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
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.”