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© March 16, 2007 by D. Andrew Sirkin.
Any reproduction or use of this document or any part of its content
requires the written consent of the author. Contact Mr. Sirkin at
dasirkin@earthlink.net, or visit www.andysirkin.com
Deciding how the vacation home will be used is usually the first step in structuring the co-ownership arrangement. Focusing on usage first usually makes the rest of the organizational process easier. This is because a co-owner’s right to use the home, or his/her right to earn rental income, are the most important and valuable benefits of ownership.
There are two basic models for allocating usage rights. The first (and less popular) model for allocating usage rights is the ’“Pay-To-Use Approach”. In this arrangement, co-owners pay a pre-agreed “usage fee” for each day or week of usage. The usage fees, along with any rental income generated if the home is also rented to non-owners, are used to pay the expenses of ownership. If the usage fees and rental income together exceed the expenses, the surplus is divided among the owners; if there is a shortfall, each owner must contribute. When the Pay-To-Use Approach is used, the purchase price and ownership of the home can be divided based on what each co-owner can afford, their investment goals, or any other criteria the group finds useful, but purchase price and ownership need not have any relationship to usage.
To fairly administer the Pay-To-Use Approach, a manager (who could be a co-owner) or management company should be in charge of reservations and collections. Usage costs/rental rates must be established for each year in advance. These can vary depending on length of stay, time of year, and whether or not the user is a co-owner. If co-owners pay less than rental tenants, it can be useful to allocate a maximum number of “discounted” days, weeks or months that each co-owner can use (which can also be seasonal), and whether co-owners can assign these “discounted” periods to family or friends. There should be a specific time of each year when co-owners can reserve usage blocks for the following year, based on a rotating preference system. The co-owner reservation period should occur before the home is offered for rent to non-owners. Of course, co-owners should also be allowed to use the home during periods that have not previously been reserved by other owners or renters, generally on a first-reserved-first-served basis.
The second (and more popular) model for allocating usage rights is the “Usage Assignment Approach”. In the “Usage Assignment Approach”, each owner is assigned the exclusive right to use the home during a specified number of days, weeks or months each year. The usage periods can be fixed (such as “the month of February” or “the first two weeks of February and July”), variable (meaning they change each year), or a combination of fixed and variable. During each co-owner’s assigned usage period, he/she can live in the home, allow family and friends to use it, rent it out (and keep the rental income), swap it, or leave it empty. When the Usage Assignment Approach is used, the purchase price of the home is generally shared among the co-owners based on the amount of usage allocated to each co- owner. To the extent some or all of the usage periods are permanently fixed, price allocation may also be influenced by the quality of each owner’s assigned usage dates and, in some cases, it may possible to show the specific days, weeks or months assigned to a particular owner on that owner’s deed.
Variable usage periods can be determined by establishing preset groups of days, weeks or months which rotate among the Co-Owners annually so that, for example, Co-Owner #1 gets “Usage Package #1” the first year, “Usage Package #2” the second year, and so on until he/she has had all the usage packages, at which time he/she begins again with “Usage Package #1”. This type of variable usage assignment allows for unlimited predictability and advance planning and, of course, a co-owners can simply trade with another co-owner if his/her usage for a particular year does not work for his/her schedule, Alternatively, variable usage periods can be selected annually by the co-owners based on a rotating system of selection priority.
There are a large number of variations and hybrids on these basic usage rights allocation models, and each group needs to find an approach that works for them and their property. For example, it is possible to employ the Usage Assignment Approach, but still allocate a certain number of weeks each year as “Pay-To-Use” weeks, meaning that during those times the home will be rented out to owners or to non-owners and the resulting income split among the owners in proportion to ownership. In another variation, it is possible to employ the Pay-To-Use Approach but still give co-owners preferences or discounts for a certain number of weeks each year.
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