After years of looking at properties in Paris, I finally decided to buy a share in a Fractional in the Marais. Overall, I have been pleased with how things have turned out, but for those who are interested in doing this, I’d like to offer you some things that I wished that I had known or thought about before I decided to do it. One of the reasons there are now many fractional offerings is that the Mayor of Paris has all but eliminated rentals of less than 30 days duration.
What is the difference between a Fractional and a Timeshare?
This is important because fractionals and timeshares do have some things in common but are very different in structure. Since I am not a lawyer, you should consult your own legal advisor, but I will try to give you a summary of the differences with the idea that this is just my understanding:
With a fractional, the property is divided in to a limited number of shares. The normal way this is done is to have it owned by a corporation and each owner owns shares in the corporation. In most cases, at least in Paris, the fractional ownership will be divided into 13 shares, with the operating agreement specifying that each share gets 2 weeks every 6 months. This usage can vary depending on how many shareholders are involved. The owners of the company elect a board of directors who over see the management of the unit and put together a budget that includes taxes, weekly cleaning, maintenance, reserves, electricity, internet, cable TV, building HOA payments etc. The shares can be resold to another buyer when the owner of the share decides they would like to leave the group. Here is a useful link: https://www.investopedia.com/terms/f/fractionalownership.asp
With a Timeshare, you are signing a contract to be able to use a certain amount of the resources involved but you may have no ownership in the underlying property and probably no say in how it is managed, and thus no say in how many others are being sold contracts, or in how much your annual fees will be. Often there is no way to exit without difficulty. Be extremely wary of getting involved in any Timeshare situation. Since I’m not an expert on Timeshares, here’s a reference article: https://www.investopedia.com/terms/t/timeshare.asp
Scheduling:
The fractional in which I purchased a share was set up as a California “not for profit” corporation with bylaws that include a fixed schedule. This means that, in our case, each share gets 2 weeks every 6 months starting and ending on a Thursday. The schedule rotates by 10 weeks the following year, so that in 13 years all of the owners will have used every week. So, the advantage of this is that your dates are predictable well in advance. Another advantage is that each share has the same value. Our bylaws allow you to give your weeks to friends or relatives, trade with other owners, but not rent to anyone or post on any website as a rental. This would be fairly standard for a fractional in Paris. There are fractionals with a system of bidding for different times, but this rapidly gets complicated. One thing that would be desirable, it a designated few days or week every 6 months or so for maintenance and or a deep cleaning, something that doesn’t happen with our 13 owner structure.
Some things to consider if you are thinking about purchasing a fractional:
How many shareholder will be involved? This is a bit of a double edged sword. The more shareholders the more awkward decision making and scheduling can become, but, the less each shareholder will have to pay in fees!
Storage: Our unit lacked individual storage areas for owners and when we designated some space this produced some initial contention. We only had a small amount of space in the unit so each owner has a small cubby. Since that time we have rented a separate storage unit just up the street and most of the owners are participating in this, thus allowing them to leave some items. Whether you think you need it or not, odds are, you will want to store some stuff!
Corporate Structure: Ours was structured in an unnecessarily complicated way with a French SCI owned by two American companies. In retrospect, one American company owning the apartment would have greatly simplified everything and significantly reduced the number of annual tax filings necessary. You will need to elect a board of directors, at least 3 shareholders. With luck you will be able to find people willing to serve, preferably with real estate, CPA and legal experience. Consider naming a managing shareholder and waiving the dues for that person. Serving in these roles can be very time consuming.
Location: Take into account the location of the property involved. Big items to ask are what floor it is on, if there is an elevator. What neighborhood, is it going to be loud! Disco bar downstairs? How close are essential services like groceries, the Metro, cafes, bakeries etc. Be cautious about buying a place out in the countryside, this will often require that you rent a car, and of course you don’t want to find out that you have eaten in every restaurant in the local village at the end of your first trip. For the most part, if you are from the USA you will be flying into and out of Paris, so pay attention to how difficult it is to get from Paris Airport(s) to your chosen property.
Property Condition: Generally the developer will assure you that everything is in “turn key” condition and will do a full remodel before the property is made available to shareholders. I would advise digging a little deeper here based on experience. You will want to know if the fridge, washer/dryer, oven, stove etc. are new, or are just in current working order. If a remodel has been done these should all have been replaced and not just reinstalled. If your unit has an Air Conditioning system, you will want to know the age of this system and whether it is functioning correctly. In our case we had issues with the existing 13 year old system, and, in spite of several attempts to repair it, ended up having a full replacement system installed at fairly high expense. For Paris apartments you are likely to want an Air Conditioning system. Also be sure that it conforms to the rules of the Syndic, the HOA.
Dues: Every year, each shareholder will be expected to pay an annual amount of dues. Obviously developers like to state a low amount because this makes the whole proposition more attractive. Given that energy costs in Europe are rising as are other things, I would consider that the forecast budget for dues is likely to be much lower than what your actual dues are going to be. Just expect this and don’t be alarmed. In our case, with things being split 13 ways, any individual share of an expense is pretty low. Still, all in, I would estimate our dues at around $800/week of usage.
Developer: Different developers are going to have different strengths, and weaknesses. Be sure to ask around and get references so you know who you are dealing with. Also be absolutely certain as to the agreements between your ownership company and the developer/management company involved in the project. Are you committed to that particular management company or are you free to seek your own management? If you do have a contract with the existing company, how long are you committed for and how much are they charging in fees? Our initial management company was charging a fee plus a percentage of any amounts they advanced on our behalf. This was not only illogical but made it very difficult to predict how much we would be paying on an ongoing basis, add a complicated currency conversion formula in to the mix and it didn’t work for us. We are now self managing.
Is this right for me? This is very much an individual decision. You should make sure that you can afford this without incurring any financial strain, if you can’t write a check for your share, probably not. You will want to make sure that if you do own a fractional, you intend to visit the destination on a regular and ongoing basis. Make sure whatever fractional you are considering suits your needs, eg. If you have several children, then a one bedroom is probably not the right choice for you. If you don’t do stairs well, pick a building with an elevator. If finding other people’s items in drawers on the property makes you crazy then this will not be for you. While you are likely to be able to sell your share for more than you paid for it, in the long run, it will not be a money maker and you should not be buying with the expectation of an investment level return.
