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Cooperative and Timeshare Ownership
Chapter: Cooperative and Timeshare Ownership
Introduction
This chapter delves into the intricate world of cooperative and timeshare ownership, providing a comprehensive analysis of their structures, legal frameworks, and valuation considerations. The content covers the topic in scientific depth, using accurate terminology and concepts. A clear explanation of relevant scientific theories and principles is provided. Examples of practical applications and related experiments are given. Mathematical formulas and equations are used where appropriate.
Cooperative Ownership
1. Definition and Structure
Cooperative ownership, often referred to as a “co-op,” represents a unique form of real estate❓ ownership where residents collectively own a corporation that owns the building or property. Unlike condominium ownership, where individuals directly own their units, co-op owners hold shares in the corporation.
2. Share Allocation and Proprietary Leases
* The corporation issues an authorized number of shares at a specified par value.
* Individual owners purchase shares, with the price per unit determining the number of shares needed for a specific apartment.
* Each shareholder receives a proprietary lease, granting them the right to occupy a specific unit.
* A monthly maintenance fee is required, covering operating expenses and debt service on the underlying mortgage.
3. Financial Structure
Traditionally, cooperative corporations arranged mortgages on entire apartment properties.
Cooperative shareholders had to fund their purchases with 100% equity or borrow the money from commercial banks using short-term, personal notes.
Now, however, a cooperative corporation can arrange a mortgage on the total property, and individual apartment shareholders can mortgage their stock for a portion of its value.
4. Advantages and Disadvantages
* Advantages: Control over property conditions through shareholder voting, potential for social exclusivity.
* Disadvantages: Complicated financing structure, potential restrictions on subletting, board approval requirements for sales.
* Risk Assessment: Buyers must consider the risk associated with the underlying mortgage for the entire property.
* Flexibility: Co-op restrictions may not allow subletting, which would be seen as a negative influence on value by someone who viewed the unit as an investment and might want to rent out the unit based on the income potential of similar units in the market.
5. Mathematical Modeling of Co-op Valuation
Valuation of co-op shares involves considering several factors, including:
- Market Value of the Underlying Property (MVP): The fair market value of the entire cooperative building.
- Number of Outstanding Shares (NOS): The total number of shares issued by the cooperative corporation.
- Share Allocation for the Unit (SAU): The number of shares allocated to the specific unit being valued.
- Monthly Maintenance Fee (MMF): The monthly fee paid by the shareholder.
A simplified model for estimating the value of a co-op share can be represented as:
Value per Share = (MVP / NOS) - (Discount Factor)
The discount factor accounts for the risks and restrictions associated with co-op ownership, such as board approval requirements and limitations on subletting.
6. Practical Application
Consider a co-op building with a market value of $10,000,000 and 10,000 outstanding shares. A unit with a share allocation of 500 shares would have a theoretical value of:
Value per Share = 10,000,000 / 10,000 = $1,000
Total Value = 500 shares * $1,000 = $500,000
However, a discount factor (e.g., 10%) might be applied to account for the disadvantages of co-op ownership:
Discounted Value = $500,000 * (1 - 0.10) = $450,000
Timeshare Ownership
1. Definition and Categories
Timesharing involves the sale of limited ownership interests or rights to use and occupy residential apartments or hotel rooms.
2. Types of Timeshare Interests
* **Deeded Interests:**
* Designated periods on a recurring basis at specific resorts (fee timesharing).
* “Floating” period during a specific portion of the year at a specific resort or group of resorts.
* **Non-Deeded Interests:**
* Right-to-use interests for a specific period at a specific resort or network of resorts.
* “Points only” interests that can be used at various resorts in a proprietary network or vacation club system.
3. Fee Timesharing
- The purchaser of the deeded timeshare interest obtains a deed that conveys title to a unit for a specific part of a year, thereby limiting the ownership.
- The purchaser has the right to sell, lease, or bequeath the timeshare interest.
- The interest can be mortgaged, and title can be recorded.
4. Non-Deeded Timeshare
* The seller of a non-deeded timeshare interest does not convey a legal title in the property.
* Typically, a purchaser receives only the right to use a timeshare unit and related premises or to use the “points” involved in the purchase.
5. Interval Ownership
* In timeshare ownership a purchaser receives a deed to a particular unit as a tenant in common.
* Each purchaser agrees to use the unit only during the time period stipulated in the deed.
* In interval ownership, the ownership period may only last for the duration of the project.
* At the end of the specified time period, the ownership reverts to the interval owners as tenants in common.
6. Leasehold Interest
- The leasehold interest type of timesharing is essentially a prepaid lease arrangement.
- A vacation license involves the transfer of a license from the developer to the purchaser, giving the latter the right to use a given type of unit for specified time periods over the life of the vacation license contract.
7. Club Membership
* Timeshare patrons purchase membership for a specified number of years in a club that owns, leases, or operates the timeshare property.
* The purchaser receives the right to use a particular type of unit for a specified period during each year of membership.
8. Mathematical Modeling of Timeshare Valuation
Timeshare valuation involves assessing the present value of the future benefits derived from using the property for a specified period each year.
- Annual Usage Value (AUV): The estimated value of using the timeshare for one year.
- Number of Years (N): The number of years the timeshare interest is valid.
- Discount Rate (DR): The rate used to discount future values to their present value.
- Maintenance Fee (MF): The annual cost of maintaining the timeshare.
The present value of a timeshare interest can be calculated as:
Present Value = Σ [ (AUV - MF) / (1 + DR)^t ] (from t=1 to N)
This formula calculates the sum of the discounted values of the annual usage value minus the maintenance fee over the duration of the timeshare interest.
9. Market Tiers
- Primary Marketplace: Sales by resort developers to individual buyers.
- Resale (Secondary) Marketplace: Resales by individuals who have purchased from resort developers.
10. Valuation Considerations
* Differentiate between primary and secondary market sales.
* Consider concession and financing packages in primary market sales.
* Use comparable sales data from the appropriate market tier.
Scope of Work in Valuation Standards
1. Relevant References in the Standards of Valuation Practice
* SR A-3: Scope of Work (appraisal)
* SR B-3: Scope of Work (review)
* SR C-2(a)(xii) and C-2(b)(x): Sufficient Report Content (scope of work reporting)
2. Relevant References in the Uniform Standards of Professional Appraisal Practice
* Scope of Work Rule
* Advisory Opinion 22: Scope of Work in Market Value Appraisal Assignments for Real Property
* Advisory Opinion 28: Scope of Work Decision, Performance, and Disclosure
* Advisory Opinion 29: An Acceptable Scope of Work
3. Relevant References in the International Valuation Standards
* General Standards: IVS 101 Scope of Work
4. Elements of a Valuation Assignment
* Client
* Intended user
* Intended use
* Type of opinion
* Effective date of opinion
* Relevant characteristics of the subject property
* Assignment conditions
Conclusion
Cooperative and timeshare ownership represent unique forms of real estate investment with distinct characteristics and valuation challenges. Understanding their legal structures, financial frameworks, and market dynamics is crucial for accurate valuation and informed decision-making.
Chapter Summary
Cooperative and Timeshare Ownership: A Scientific Summary
This chapter delves into the intricacies of cooperative and timeshare ownership, contrasting these models with more conventional real estate❓ structures like condominiums. The primary focus is on understanding the ownership structures, financing mechanisms, associated risks, and valuation considerations unique to each type.
Cooperative Ownership (Co-ops):
- Ownership Structure: In a cooperative, individuals purchase shares in a corporation that owns the entire property. Ownership of shares grants a proprietary lease for a specific unit, entitling the shareholder to occupancy. This differs significantly from condominium ownership, where individuals directly own their units.
- Financing: Historically, co-op financing involved a blanket mortgage on the entire property, with shareholders relying on equity or personal loans for purchases. More recently, individual shareholders can mortgage their shares, easing financing burdens.
- Monthly Payments: Shareholders are obligated to make monthly payments covering their proportionate share of operating expenses, debt service on the underlying mortgage, and maintenance fees for common areas. These fees are determined and may be adjusted by the co-op’s board❓ of directors.
- Control and Restrictions: Shareholders exercise control through voting rights in electing directors, influencing property conditions. However, co-ops often impose stricter restrictions on subletting and sales than condominiums, potentially impacting value and investment appeal. Co-op boards often wield significant influence over buyer approval, which is both a potential advantage or disadvantage for certain buyers/sellers.
- Risks and Disadvantages: The co-op structure, with individual loans and a share of the blanket mortgage, historically presented a higher perceived risk than condominium ownership. Strict co-op rules and board influence can also be seen as drawbacks.
Timeshare Ownership:
- Definition: Timesharing involves the sale of limited ownership interests or usage rights in residential units or hotel rooms.
- Types of Interests: There are two main categories: deed❓ed interests and non-deeded interests.
- Deeded Interests: Provide actual ownership for a specific time period. This can be:
- Fixed: Ownership during a specific, recurring period.
- Floating: Ownership during a flexible time within a specified range.
- Timeshare Ownership vs. interval ownership❓: Timeshare ownership grants a deed to a unit as a tenant in common, while interval ownership lasts for the project’s duration, reverting to owners as tenants in common afterward, with the option to sell or renew.
- Non-Deeded Interests: Grant only the right to use the property or “points”. This can be:
- Right-to-Use: Usage rights for a specific period at a designated resort.
- Points-Based: Points redeemable for stays at various resorts within a network.
- Leasehold Interest, Vacation License, Club Membership: Variations of non-deeded timeshares, granting usage rights for a specific term or through a membership.
- Deeded Interests: Provide actual ownership for a specific time period. This can be:
- market❓ Tiers: The timeshare industry operates on two tiers:
- Primary Market: Sales by developers to individual buyers, often including incentives.
- Secondary Market: Resales by individuals, generally at different prices and conditions.
- Valuation Considerations: Appraisers must distinguish between timeshare interest types and markets (primary vs. secondary) to ensure accurate valuations. Primary market sales prices, often including incentives not transferable to the secondary market, should not be used for valuing resales.
Scope of Work and Appraisal Problem Solving:
- Scope of Work: The chapter emphasizes the importance of defining the scope of work in valuation assignments. Scope of work is defined by the type and extent of research needed to solve an appraisal problem.
- Problem Solving Framework: The valuation assignment should be viewed as a problem solving exercise, and the scope of work should be appropriate for the problem being solved.
- Three Steps to Problem Solving: The problem solving framework that should be followed in an appraisal assignment is 1) Identify the problem, 2) Determine the solution (scope of work), and 3) Apply the solution.
- Valuation Standards: The valuation profession places the responsibility for determining the appropriate scope of work in an appraisal assignment squarely on the shoulders of the appraiser.
Implications for Valuation:
The chapter highlights the need for specialized knowledge in valuing cooperative and timeshare interests. Appraisers must thoroughly understand the ownership structure, financing nuances, market dynamics, and potential restrictions associated with each type of ownership to provide credible and accurate valuations. Determining an appropriate scope of work is essential to any appraisal assignment.
