How to pro­tect your frac­tion

Al­though frac­tional own­er­ship has come un­der fire in re­cent days, there are ways to pro­tect your in­vest­ment. Lea Jacobs re­ports

Business Day - Home Front - - HOMEFRONT -

WHEN frac­tional own­er­ship was in­tro­duced to South African con­sumers in 2004, many must have thought it was the ideal way to “own” a unit in an up­mar­ket, per­haps pre­vi­ously un­af­ford­able, de­vel­op­ment. The com­mer­cial con­cept was first de­vel­oped in the US and it al­lowed part-own­er­ship of items such as jets or yachts; how­ever, it did not in­clude im­mov­able prop­erty.

The ar­range­ment ap­peared to be the per­fect an­swer for those who wanted to have the use of an up­mar­ket home, but who ei­ther didn’t want the has­sles associated with hol­i­day home own­er­ship or couldn’t af­ford the cap­i­tal out­lay re­quired. The con­cept of shar­ing the costs of a home with 12 or 13 other in­vestors who col­lec­tively not only paid for the prop­erty but also shared in the out­lay of fur­nish­ing and main­tain­ing the home was a big hit.

The scheme re­cently came un­der the spot­light of the me­dia and cracks be­gan to emerge. All was not well in par­adise and some of those who had in­vested in units un­der the Se­eff Frac­tional Own­er­ship banner re­ceived a nasty shock when it was dis­cov­ered that the units that in­vestors as­sumed they owned, ac­tu­ally car­ried enor­mous bonds. The Es­tate Agency Af­fairs Board (EAAB) is cur­rently in­ves­ti­gat­ing those go­ings-on.

What is frac­tional own­er­ship and are there ways to pro­tect your in­vest­ment?

Alex Bosch, the ex­ec­u­tive di­rec­tor of the Va­ca­tional Own­er­ship As­so­ci­a­tion of South­ern Africa (VOASA), says the term frac­tional own­er­ship can be mis­lead­ing as it con­veys the im­pres­sion to the con­sumer of the right to own­er­ship of prop­erty.

“Own­er­ship of im­mov­able prop­erty, ex­cept in terms of spe­cial leg­is­la­tion, can­not be frag­mented.” The ref­er­ence to “own­er­ship” is a “de­lib­er­ate ploy to the gullible con­sumer pub­lic to ac­quire a real right in lux­ury hol­i­day ac­com­mo­da­tion at a frac­tion of the cost of the ac­com­mo­da­tion as if it were pur­chased in full own­er­ship”, he says.

He says a num­ber of de­vel­op­ers have ac­quired un­de­vel­oped im­mov­able prop­erty in up­mar­ket golf es­tates or game parks, reg­is­tered the prop­erty in a pri­vate com­pany and then ob­tained bond fi­nance to de­velop the ac­com­mo­da­tion scheme. “The de­vel­oper/pro­moter then sold on and al­lo­cated shares in the pri­vate com- pany to mem­bers of the pub­lic, thus avoid­ing the pro­vi­sions of Sec­tion 114 of the Com­pa­nies Act 1973; al­though declar­ing the bond fi­nance (mort­gage loan). The de­vel­oper/pro­moter would re­tain di­rec­tor­ship of the com­pany, man­age the fi­nan­cial and op­er­a­tional af­fairs un­til the first gen­eral meet­ing. The risk at­tached hereto is that the fi­nan­cial con­trol is still in the hands of the de­vel­oper and fur­ther loans by the com­pany can be in­curred by the adop­tion of an or­di­nary res­o­lu­tion passed by the di­rec­tor (de­vel­oper).”

Aside from the dan­gers associated with this form of in­vest­ment there are many suc­cess­ful mod­els cur­rently run­ning in SA. In­vestors, how­ever, should be wary of which schemes they in­vest in.

Bosch says that par­tic­i­pants in a frac­tional own­er­ship scheme should check the fol­low­ing be­fore in­vest­ing:

The legal struc­ture of the com­pany in which the par­tic­i­pant ac­quires a share should ide­ally be a share-block struc­ture. The ac­qui­si­tion of the share which cre­ates the right to or the in­ter­est in the use of im­mov­able prop­erty is by pre­sump­tion deemed to be a share-block struc­ture (sec­tion 4 of the Share Blocks Con­trol Act).

Ide­ally it is prefer­able to pur­chase into a com­pleted build­ing.

If it is not com­pleted, in­vestors should en­sure that the pur­chase agree­ment has a pro­vi­sion that the funds be held in a trust ac­count un­der the con­trol of a legal prac­ti­tioner or es­tate agent as de­fined in the Share Block Con­trol Act (SBCA).

The pur­chase agree­ment must com­ply with Sec­tion 17 of the SBCA.

En­sure that the first gen­eral meet­ing is held timeously and in­de­pen­dent direc­tors are elected.

En­sure that the scheme is man­aged by a pro­fes­sional man­age­ment com­pany with the nec­es­sary cre­den­tials re­quired by the EAAB or a sim­i­lar body.

He says that while cer­tain de­vel­op­ers of the frac­tional own­er­ship scheme re­fute the con­cept of the share-block struc­ture, “the view of the VOASA is firm on this as­pect — a frac­tional own­er­ship scheme is sub­ject to the share-block struc­ture and the Prop­erty Time­shar­ing Con­trol Act. The man­ner of the share­hold­ing which con­fers en­ti­tle­ment to us­age of any prop­erty does not mat­ter — the slight­est con­no­ta­tion is suf­fi­cient to deem it a share­block scheme.”

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