Fractional ownership of property in India – What is it? How does it work?

Many people dream of owning a property and work towards saving their earnings to afford the property. May it be a vehicle or a real estate property. However, it may take a number of years for a person to gather the necessary amount. 

Would you appreciate it if you can claim the ownership of a property/asset in a simpler and more affordable way? What if you could own a fraction of the property and still earn returns from that fractional ownership?

Fractional ownership of property is a new way of owning a property that you have been eyeing for some time. Here are all the details about fractional ownership that you would like to know.

What is fractional ownership?
 

Fractional ownership refers to a set-up wherein groups of investors pool in funds to purchase a property. They share passive ownership of a high-value asset. This approach reduces the financial burden on a single investor to own a property and allows the investor to earn returns on the investment. 

The asset, here, can be anything such as a commercial property, a residential property, a jet, a yacht, or even a warehouse. 

All the investors will share the incomes and expenses related to such assets in the right proportions based on the investments. 

Lately, assets, such as vehicles, equipment, and furniture leased by corporate companies are also following the trend of fractional ownership. The minimum investment on these assets can be Rs.20,000. Further, the minimum investment required to get fractional ownership of commercial property can be as low as Rs.5 lakh.

When it comes to commercial property, the ritual of fractional ownership is carried out through a Specific Purpose Vehicle (SPV). Through SPV, funds are raised to own and manage a property. An investor, in this case, will own shares of the SPV holding the property.

Why is fractional ownership gaining popularity?
 

Fractional ownership is the right approach for the assets that are less liquid, difficult to manage, or unaffordable for small investors. The key reason for this concept to get a lot of traction is the cool quotient.

You owning a jet, a yacht, or any other high-value asset can be something that portrays you in a brighter light. People are going behind this trend as it gives you a bigger image without making the full investment.

Also, the entire amount you invest in getting the fractional ownership is distributed towards the net distributable cash flows. The fractional ownership company does not levy any charges on your investment, as is the case for other kinds of investments. However, a small, reasonable fee may be charged for the services.

Such an investment gets more stable over time and is a good choice if you look at a medium-to-long-term investment horizon. The usual practice is to grow wealth over 5-8 years and sell the asset off. If you want to cash out your investment even before this period, you can do so by selling off your share.

What should you know about fractional ownership?
 

Fractional ownership of assets does not guarantee any income certainty, as in bonds or shares. The probability of meeting a fraudster and getting scammed is no less in this sphere.

Be mindful that the value of physical assets depreciate with time and undergo wear and tear. The income from such an asset must be higher than the cost of maintenance for the investors to make profits from their investments. 

Therefore, it is essential to know the nature of the asset you are investing in, its lifespan, the maintenance cost, the income generated from the asset, and similar things beforehand. 
 

Is fractional ownership related to the stock market?
 

As an analogy, fractional ownership of properties is very similar to investing in the stock market. The investor has the freedom to pick and choose the property they want to own fractionally. However, the concept does not correlate with the stock market in reality. 

Investors can see fractional ownership as a way of diversifying their portfolio through such an investment. 

Possible models of fractional ownership
 

Depending on the type of the property, the tax treatment applicable to the respective model and the model most economical and convenient, you can choose the right model for your asset from the available options. 

Here are the possible models of fractional ownership.

Joint ownership

In this model, all the owners have title to the property and reserve the right to usage without prejudicing (harming) the rights of other co-owners. One co-owner has the freedom to sell their shares on the property with the consent of the other co-owners. There is no ‘first-refusal right’ agreement between the co-owners.

Co-operative model

All the investors interested in buying an asset are to form a co-operative society and then purchase the asset in the name of the co-operative society. All the investors become members of the society, and each holds the shares of the property. 

When one co-owner wants to sell off the shares, the shares in the co-operative society will be transferred to the new fractional owner. 

Company structure

This model recommends that the fractional shareowners form a company and they become the shareholders of the company. The fractionally-owned property becomes a property of the company. The company must comply with the provisions and regulations of the Companies Act. 

This option is more advantageous compared to the previous two options as you can save on stamp duty. In contrast, this model comes with its own set of responsibilities as well.

Trust structure

The prospective fractional owners must create a trust where the property seller is the author of the trust. The seller has to execute a trust deed for the benefit of the proposed fractional owners. There are specific directions to preparing the trust deed to keep this model effective.

You can take advantage of this model in terms of tax if you can create an offshore trust in a country with which India has a tax treaty. 

Types of usage of fractional ownership
 

When it comes to co-ownership, each member may have their ideas of putting the asset at hand to use. Therefore, the first thing the fractional owners can do upon purchasing an asset is to settle their opinions on how to use the property. 

There are two basic ways of allocating usage rights, and they are:

1. Pay-to-use approach

• Co-owners pay a usage fee calculated on a per day or per week basis to use the property or asset.
• The usage fee plus the rental income is used to pay for the expenses.
• If there is a surplus, it is divided among the co-owners.
• If there is a shortfall, all co-owners contribute to cover the expenses.
• The investment of each co-owner can be based on their affordability, investment goals, and other criteria. 
• The investment proportion does not have any impact on the usage rights.

2. Usage assignment approach

• Each owner is assigned the exclusive right to use the property for a specific number of days per year.
• The usage period can be fixed, variable, or a mixture of both.
• During a co-owner’s usage period, the co-owner can use the property as per their wish or even leave it unoccupied.
• The purchase price and the usage rights of each co-owner are to be proportionate.

The concept of fractional ownership of properties/assets is still in its infancy and is on the verge of gaining popularity. The government is yet to come up with tax regulations on this concept. Once it gains momentum and encounters any complicated issues, the government may think of a solution and tighten the rope.