havoc on your portfolio. As with any major financial decision, be sure to consult your financial, legal and tax advisors, to help you determine the best solution to get you sailing, driving, flying, or vacationing in no time!

Peter A. Rohr is a Senior Vice President – Investments and Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia.