Despite Ripe Conditions, Fractional Interest Market Slow to Take Hold in San Francisco

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By Robert Carlsen

Fractional ownership projects in San Francisco are few and far between—the two major ones being the Ritz-Carlton Residences in the financial district, which incidentally is no longer offering fractional sales, and the Fairmont Heritage Place in Ghirardelli Square, but the future success of the concept is seen by real estate experts to be undisputed.

“San Francisco is the right kind of place [for fractional ownership],” said Andy Sirkin, owner of the San Francisco- and Paris-based Sirkin & Associates law firm and experts on fractional ownership, tenants in common and other co-ownership concepts. “And actually I’m surprised at how little the concept has grown there.”

Sirkin said that globally, fractional ownership is “fabulously” successful in urban destinations, such as New York City and Paris, but San Francisco has some barriers, such as a complicated permitting process and the high cost of development. “First you have the high costs of building in the city, then the process of selling all the units, which can take a long time, and most developers are reluctant to take that long road,” he said.

Fractional ownership is an arrangement where a group of individuals or families co-own and share use of a vacation home or condo. Sirkin’s Web site states that “statistics have shown that people only use their vacation home 17-30 days each year. Fractionals are appealing because they allow people to own only the share of a vacation home that they will use…”

At the Fairmont Heritage Place private residence club, for example, which opened in 2008, there are 53 one-, two- and three-bedroom units ranging from 846-1,900 square feet, each with 10 deeded fractional interest owners who each have rights to the unit for 35 days per year. The units are in five buildings, come furnished and offer 24-hour concierge service, butler service, an owner’s lounge, in-residence dining, pre-arrival grocery stocking, executive business center, underground valet parking and chauffeur service with a five-mile radius from Ghirardelli Square. Prices currently range from $200,000 for a one-bedroom to $269,000 for a three-bedroom.

Kevin Morgan, asset manager for the Fairmont property via the owner, real estate investment firm JMA Ventures LLC of San Francisco, said that the property is currently more than 50 percent sold out. “We have increased pricing over the years, and this will likely happen again towards year-end with the opening of Jonathan Waxman’s new restaurant and Le Merais’ new location at Ghirardelli Square,” he said. Berkeley-born Waxman, chef/owner of New York City’s Barbuto and who began his career at Chez Panisse, will open his restaurant this fall in the Mustard Building; Patrick and Joanna Ascaso are bringing a second location of its famed bistro and bakery to the square’s Apartment House later this year.

Morgan added that with San Francisco inventory at an all-time low and pricing on traditional condos becoming more and more expensive, the fractional option “has become even more unique and we are beginning to see a powerful trend in interest with the value proposition that we offer.”

Morgan said the general profile of the property’s buyers are 40 years old, net worth in excess of $2 million with a primary residence valued at more than $1 million. “Historically, a majority of our buyers have been from the Bay Area as well as Southern California,” he said. “However, we have more recently seen interest from international buyers, including an upcoming sale to a Chinese buyer.”

One of the advantages Fairmont has over other regional properties is the ability of the owner to access the reciprocal use system to exchange all the allotted 35 nights of annual time into over 200 Fairmont-affiliated hotels around the world, he said.

Though Sirkin said that the great recession certainly affected the sales performance of fractional offerings introduced between 2008 and 2011, he does not think economic conditions alone fully explain the “slow sellout” of the two San Francisco properties, “particularly in light of the boom in the city’s residential and commercial prices of the last five years.”

“The additional factors are project-specific,” he said. “I think that the value proposition in these two projects has not resonated as well in the marketplace compared with some other projects, such as Phillips House in New York City.”

Sirkin said that in the case of the Fairmont, the location is favorable for buyers who visit San Francisco looking for a “Fisherman’s Wharf experience,” but not for people who visit for arts events, shopping, business or family reasons. In the case of the Ritz-Carlton, the location of the project is “perceived as marginal because of the surrounding street activity, especially on weekends and at night.”

West Coast Commercial Real Estate News