Introduction
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”

2) Pure Rental property

3) Second Home/ Hobby Rental

Possible Model Structures for Fractional Ownership in India

There are many possible structures for implementing the concept of fractional ownership in India . The prospective owner should choose the model best suited to his needs depending on the type of the property, the tax treatment to be applicable for the respective model and above all the model most economical and convenient. For the sake of illustration, if the property is an expensive handbag, the joint ownership or co-ownership model will be preferred to the other models. But if the property is a vacation house or any other more expensive immovable property it will be better if the property is owned through the company model or co-operative model. The advantages of such an arrangement also include distinction of shares among the fractional owners and the capacity to transfer shares by any one of the fractional owners, when that fractional owner has to end the arrangement.

The company model or the trust model will be even better if it allows the fractional owners to take advantage of the tax benefits. For example, countries like Mauritius and Cyprus have concluded Double Taxation Avoidance Agreements (DTAA) with India. India has comprehensive DTAA’s with 79 countries. What it means is that there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act, 1961,-Sections 90 and 91 provide specific relief to tax payers to prevet double taxation. While Section 90 provides tax exemptions to tax payers who have paid tax in a country with which India has signed a DTAA, Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed DTAA.

The various possible models are hereinafter mentioned below in detail:

1) Joint Ownership

Joint Ownership is the mode of ownership of a property where the property is held by more than one person jointly. All the joint owners have title to the property and have the right to usage without prejudicing the corresponding rights of the other co-owners. The shares or rights of one joint-owner over the property, can be sold individually and separately, provided that the other co-owners consent to the act of him and there is no “first refusal right” agreement between the co-owners.


2) Co-operative Model of owning Fractional Ownership

Here, the proposed buyers of a property are to form a Co-operative Society for the purpose of purchasing of the property. The Co-operative Society owns the property and the members of the society hold the shares of the property. The various states have their own enactments regarding co-operative societies in spite of a Central Act in existence, namely Multi-State Co-operative Societies Act, 2002. The Acts have laid down guidelines on the conditions to be complied before the formation of a co-operative society.

When a Co-operative Society is formed with the intention of owning a fractional property, it will have to comply with the respective State regulations. So, all the co-owners of the property will be members of the Co-operative Society who hold shares proportionate to their rights in the property. So when one co-owner, a fractional owner, wants to sell off his rights in the property, his shares in the co-operative society gets transferred to the new fractional owner. In the case of death of one of the members, his nominee becomes eligible to the rights of the deceased and becomes the title holder. If the deceased had not nominated any, a committee formed by the fractional owners can pass on the shares to whomsoever they think as the successor or legal heir of the deceased.

3) Company Structure

In this structure, the fractional owners of the property form a Company and the fractional owners become share holders of the Company. The fractionally owned property becomes a property of the Company. Here the Companies Act, 1956, becomes applicable to the property. So, the various requirements, under the Act like filing of Annual Returns, Conducting Annual General Body Meetings of the share holders etc. would are to be complied with. In this structure, whenever a fractional owner wants to transfer his interest in the property, his shares will be transferred to the new fractional owner. This structure has its advantages compared to Co-operative society and Joint-ownership structures since stamp duty can be saved on each instance of share transfer. Here a share certificate is given to each fractional owner depicting the share holding pattern in the fractional property. The number of shares held by each shareholder in the company will have a proportional representation to the amount of capital invested by him in the fractional property or the rights possessed by him as laid out in the ownership agreement.

But to do so it is to be noted that, in the memorandum of association of the Company, the objective of the Company should be mentioned as holding, acquisition of properties, giving it for rent and so on. Further board resolutions need to be passed from time to time authorizing the shareholders to hold and dispose off the property belonging to the company. This gives the fractional owners the right to use the property on behalf of the Company for achieving its objective. The articles of association should also prescribe that in the event of transfer of shares, the new shareholders will have the right to use the property even without any explicit agreement between him and the Company. In France a company structure presently employed is as follows:

‘Each co-owner will be a shareholder in an US-based company, which in turn will hold the shares in a French real estate entity. This double company structure is set up in order to ensure the simplest and most transparent ownership structure for the property, as well as to make shares easily transferable without disrupting the underlying ownership structure of the property. In this way, re-sales, gifts, or inheritances of fractional shares will occur in the United States, thereby avoiding the administrative intricacies of French real estate transactions’.

4) Trust Structure

The trust model is advantageous, only when some taxation benefits can be availed of by creation of an offshore trust in a country with which India has a tax treaty. For example an off-shore trust is created in Mauritius or Cyprus, to avail of the Capital gains Tax benefits. Here the prospective fractional owners create a trust. The initial seller of the property is the author of the trust, who acts as the settler by executing a trust deed. He executes a trust for the beneficial interest of the proposed fractional owners. The trustees of the property are the fractional owners themselves such that in the trust deed, one half of the fractional owners are trustees and the other half beneficiaries or some of them are trustees and the remaining are beneficiaries. The trust deed should mention that the beneficiaries will have the right to transfer the trust property in consultation with the trustees. Even though administrative limitations are there, the formalities and procedures which need to be complied with under the Company model can be dispensed with. When a fractional owner wants to dispose off his interest in the property, the new fractional owner assumes the office of the trustee and the seller of the fractional interest ceases to be a trustee.

Fractional Ownership or Real Estate Mutual Fund

The single biggest challenge which Fractional ownership will have to face in India in the real estate sector might be from Real Estate Mutual Fund (REMF). Necessary amendments were made in the SEBI (Mutual Fund) Regulations, 1996, to allow existing mutual funds to launch Real Estate Mutual Funds. REMF scheme means a mutual fund which has investment objective to invest directly or indirectly in real estate property and should be governed by the provisions and guidelines under the SEBI (Mutual Funds), Regulations, 1996.

Differences between Fractional Ownership and REMF

Conclusion

Fractional ownership has proved to be a success across Europe, Africa, U.S.A and many other countries as well. The affirmative response received by REMF from the markets must prove encouraging for the fractional ownership concept to be taken off. Off late more and more people are becoming experimental with regards to mode of investment as well. The booming economy and the newly rich are not afraid to experiment. Further, support from the government is a necessary pre-requisite for the success of any new initiative. As of now the government is considering to give REMF tax concessions. Hence if the same relief can be extended to fractional ownership schemes as well, it will be of great effect.

Many corporate houses have already started implementing this novel concept. The demand for timeshare products in India is likely to grow at approximately16% per annum from 2006 to 2015, according to a report released by Group RCI and global real estate consultants, Cushman & Wakefield. This can have a huge impact on the fractional ownership industry positively.

The future of the fractional ownership products in the Indian real estate market is likely to be governed by several factors including price appreciation in the resale market, the degree to which development financing is available in the future, the rate at which consumer awareness of the product increases in the future, the financial success of future projects as well as the extent of long-term return on investment that each product is able to generate, particularly in the current economic environment. Though the concept is popularly applied in real estate and aviation sectors the fact remains that it can be applied elsewhere also.

In the initial stage of the growth of timeshare industry, though the concept had an impact in many countries, in India it was relatively less well received. Also many time share owners had got defrauded, due to the eye-catching tags that these companies used. So the market might be skeptical about this new and improved version of time share also. The advantages of fractional ownership as compared to time share have to be highlighted here. Consequently there is no reason for fractional ownership to be unsuccessful. Therefore, it is the appropriate time to take positive steps in seizing the best opportunities available.