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To buy or to share -- that is the question

Fractional ownership offers shared sense of wealth

A couple of years ago, a group of girlfriends from California made national headlines when they decided to buy and share a $37,000 diamond necklace set with 118 diamonds and a total weight of 16.25 carats. Because no one woman could afford the necklace on her own, the women agreed to share ownership, each taking possession and wearing the necklace for four weeks per year.

These women brought renewed energy into an ordinary phenomenon, fractional ownership. Fractional ownership is where individuals purchase portions or shares of an expensive asset that they may not otherwise be able to afford individually. The buyers share the cost of the asset and, in some cases, associated maintenance and management costs, fees and taxes as well.

Seeking the luxury lifestyle

For those who have only dreamed about affording -- and self-indulging -- in luxury items in the past, shared ownership is a way to have their proverbial cake and eat it, too. While fractional ownership has been traditionally associated with timeshares in a condo or property shared by several individuals in vacation resorts in the Florida Keys, Rocky Mountains and elsewhere, the idea has taken on a new life in the purchase of some extraordinary items, such as private jets, yachts and exotic cars.

For example, a company called Exotic Car Share in Illinois sells ownership shares in a new Bentley Continental GT costing about $30,000 per one-fifth share, plus a $10,000 per year maintenance fee. Marquis Jet is making ownership of a private jet within reach to moderately wealthy individuals and companies by enabling the purchase of incremental time to use its private jets. The company sells 25-hour time-block cards for private jet travel for around $109,000. The purchase of a second home or a vacation home is perhaps the most popular category for fractional ownership. In recent years, the number of vacation or second homes has risen 25 percent to more than 5.1 million properties in recent years, according to the National Association of Realtors. Second-home sales in New England ski resorts, for example, have increased to 16 percent in 2004. This interest in second-home ownership will likely continue to rise as fractional ownership makes the purchase of a vacation home a viable option for many more Americans.

Weighing the benefits of fractional ownership

There are several advantages to fractional ownership. For one, shared ownership provides the opportunity to enjoy a luxurious hobby or interest that may otherwise not be an option. Many cannot justify the high costs of owning a luxury item that they would not use 365 days a year; however, they can justify sharing the cost and ownership of a luxury item to enjoy for a few days, weeks or months. Moreover, many find they can enjoy a bigger and better second home or yacht that shared ownership affords. Further, fractional owners typically outsource maintenance and upkeep to a third party to avoid worries about leaky roofs or busted pipes.

Having a partnership in a luxury asset isn't always smooth sailing. It's important that a potential owner has a full understanding of additional limitations and costs, and that she plans for potential problems. Some risks associated with shared ownership include unanticipated costs, including significant buy-in costs, maintenance and storage fees, property taxes and the like. Anyone considering a fractional ownership deal should enter into the transaction as she would with any other big purchase. Talk to your tax attorney, seek the advice of your financial adviser, and make sure you're aware and understand the structure of the deal and any related fees.

Calculating the costs of fractional ownership

Along with the personal satisfaction of partial ownership of an asset such as a private jet, shared ownership also can offer financial advantages. Real estate or vacation homes, for example, allow you to invest your money and enjoy yourself (although some items will depreciate in value, such as a brand new car, which decreases in value once it leaves the dealership).

With a timeshare, you and a group of other people share the purchase cost of a vacation accommodation, in increments of a week or more per year, enabling you to use that accommodation during the period of time you choose. Accommodations range from hotel rooms to condos, cabins, RVs and houseboats.

Fractional ownership resembles the concept of timeshares in some ways. However, the differences between timeshares and fractional ownership properties are prices, financing and fees. Through a fractional ownership, you have the opportunity to buy partial ownership of a large purchase like a luxury vacation home.

Currently, the average cost of a timeshare in a condo in the United States is approximately $30,000 for two weeks of use per year. With 26 owners, in one year a group of owners typically pays $780,000 for access to a condo, which can be more expensive than the actual selling price of the unit, and for less use of it.

But with fractional ownership, investors maybe able to invest less money and get more use per year. For example, if a particular condo costs $258,500 to buy outright and you are one of 12 investors who pay $25,000 each, then the group will have more than enough money to purchase this property and cover maintenance costs, plus each investor can use the property for a month a year for many years to come.

Despite the benefits of fractional ownership, it is important to note that purchasing a timeshare or engaging in a fractional ownership transaction should not be viewed as a financial investment with the expectation of gaining a profit in either reselling it or renting it to someone else.

Considering various financing options

If fractional ownership is in your future, talk with your financial adviser about various financing options. When faced with a major expense, many immediately think about taking on additional debt, such as through personal loans or credit cards; however, a traditional loan may not be the best or most cost-effective option for a fractional ownership deal.

Consider the following traditional and alternative financing options and talk to your financial adviser about which investment options best fits your needs:

¥ Securities-based lending: There are various securities-based financing options available today that enable you to leverage your eligible securities.

Such financing options can be a tax-efficient source of funds, and often enables the borrower to benefit from a lower interest rate than he would receive through unsecured forms of debt. In many cases, securities-based lending shouldn't disrupt your investment strategy.

For example, loan accounts are available in which you can pledge a broad range of eligible assets as collateral, such as your managed assets accounts, exchange funds or third-party assets. Pledging assets as collateral can be advantageous because you borrow against, rather than sell, your assets, which helps keep your investment strategy on track.

Securities-based financing involves special risks, however. Before deciding on a securities-based loan, you should consider individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. Your financial adviser can answer any questions or concerns you may have about securities-based loans.

¥ Home equity and personal lending: Your assets can be a powerful borrowing tool that provides you with ready access to financing at times when you need it most.

Some traditional home equity loans offer adjustable rates with revolving lines of credit secured by your home equity. In some cases, you are able to make interest-only payments during the initial period of the loan, which decreases your monthly payments. While paying only interest won't reduce your principal balance, most interest-only loans allow payment toward principal at any time without penalty, giving you cash flow flexibility and control.

Creating pride in ownership

Fractional ownership can provide flexibility, feasibility and all the pride of full ownership without all the full-time maintenance and expense. Further, when strategically financed, it doesn't have to deplete your cash or wreak havoc on your portfolio. As with any major financial decision, consult your financial, legal and tax advisers to help you determine the best solution to get you sailing, driving, flying or vacationing in no time.

Information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its financial advisers provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisers.

Liddy is a vice president and financial adviser at the Merrill Lynch office of downtown San Diego. She and her team provide high-net-worth individuals with wealth management advice and guidance to help them achieve their financial goals. Liddy can be reached at (619) 699-3706 and courtney_liddy@ml.com.>

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