Getting The Fractional Facts
Costs, limited free time, and lack of skills are the main reasons why consumers who dream
about boating may hesitate to take the plunge. These obstacles can be reduced or eliminated,
thanks to boat time-shares, rental clubs, and fractional ownership arrangements
oat time-shares and rental clubs are similar to on-land
arrangements for vacation homes. But for an experience that’s as close to owning a boat as possible, nothing beats a fractional ownership. In a fractional ownership arrangement, a group of investors share in the
cost of buying a boat. Owners may pay equal amounts for the
purchase or they may divide up the shares in different amounts
— which will be reflected in the amount of usage the individual
owners can claim and their share of any profits if the boat is sold.
Fractional ownerships are often managed by a brokerage company in the business of buying new boats outright or handling
sales of used boats for owners.
At the time the fractional is organized, owners can make a down payment on their share and make monthly
loan payments to the broker, or they
can pay for their portion of the purchase
amount in full. Brokers make their
money on the sale of the boat and in
the monthly fees charged for managing scheduling, maintenance, repairs,
storage, and insurance, but the costs
are still a fraction of what a single
owner would pay. Unlike informal co-ownership arrangements, where a few
friends pool their money together to buy a boat, formal written agreements spell out the financial and legal obligations of
the fractional owners. The agreements establish clear schedules so that owners can count on using the boat at specific
times and provide opportunities for spur-of-the-moment use.
Because fractionals involve direct ownership, each owner
has greater control over how the boat is used and maintained
and where it’s located. For example, if only four or five people
share the boat, this allows for lots of flexibility in scheduling.
Owners are more likely to get their fair share of the “good days”
each boating season. Fractional ownership plans are probably
most user friendly and cost effective in places where it’s possible
to boat year-round. Having a brokerage company take care of
maintenance and repairs means owners spend all their boating
B
time on the water, not at the dock or in the marina yard, cleaning and painting. Also, maintenance and cleaning are done on a
regular basis and at a consistent standard, avoiding unpleasant
surprises.
An added benefit of having a broker manage the boat is that
the broker is responsible for collecting payments from co-owners,
paying bills, and keeping records. This helps avoid disputes and
cash shortfalls. Co-owner payments are based on a budget and
regular assessment system rather than “as needed.” At the end
of each year, the manager estimates expenses for the coming
year, including group mortgage (if any), insurance, maintenance,
repairs, and improvements, and determines the amount needed from each co-owner to pay the bills. The anticipated
expenses should include some reserves
for long-term recurring expenses such as
engine replacements or new sails.
Usually, the owners form a limited
liability company (LLC) and all are listed
on the boat’s title. This reduces owners’ liability exposure if the boat is in
an accident or if a passenger is injured
while aboard. An LLC may also protect
the shared property from seizure by the
creditors of co-owners and increases
flexibility if ownership changes. Fractional owners may be able
to deduct interest if they pay for their share of the boat with a
qualified mortgage. Boats can qualify as second homes under the
IRS Code if the loan is secured and the financed boat includes a
head, sleeping, and cooking facilities. However, this benefit may
not be available if the owners form an LLC.
When entering into a fractional ownership arrangement,
review the terms of the agreement with a lawyer and the tax
ramifications with a tax consultant. Laws vary from state to
state regarding fractionals, especially if the boat is used as a
rental during non-scheduled periods. When setting up a fractional ownership, ensure the arrangement provides for protection for co-owners if one partner defaults on monthly payments.
— Caroline Ajootian
The BoatU.S. Consumer Protection Bureau is here to help members with questions or problems involving boats, engines or marine-related busi-nesses. The Bureau also maintains the nation’s only “Consumer Protection Database” containing 20 years of complaints and safety information
reported by boat owners, the U.S. Coast Guard, manufacturers, marine surveyors and marine technicians. E-mail consumerprotection@BoatUS.
com, call 703-461-2856 or visit www.BoatUS.com/consumer.
plifying the process of getting out on the
water, fractional companies are opening
the world of boating to a whole generation
of boaters who might not otherwise have
the opportunity. And these are a tech-savvy, well-trained generation of boaters.
Lowering the barriers to entry inherent in
boating (substantial down payments, large
monthly payments, maintenance and slip
fees) is good for the industry in the long
run. Many members go on to become boat
owners themselves, and the responsibility
and courtesy toward fellow boaters that
are a necessary component of fractional
boating benefits all of us on the water. The
fractional concept continues to grow in
the U.S., and more boat manufacturers are
bringing programs online. As a means for
introducing new boaters to the lifestyle, it’s
hard to argue with the math.
Dave Guilford is a freelance writer and the
former owner of True South Yacht Services in
Louisiana. He lives in Paris and is currently at
work on a novel about the dire consequences
of coastal erosion. He can be reached at
dguilford@gmail.com.
