Professional Documents
Culture Documents
Ragatz Report
Ragatz Report
Prepared for
SIMON ROFFE
February 2007
767 Willamette Street ● Suite 307 ● Eugene, OR 97401 ● Tel: (541) 686-9335 ● Fax: (541) 686-8142
TABLE OF CONTENTS
Page
I. INTRODUCTION .......................................................................................................... 1
Purpose.................................................................................................................... 1
Manzanillo .............................................................................................................. 2
II. AN OVERVIEW OF THE FRACTIONAL INTEREST INDUSTRY ........................ 7
A. OVERVIEW COMMENTS.................................................................................... 7
Introduction............................................................................................................. 7
Definitions............................................................................................................... 7
B. SUPPLY SIDE CHARACTERISTICS................................................................... 9
Introduction............................................................................................................. 9
Industry Performance: 2005................................................................................... 9
Number of Projects ............................................................................................... 12
Number of Units ................................................................................................... 19
Developer Type..................................................................................................... 21
Destination Type................................................................................................... 21
Fraction Size ......................................................................................................... 22
On-Site Amenities................................................................................................. 22
Services Included With Purchase.......................................................................... 23
Use Plan ................................................................................................................ 24
Prices..................................................................................................................... 25
Maintenance Fees.................................................................................................. 26
Some Summary Averages..................................................................................... 28
Destination Clubs.................................................................................................. 28
C. DEMAND SIDE CHARACTERISTICS: EXISTING OWNERS ...................... 30
Introduction........................................................................................................... 30
Demographic Characteristics ................................................................................ 30
Marketing or Lead Generation Channel ............................................................... 32
Motivations for Purchasing................................................................................... 33
Hesitations About Purchasing............................................................................... 34
Current and Future Use of HFI/PRC .................................................................... 35
Satisfaction With Purchase ................................................................................... 36
Would Purchase Again in Hindsight..................................................................... 37
Would Recommend HFI/PRC Ownership............................................................ 38
Satisfaction With Most Recent Stay ..................................................................... 39
Interest in Purchasing More .................................................................................. 40
Changes in Maintenance Fees and Service Level................................................. 40
D. DEMAND SIDE CHARACTERISTICS: POTENTIAL BUYERS.................... 41
Introduction........................................................................................................... 41
Demographics ....................................................................................................... 41
Awareness of FI/PRC Concept ............................................................................. 43
Opinion of FI/PRC Concept.................................................................................. 45
Important Amenities ............................................................................................. 46
Preferred Location Types...................................................................................... 47
Preferred Unit Size................................................................................................ 48
Preferred Share Size.............................................................................................. 49
Preference for Rental and Resale Services ........................................................... 50
Financing of Purchase........................................................................................... 51
Deeded Versus Non-equity Membership.............................................................. 52
Impact of Major Hotel Brand................................................................................ 52
Access to Resort Home......................................................................................... 53
Multi-site Clubs .................................................................................................... 54
Exchange Service.................................................................................................. 54
Purchase Motivations............................................................................................ 55
Purchase Hesitations ............................................................................................. 56
Interest in Purchasing............................................................................................ 57
Company Interest in Purchasing ........................................................................... 58
Looking Glass Cohorts® ...................................................................................... 59
E. POTENTIAL MARKET DEPTH ......................................................................... 61
III. THE FRACTIONAL INTEREST INDUSTRY IN MEXICO .................................. 65
Introduction........................................................................................................... 65
IV. CONCLUSIONS AND RECOMMENDATIONS .................................................... 79
General Conclusions ............................................................................................. 79
The Product........................................................................................................... 81
Size of Shares........................................................................................................ 83
Use Plan ................................................................................................................ 86
Pricing ................................................................................................................... 88
Sales Pace.............................................................................................................. 95
Miscellaneous Recommendations......................................................................... 96
Anticipated Financial Performance....................................................................... 97
Page
I. INTRODUCTION
Purpose
The purpose of this document is to provide preliminary comments concerning a
possible fractional interest project in Manzanillo, Colima, Mexico. The project is
currently planned for a total of 78 units, including 30 whole-ownership units and 48
fractional interest units. Emphasis in this document is entirely on the fractional interest
component.
The subject property is a very prime site on a point of land with spectacular views
of Manzanillo Bay and the environs. It is next to Las Hadas, the renowned development
that heretofore has been the most upscale in Manzanillo. Besides the 78 residential units,
the overall development will contain an extensive set of amenities and services, as well as
unique and attractive architecture and site planning. Emphasis will be on a “green-
construction, sustainable energy design.” Upon completion, it is fully anticipated that the
project will be the most attractive resort development in Manzanillo.
It is emphasized that this document is not a thorough feasibility analysis, but
rather a series of preliminary conclusions and recommendations. Comments are based
on:
Manzanillo
The subject property is located in the tourist-oriented community of Manzanillo in
the State of Colima, Mexico. It is on the west coast of the country. The second largest
city in Mexico, Guadalajara, is located about 200 miles to the northeast. Puerto Vallarta
is about 235 miles to the northwest. An article describing the many attributes of this
unique community is found at the end of this chapter.
Some statistics describing the tourism industry in Manzanillo are briefly listed
below.
2. In 2005, 82.5 percent of the tourists came from outside of Mexico with the other
17.5 percent coming from within the country.
3. The average length-of-stay was 2.3 nights, and the average visitor party size was
2.5 people. In regard to a fractional interest offering these statistics suggest a
flexible use plan and smaller units, as will be returned to in the final chapter.
5. There were 2,343 commercial flights into Manzanillo in 2005, up 8.6 percent
from 2004.
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II. AN OVERVIEW OF THE FRACTIONAL INTEREST
INDUSTRY
A. OVERVIEW COMMENTS
Introduction
As noted in Chapter I, the product being considered for the subject property is
fractional interests (aka a private residence club). Since the product is relatively new in
the resort real estate industry, it is valuable to provide some background information on
its current status.
Material in this chapter is taken from previous work conducted by Ragatz
Associates, and not specifically for this report at-hand. It is intended for readers who
may not be fully acquainted with this cutting-edge product.
Following some definitions, the remainder of the chapter is divided into three
sections. The first one describes results of our most recent (May 2006) survey of the
supply side of the industry. The second describes results of the only survey ever
conducted of fractional interest owners (February 2005). The third describes results of
the only survey ever conducted of the public-at-large, concerning their interest in
purchasing the product (March 2005).
Unfortunately, the vast majority of the information in all three sections pertains to
the fractional interest industry in the United States instead of Mexico since research
heretofore has not been conducted in the latter country. However, Chapter III does
describe the current fractional interest industry in Mexico.
Definitions
As defined by Ragatz Associates, the overall fractional industry contains four
types of products. The first three are fairly similar, with the categories being defined by
the rather subjective criteria of price per square foot and degree of services.
Traditional fractional interests: product selling for less than $500 per square
foot. These are usually resort homes of average quality, in regional resort
areas, with typical resort amenities and services. Often characterized as at the
“three star” level of quality. Hereafter in this report they are referred to as
TFIs.
High-end fractional interests: product selling for $500 to $999 per square foot.
This product represents a step up from the preceding category, typically due to
some combination of more desirable location, lower density, larger unit size,
higher construction and furnishings quality, or additional amenities or
services. Often characterized as “four star” quality. This product has attained
the trappings of a true industry within the past five to 10 years. Hereafter in
this report, they are referred to as HFIs. This is probably the most appropriate
category for the subject property in Manzanillo.
Private residence clubs: product selling for $1,000 or more per square foot.
These represent the pinnacle of quality -- not just among fractional interest
projects but in comparison with virtually any resort accommodations available
-- due to a combination of locations in the top tier of resort destinations on
prime sites, extraordinary architecture and design, and the highest levels of
services and amenities. “Five star” quality in every way. As HFIs, this
product has attained the trappings of a true industry within the past five to 10
years. Hereafter in this report, they are referred to as PRCs.
Introduction
Information in this section is taken from the most recent survey of the supply side
of the fractional interest industry, including market trends and product characteristics. 1 It
was completed by Ragatz Associates in May 2006. The survey was conducted by
telephone and included over 90 percent of all fractional interest projects known to exist in
North America.
1
The Fractional Interest Industry: 2006 Edition is the property of NorthCourse Advisory Services. Full
copies of the survey may be obtained by contacting NorthCourse at www.northcourse.com.
total $1,967.8
In relative terms, new closed sales represented 78 percent of the total, presales
represented 20 percent, and resales represented two percent. New closed sales from TFI
and HFI projects combined represented 19 percent of the total. PRCs represented 22
percent and DCs represented 37 percent. The three fractional tiers represented 63 percent
of the total (including new sales, presales and resales) and DCs represented 37 percent.
These relative figures are summarized in the table below.
total sales
FI/PRC 63.1%
DC 36.9%
total 100.0%
As noted, the total sales volume for all four products increased by 28 percent in
2005 over 2004. As summarized in the table below, most significant increases in
absolute terms were for DCs (+$276 million) and TFIs/HFIs (+$149 million). DCs
increased by $33 million, and resales by $16 million. In relative terms, TFIs/HFIs
increased by 68 percent, resales by 52 percent and DCs by 43 percent. PRCs increased
by eight percent. As an indicator of the maturation of the industry, the amount of
presales actually decreased by $49 million, or -11 percent.
The graph below concentrates only on new closed sales in 2005. This amount
was about $1.5 billion, up from $1.1 billion in 2004 (+43 percent), and from $515 million
in 2003 (+199 percent). The graph also shows the tremendous growth in the overall
industry since Ragatz Associates first started tracking it in 1999.
Across all fractional projects selling in 2005, new closed sales volume averaged
$16.7 million. This average is up significantly from the past four years when it was
$12.8 million (2004), $10.8 million (2003), $10.3 million (2002) and $10.7 million
(2001). Averages were $4.2 million for TFIs,
Estimated Closed Sales Volume, 1999-
$15.8 million for HFIs, and $24.4 million for $1,800 2005* $1,532.0
PRCs. $1,500
Number of Projects
Number of Existing HFI and PRC Projects
As of March 2006 some 188 fractional 100
89
90 81
interest projects that had begun sales prior to
80
66
December 31, 2005 were identified in North 70
59
60
America. They are listed on the following 50 42
47
40
pages. Of these, 99 were TFIs, 42 were HFIs, 31
30 20
and 47 were PRCs. Of the 188 total, locations 20 13
4 6
10
include: 156 in the United States, 17 in 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Canada, six in the Caribbean, five in Mexico,
and four elsewhere.
Fractional Interest Projects, March 2006
Fractional interest projects are now
found in 29 states. Four states contain 37 Location Number of Projects
United States 156
percent of the 188, including Colorado (18 Canada 17
Caribbean 6
percent), California (eight percent), Oregon Mexico 5
Other 4
(six percent) and South Carolina (five
percent). It also is noted that Colorado (28
percent) and California (17 percent) contain 45 percent of the HFIs and PRCs. The state-
by-state distribution is shown in the first table on the following page.
ARIZONA
Rocks at Pinnacle Point Scottsdale, AZ HFI
Scottsdale Club Villas Scottsdale, AZ HFI
Rancho Manana Private Residence Club & Spa Cave Creek, AZ HFI
Four Seasons Residence Club Scottsdale at Troon North Scottsdale, AZ PRC
Quality Hill Resort Villas Pinetop, AZ TFI
CALIFORNIA
Club at Big Bear Village Big Bear Lake, CA HFI
Villas of Gold Mountain Graegle, CA HFI
Mountain Club Kirkwood, CA HFI
Northstar Club Northstar, CA HFI
Sentinals Private Ownership Club Kirkwood, CA HFI
Sierra Shores South Lake Tahoe, CA HFI
Residence Club at PGA West La Quinta, CA HFI
Tallus Private Residence Club Mammoth Lakes, CA HFI
80│50 Mammoth Lakes, CA PRC
Four Seasons Residence Club at Aviara Carlsbad, CA PRC
Marriott Grand Residence Club South Lake Tahoe, CA PRC
Storied Places at Tonopalo Tahoe Vista, CA PRC
Villas at Rancho Valencia La Jolla, CA PRC
Old Greenwood Truckee, CA PRC
Calistoga Ranch Calistoga, CA PRC
4 Seasons at Desert Breezes Palm Desert, CA TFI
COLORADO
Christie Club Steamboat Springs, CO HFI
Franz Klammer Lodge Telluride, CO HFI
Fox Acres Residence Club Red Feather Lakes, CA HFI
Cirque at Copper Mountain Copper Mountain, CO HFI
Inn at Lost Creek Telluride, CO HFI
Pine Meadows Telluride, CO HFI
Hyatt Main Street Station Breckenridge, CO PRC
Ritz-Carlton Club at Aspen Highlands Aspen, CO PRC
Ritz-Carlton Club at Bachelor Gulch Beaver Creek, CO PRC
Roaring Fork Club Basalt, CO PRC
Sanctuary at Snowmass Club Snowmass Village, CO PRC
Snowmass Club Snowmass, CO PRC
Valdoro Mountain Lodge Breckenridge, CO PRC
MICHIGAN
Cottages at Waters Edge Thompsonville, MI TFI
CANADA
Parkside Victoria Resort & Spa Parksville, BC HFI
The growth rate among HFIs and PRCs has been steady since these product types
were introduced in the mid-1990s, increasing from just four in 1995 to 89 by the end of
2005. The growth rate in this segment of the industry rose by 10 percent in 2005.
Because the TFI market was not studied between 1989 and 2003, growth trends in this
segment are not available.
In addition to the 188 fractional interest projects, at least 22 destination clubs
were active in sales during 2005. They are listed in the second table on the following
page.
Destination Clubs
46%
45% TFI
38%
the 188 total projects. Of these, 40% HFI
34%
33%
35% PRC
approximately 2,000 are in TFI projects and
27%
26%
30%
23%
approximately 2,700 are in HFI and PRC 25%
17%
16%
20%
13%
projects. Among the 4,700, approximately
11%
15%
10%
6%
5%
4,100 are in the United States.
5%
5%
0%
As previously emphasized, this
Studio 1-BR 2-BR 3-BR 4-BR
survey examined only projects active in
sales. The estimated number of built units at fractional interest projects selling during
2005 was 3,555. Of these, 1,195 were at TFI projects, 1,170 were at HFI projects and
1,190 were at PRC projects.
The average size of TFI projects in active sales was 65 built units. If all under-
construction and planned units are built, the average TFI project will contain 99 units.
The average size of an HFI project was 45 built units. If all under-construction and
planned units are completed, the average HFI project will contain 68 units. The average
size of a PRC project was 35 built units. If all under-construction and planned units are
completed, the average PRC project will contain 52 units. The overall fractional interest
project contains 45 built units, which will increase to 69 units if all under-construction
and planned units are completed.
The preceding information on project size for the three tiers is summarized in the
following table.
built 651 45 35 45
under-construction 15 11 8 11
planned 18 13 10 13
total at build-out 99 68 52 69
3,365
TFI
3,225
(46 percent) and TFIs (34 percent). Units HFI
3,000 PRC
2,424
containing three or more bedrooms were
2,141
1,940
1,532
1,459
more typical at HFI (33 percent) and PRC 2,000
1,288
(26 percent) projects than at TFI projects (23
823
863
760
1,000
461
425
416
percent) Of all 3,555 built units in active
0
projects, seven percent are studios, 22
Studio 1-BR 2-BR 3-BR 4-BR
percent are one-bedrooms, 37 percent are
two-bedrooms, 28 percent are three-
bedrooms, and six percent are four-bedrooms.
Not only do TFI units typically offer fewer bedrooms, they also have smaller unit
areas, on average. The overall average unit size at TFI projects was 1,220 square feet.
Among HFIs, the overall average unit size was 1,830 square feet. The average among
PRCs was 1,600 square feet. Many PRCs have smaller units than TFIs and HFIs due to
locations featuring exceptionally high land values.
Unit areas also vary significantly by destination type. Among units at projects in
active sales during 2005, the largest units on average were found in wine (2,482 square
feet) and golf (2,292 square feet) destinations. In contrast, ski and beach destinations
offer units containing an average of 1,789 and 1,644 square feet, respectively. Due to the
expense and scarcity of developable land in urban areas, units are smallest at these
projects – 759 square feet, on average.
Developer Type
There are essentially three types of
Developer Type
fractional interest development companies:
95%
100%
88%
hotel companies, other public companies, 90% TFI
80% HFI
and independent companies. Like in the 70% PRC
53%
early years of the timeshare industry, 60%
50%
38%
independent developers currently have a 40%
30%
clear majority in number of fractional 20%
9%
8%
5%
4%
10%
interest projects. Of fractional interest
0%
projects selling during 2005, 74 percent were Hotel Independent Other Public
Destination Type
Fractional interest resorts exist in Destination Type
five primary types of destinations – ski (51
70%
62%
HFI
percent), urban (four percent), and wine 50% PRC
37%
40%
31%
8%
6%
10%
5%
6%
5%
0%
destinations. HFIs are located in four of
Ski Beach Golf Multiple Urban Wine
Fraction Size
TFI
Fraction Size
Fractional interest share sizes
60% HFI
53%
range from a 1/25 (two weeks of PRC
50%
ownership) to a 1/4 (13 weeks of
37%
ownership). Among TFIs in active 40%
27%
sales during 2005, over half (53
27%
percent) offered 1/4 shares, leading to
20%
18%
17%
20%
11%
an average fraction size of 1/5 (nine or
11%
10%
10%
10%
10 weeks of ownership) among these
0%
projects. HFI and PRC projects 1/21 - 1/17 1/13 - 1/11 1/10 - 1/8 1/7 - 1/6 1/5 - 1/4
tended to offer smaller share sizes.
Among HFI projects, the average size was a 1/7 (seven weeks of ownership). The
average size among PRCs was a 1/9 share (five or six weeks of ownership).
On-Site Amenities
Due to the variety of destination types that were selling fractional interests during
2005, on-site amenities vary greatly. The most typical amenities included were exercise
facilities (81 percent), swimming pool (79 percent), and whirlpool (75 percent). Slightly
less common were year-round storage (64 percent), spa facilities (59 percent), and
restaurant (56 percent). The least common amenities were beach (25 percent), ski-in/ski-
out access (26 percent), golf (34 percent), and tennis (36 percent).
Among projects located in golf destinations, 70 percent offered on-site golf
courses. Among projects located in ski destinations, 54 percent offered ski-in/ski-out
access. Among projects located in beach destinations, 57 percent were located directly
on the beach.
Use Plan
Fractional interest projects employ
Use Plan
several use plans, or access arrangements,
for determining when owners and guests 53%
Rotating
may occupy their units. The most calendar
22%
28%
common arrangements are rotating
calendar, rotating priority, and set 33%
calendar. Some projects use multiple use Rotating priority 56%
50%
plans.
A rotating calendar system 13% TFI
HFI
provides owners every nth week. For Fixed weeks 9% PRC
25%
example, a 1/4 share owner might have
every fourth week. With this plan, over a 0% 25% 50% 75%
four-year period, each owner will
eventually have access to every week of the year. The majority of TFI projects selling
during 2005 use this plan (53 percent).
With a rotating priority system, owners use a priority or lottery system for making
reservations. For example, a 1/10 share owner might have first choice for reservations
during one reservation period, but drop to second choice the following reservation period
and so on. This is the most common use plan for HFI (56 percent) and PRC projects (50
percent).
A set calendar system is not often used because it does not provide a great deal of
flexibility. Under this system, owners have the same fixed weeks every year. This plan
was not used by many fractional interest projects selling during 2005. It is often used in
conjunction with rotating priority, with some fixed weeks during peak season.
0
0
0
0
,00
,00
,00
,00
,00
,00
,00
weeks of use), as well as in varying
00
00
00
00
00
00
00
$1
$2
$7
$3
$4
$6
$5
unit sizes and quality tiers, there is
a great deal of price variation. Three methods are used to examine retail prices of
fractional interest real estate: price per fraction, price per square foot, and price per week
of ownership.
On a price-per-fraction basis by unit
size, TFIs selling in 2005 averaged from
Average Price Per Square Foot, By Size of Unit
$60,750 for a studio unit to $163,985 for a
$572
three-bedroom unit, or $115,650 overall. Studio $888
$1,980
HFIs averaged from $102,333 for a studio $374
1-BR $883
$1,970
unit to $303,333 for a four-bedroom unit, or
$422
$187,500 overall. PRCs averaged from 2-BR $721
$1,774
$430 TFI
$106,300 for a studio unit to $649,564 for a 3-BR $735
$1,663 HFI
four-bedroom unit, or $290,000 overall. PRC
4-BR $695
The overall average price for all three tiers $1,677
Maintenance Fees
The average maintenance fee among all fractional interest projects selling during
2005 was $5,575. This figure includes fees for all fraction and unit sizes.
The average annual maintenance fee at TFI projects ranged from $312 in a studio
unit to $4,200 in a three-bedroom unit. The average maintenance fee by unit type for
• studio: $1,545
• one-bedroom: $3,035
• two-bedroom: $5,608
• three-bedroom: $7,100
• four-bedroom: $11,000
• studio: $195
• one-bedroom: $510
• two-bedroom: $985
• three-bedroom: $1,238
• four-bedroom: $1,890
Destination Clubs
Due to the limited number of active DCs it is not possible to provide much
information about this segment without revealing specifics about each one. Due to the
proprietary nature of the survey and the need to protect the individual data collected on
each club, only ranges of data are shown in this section.
• Fees for space available usage (after the guaranteed usage) range from $0 to
$215 per night.
• The term of membership for each club is 30 years (except the equity clubs).
• The refundable amount should a member wish to leave the club is 88 percent.
• The value of a single residence ranges in price from $500,000 to $8.0 million,
with an overall average of $2.4 million.
• A single residence ranges in size from 1,600 to 13,000 square feet, with an
overall average of 3,450 square feet.
Introduction
Information in this section is Demographic Characteristics
based on a survey of existing fractional Private
Residence
interest owners. It was conducted by All High End Club
Characteristic Responses Owners Owners
Ragatz Associates in February 2005.
Some 3,572 questionnaires were Household
Single female 3.7% 4.8% 3.0%
distributed to owners at 15 different HFI Single male 2.4% 2.1% 2.6%
Couple 93.9% 92.1% 94.4%
and PRC resorts. Some 501 were
Total 100.0% 100.0% 100.0%
returned.
Children Under 18 in Home
No 74.1% 57.9% 84.1%
Yes 25.9% 42.1% 15.9%
Demographic Characteristics Total 100.0% 100.0% 100.0%
Respondents were asked several
Age
questions about themselves, including Under 40 10.6% 6.3% 13.2%
40 to 44 12.0% 10.5% 12.9%
household type, age, income, and net 45 to 49 15.6% 13.7% 16.8%
50 to 54 16.6% 18.9% 15.2%
worth. It is noted that owners of TFIs 55 to 59 19.5% 24.7% 16.2%
60 to 64 12.4% 14.2% 11.2%
were not included in the survey. 65 or older 13.3% 11.5% 14.6%
2
Source: SRC: www.demographicsnow.com.
annual use report visiting their HFI/PRC more 6 or more weeks 3.9
often.
0 1 2 3 4 5
When asked how they expect to use their
HFI/PRC in the future, owners say they will allocate two-thirds of their time for personal
use. Owners plan to exchange 11% of their time, either internally through a developer
network or externally through an exchange company. Another 10% is slated to be given
away to friends, relatives and acquaintances free of charge. Owners say that very little of
their time will go unused (2% of time). While fractional resorts often times have very
high occupancy rates, undoubtedly more than 2% of time will go unused.
For the most part, planned future use does not vary much by analyzed subgroups.
However, some points of interest include:
• Share size: As the number of weeks owned increases, the amount of time
reserved for personal use decreases while the amount of time that will be given
away free and rented increases.
Quality of
Service, Quality, Building Number, Quality of On-
Response Level, Frequency of Maintenance, Landscaping, Quality of site
Time for Frequency of Interior Resort Maintenance Amenities at Management
Characteristic Reservations Maid Service Replacements Improvements at Resort Resort Staff
Adjustment Willing To
Make
Pay more for improvements 6.0% 1.4% 5.6% 2.9% 0.8% 6.4% 3.5%
About right 86.3% 84.8% 84.3% 92.2% 91.5% 87.0% 90.1%
Pay less for reductions 4.1% 10.5% 2.7% 2.1% 2.7% 4.6% 4.1%
No opinion 3.5% 3.3% 7.5% 2.9% 5.0% 2.1% 2.3%
Introduction
Information in this section is based on a survey conducted of the public-at-large,
with the intent being to understand the potential depth of demand for fractional interests,
as well as most preferred characteristics. It was conducted by Ragatz Associates in May
2005. The survey was sent to 16,000 households with incomes over $150,000. Some
189 completed questionnaires were returned.
Demographics
• Children in home: Less than half of all respondents have a child(ren) under the
age of 18 in their household. Demographic Characteristics
Among HFI/PRC owners only High-Income HFI/PRC
Characteristic Households Owners
one-quarter have one or more
children under the age of 18 in Household
Single female 6.4% 3.7%
their home. Single male 5.9% 2.4%
Couple 84.7% 93.9%
• Net worth: The majority of respondents report an approximate net worth between
$1 million and $4.9 million. This is somewhat lower than current HFI/PRC
owners.
1
Source: SRC: www.demographicsnow.com.
The concept should not be confused with resort timesharing, since: (1) it
is more exclusive; (2) the resort homes are larger and more luxuriously furnished;
(3) more services, privileges and amenities are included; (4) prices are much
higher; (5) owners receive more usage every year; and (6) purchasers have much
higher incomes.
• Recreational property ownership: Respondents that already own some other form
of recreational property are more likely to be familiar with the fractional interest
concept than those who do not currently own recreational property.
Respondents were next asked to indicate whether they felt the FI/PRC concept seems
like a good idea. As shown in the graph, more than three-quarters of all respondents say
“yes,” the concept as applied to resort real estate does seem like a good idea. Perhaps
more importantly, only 5.9% feel it is not a good concept.
• Awareness of concept: Approval of the
concept is greater among those who were Does FI/PRC Concept Seem Like a Good
Idea?
previously aware. Fully, 82.6% of those
who had already been introduced to the No opinion Yes
17.3% 76.8%
concept think it is a good idea. By
contrast, among those being introduced to No
5.9%
the concept via this survey, only 71.0%
feel it is a good idea. These respondents
who were not previously aware do not
necessarily dissaprove of the concept, but
rather are more likely to state no opinion.
• Recreational property ownership:
Approval of the concept is greater among those who already own some form of
recreational property.
• Demographics: Responses do not vary much by variables such as gender, having
children in the home or household income.
Respondents were given a list of 11 common amenities at FI/PRC resorts and were
asked to rate the importance of each to their family. As the graph shows, having fully-
equiped exercise facilities, fine dining and daily maid service are “very important” to
more than half of all respondents. Pre-
stocking of the resort home with groceries, Importance of Amenities
Percent indicating "very important"
beverages, etc., appears to be least important
to offer.
Fully equiped exercise center 65.4%
Results are consistent across analyzed
subgroups, however some notable findings Fine dining restaurant and lounge 54.1%
are:
Daily maid service 50.8%
Respondents were given a list of five different types of resort destinations and were
asked to rate the attractiveness of each. Overall, beach locations are the most preferred,
with 76.1% rating them “very attractive.” Ski and golf locations are “very attractive” to
four out of every 10 respondents. While urban destinations receive the least amount of
“very attractive” ratings, still some 17.4% are excited about city locations.
If respondents were to purchase with a developer who has a network of resorts, would
they prefer only traditional resort-type locations, only urban locations, or a mixture of
both? Overwhelmingly, respondents prefer a mixture of both traditional resort locations
Respondents were asked to choose which option they most prefer from a list of four
different share sizes: (1) a 1/12 share; (2) a 1/6 share, at 90% higher cost than the 1/12
share; (3) a 1/4 share, at 150% higher cost than the 1/12 share; or (4) whole ownership, at
the same price as the 1/4 share, but unfurnished and with no services. Overall, two-thirds
of respondents most prefer the smaller, 1/12 share, which provides four weeks of annual
use. Most of the remaining respondents prefer either whole ownership (16.7%) or a 1/6
share (14.0%).
As with size of unit, these
Preferred Share Size
preferences are fairly universal. Younger
respondents, and those with children are Characteristic Percent
to 18.0%.
purchase.
Another 24.9% feel neutral about the presence of a major hotel company,
while very few (1.6%) would be negatively impacted by the presence of a major
hotel company. Results are consistent across all analyzed subgroups.
Exchange Service
Respondents next were told that they
could have the ability to exchange some or all
Preference for External Exchange Service
of their purchased time with owners at
comparable quality resorts via an external
Don't know Opportunity
exchange service. Overall, nearly seven out of to trade
26.2%
68.4%
every 10 respondents would like the opportunity
to exchange time with owners at other resorts
(68.4%). Some 26.2% are unsure about an
exchange service while only one in 20 do not
No trading
like the idea (5.3%). 5.3%
and a good value for the money top the list. Advantage of second home
67.6%
without high cost
Other important purchase motivators
include the exchange opportunity and the Investment, equity appreciation 59.9%
are by far the least cited item, with only 22.7% Trading opportunity with
56.2%
comparable resorts
saying they are “very important” in
Able to purchase amount of time
influencing their purchase decision. 53.7%
would use
This pattern of results is consistent across 1/6 Share (8 Weeks), for 90% More Than
1/12 Share
variables such as income, age, gender and 100% interested 4.1%
Better than 50-50 11.8%
whether or not children are in the household. About 50-50 20.6%
Less than 50-50 30.0%
Some small differences, however, include: Zero, no interest 33.5%
and 1/6 shares increase with income. 1/4 Share (3 Months) for 150% More Than
1/12 Share
However, interest in the larger 1/4 share 100% interested 2.3%
Better than 50-50 8.8%
is relatively stable across income groups. About 50-50 11.7%
Less than 50-50 21.1%
• Age: Respondents over the age of 50 are Zero, no interest 56.1%
Singles
Andrea, Single Moms With Careers, Median Age 39, Median Income $48,916 2.4% 1.4% 2.2%
Sean, Affluent Guys, Median Age 41, Median Income $93,377 1.2% 1.7% 1.7%
Randy, Single Dads, Median Age 37, Median Income $39,965 1.2% 1.2% 1.9%
Elizabeth, Savvy Career Women, Median Age 41, Median Income $166,425 1.2% 0.5% 0.3%
Jonathan, Elite Single Men, Median Age 41, Median Income $165,331 1.2% 0.3% 0.5%
Virginia, Upscale Mature Women, Median Age 60, Median Income $69,605 0.0% 3.0% 2.0%
Allison, Educated Working Women, Median Age 33, Median Income $49,789 0.0% 2.3% 4.5%
Harry, Well-To-Do Gentlemen, Median Age 57, Median Income $48,976 0.0% 1.2% 1.8%
Bernice, Active Grandmothers, Median Age 61, Median Income $35,431 0.0% 0.9% 3.6%
Ryan, Energetic Young Guys, Median Age 33, Median Income $47,207 0.0% 0.3% 3.4%
Jason, Male Students & Grads, Median Age 26, Median Income $17,276 0.0% 0.2% 1.8%
Elmer, Sedentary Men, Median Age 73, Median Income $16,800 0.0% 0.0% 1.3%
Jerry, Working-Class Guys, Median Age 45, Median Income $19,400 0.0% 0.0% 2.1%
Megan, Fit & Stylish Students, Median Age 26, Median Income $16,900 0.0% 0.0% 2.6%
Penny, Working-Class Women, Median Age 42, Median Income $17,900 0.0% 0.0% 2.0%
Minnie, Fixed Income Grandmothers, Median Age 73, Median Income <$15,000 0.1% 0.0% 5.8%
Denise, Single Moms On A Budget, Median Age 37, Median Income $17,400 0.0% 0.0% 3.5%
Sub-total 7.3% 13.0% 41.0%
segments, although those two • Over eight times more heavily represented among
fractional interest owners than among all U.S.
segments represent only households.
Median Age: 62 years
6.5% of U.S. households. Median Income: $149,900
Five segments represent • Urban families who, despite children at home, have
Jeffrey & Ellen
sufficient financial resources to own the latest high-tech
Affluent Couples with Kids products and to lead very active recreational and cultural
92.7% of the HFI/PRC
lifestyles.
market. Only 10 of the 30 • Middle-aged and affluent.
• More than 10 times more heavily represented among
segments that exist in the private residence club owners than among all U.S.
households.
U.S. population are even
Median Age: 42 years • Almost six times more heavily represented among
represented among HFI/PRC Median Income: $144,800 fractional interest owners than among all U.S.
households.
owners. Stan & Carole
• Unburdened by children, credit-worthy, dual-income
Upscale Middle-Aged Couples couples who divide their time between the great outdoors
Traditional fractional
and domestic hobbies.
interest owners are slightly • Can afford to vacation, but seek value for their money.
• About 25% more heavily represented among private
more diverse, with 23 residence club owners than among all U.S. households.
segments represented, but the • About 33% more heavily represented among fractional
Median Age: 49 years interest owners than among all U.S. households.
same five segments represent Median Income: $73,500
Burt & Marilyn
78.0% of the market. • Comfortable, close-to-retirement homeowners with no
Mature Couples children at home to support; active investors; engage in
Thumbnail profiles of charitable activities, travel, politics and their
grandchildren.
the five segments of greatest • Only about 54% as heavily represented among private
residence club owners as their share of all U.S.
importance to these two households, due to modest incomes.
• More than twice as heavily represented among fractional
markets are provided. The Median Age: 66 years
interest owners as among all U.S. households.
Median Income $54,900
concentration in these few Barry & Kathleen
• Educated, dual-income, childless couples who have
Affluent Professional Couples connoisseur tastes and are focused on their careers,
Cohorts® segments creates staying fit, and investing.
significant opportunities for • About 85% more heavily represented among fractional
interest owners than among all U.S. households.
targeted marketing not • Over three times as heavily represented among fractional
interest owners as among all U.S. households.
available in many industries.
Median Age: 46 years
Median Income: $137,400
The Pacific, Middle Atlantic and South Atlantic states contain the greatest number
of households with incomes over $250,000. Together these regions account for 58
percent of U.S. households that are income-eligible for a HFI purchase. The same three
regions also contain the greatest number of households with incomes over $500,000.
Table II-3 shows the remaining market demand for HFI/PRCs. The numbers
shown are found simply by subtracting the number of existing owners from the number
of income-eligible households in each region. Currently only 0.16 percent of the income-
eligible market for HFIs and 3.67 percent of the market for PRCs have been absorbed.
TABLE II-3
Remaining Market Potential For HFI/PRCs in the U.S, By Region
Introduction
The purpose of this chapter is to describe the fractional interest industry in
Mexico, as it currently is known to exist. It appears there are few active projects
currently in sales in the country, although it is known that many are being planned.
Ragatz Associates has recently worked on such projects in Merida, Los Cabos, Huatulco,
Puerto Vallarta, Cancun and Puerto Peñasco. Most likely, other projects are being
planned without the involvement of our firm.
The resort timeshare industry has long thrived in the country with sales in 2006
perhaps approaching $1 billion. While this product and the prices are oriented toward a
different consumer and use pattern than fractional interests, it does provide some
indication that at least one form of shared ownership has succeeded very well in the
country. As the fractional interest concept becomes more understood and accepted in the
United States, it is fully suspected that it will also expand into Mexico, just as did the
resort timeshare industry many years ago.
Thus far the fractional interest industry in Mexico has been concentrated almost
entirely in Los Cabos. Here, seven projects are in active sales with several more being
discussed. Most of the remainder of this chapter, therefore, concentrates on the situation
in this community, since it represents a good comparison as to what perhaps could
happen in Manzanillo over time. Before describing the market in Los Cabos, however, a
run down is provided of what is known about the industry in other tourist communities in
Mexico.
Cancun
None in active sales known to exist, except for a couple of very small 1/4 share
projects of less than 10 units. It appears that both were created simply as a way to lower
the prices of whole-ownership condominiums, as there is no mark-up ratio used in setting
prices.
We recently completed a feasibility analysis for Fairmont Hotels and Resorts for a
50-unit private residence club next to their new hotel in the Mayakoba master-planned
resort community south of Cancun. Here, 1/10 shares are being planned at prices of
about $200,000. The average residence would contain about 3,000 square feet for a per
square foot price of about $665. Sales have been projected to begin for the past two
years, but internal partnership issues have slowed the process.
Huatulco
There is one existing very moderately priced fractional interest project in
Huatulco that has been in and out of sales for several years. Here, 1/8 shares were sold in
small two-bedroom units for about $80,000, or about $400 per square foot. It appears the
product represented more of a “drop-in-price” concept for whole-ownership
condominiums rather than a true product unto itself.
We recently completed a study for several large high-end single family residences
next to the Quinta Real Hotel. Sales stopped after a few months, apparently due to some
Mazatlan
None known to exist at this time. However, we are conducting a feasibility
analysis for a 78-unit project on a beautiful site next to Las Hadas. A 1/4 share offering
is being discussed with prices of about $125,000 in a one-bedroom unit, $175,000 in a
two-bedroom unit, and $225,000 in a three-bedroom unit. The average per square foot
price would be about $400. Implementation is probably 24 months away.
Merida
None known to exist at this time. However, we recently completed a feasibility
analysis for a 100-unit project as part of a large master-planned golf course community.
There would be 50 two-bedroom units and 50 three-bedroom units. The most frequent
share would be a 1/10. Starting prices would be $70,000 and $90,000, respectively. The
average price per square foot is estimated at $400.
Puerto Peñasco
Two projects have an organized program for fractional interests, including
Laguna Shores and Oasis. However, there are only 10 units at Laguna Shores and two at
Oasis. Prices are shown below.
Both projects sell a 1/6 share. Prices are very low in accord with comparables
anywhere in North America. The average price when combining two- and three-bedroom
units is only $86,000, or $10,750 per week and $245 per square foot. The consultant has
never seen such low prices in the industry. The average mark-up over whole-ownership
Puerto Vallarta
None known to be in active sales at this time, but at least five are being discussed.
Punta Mita
Three high-end private residence clubs have been discussed in Punta Mita, but it
appears that none are now in active sales. The three include ones by Four Seasons, St.
Regis and Rosewood. All have discussed selling 1/12 shares in the range of $250,000 to
$300,000, and around $1,500 per square foot. All three apparently are on hold for a
variety of reasons. Most likely, at least two will be started this year.
Zihuatanejo
There is only one fractional interest project in Ixtapa-Zihuatanejo, with a second
one under-construction and a third being planned. The three projects are described in the
following paragraphs.
Los Cabos
As previously noted, by far the most popular resort destination where fractional
interest projects already are quite prevalent in Mexico is the Los Cabos area of Baja
California. Some seven projects were identified in the area, including five that are
occupied and two that are under-construction. All seven have some type of on-site sales
office. The under-construction projects are selling inventory on a “reservation-with-
deposit” basis, without final closings.
Two of the seven projects are located in San Jose del Cabo and five in Cabo San
Lucas. All seven are summarized in Tables III-1 through Table III-8.
As shown in Table III-2, a total of 321 fractional interest units currently exist or
are under-construction in Los Cabos. All seven projects offer three-bedrooms, and they
account for 49.5 percent of all inventory. Five projects offer two-bedrooms, and they
account for 32.1 percent of all inventory. Only two projects (Capella and Esperanza)
offer four-bedrooms and only one (Cabo Villas) offers one-bedrooms.
The largest project is Mision La Serena (75 units), followed by Cabo Villas (60
units) and Esperanza (60 units). The smallest projects are La Estancia (30 units) and
Capella (31 units). The average number of built and under-construction units for all
projects is 46.
Average unit sizes are 800 square feet for a one-bedroom, 2,125 for a two-
bedroom, 2,805 for a three-bedroom and 3,487 for a four-bedroom. The largest two-
bedrooms (2,400 square feet) are at Esperanza, and the largest three-bedrooms (3,075
square feet) are at Capella. The smallest two-bedrooms (1,860 square feet) and three-
bedrooms (2,340 square feet) are at Grand Regina. (See Table III-3.)
TABLE III-2
Size and Bedroom Configuration
All projects have swimming pools, as shown in Table III-4. Montecristo is the
only property that does not offer exercise facilities and is not located on the beach. Three
projects will have on-site golf courses and four properties will offer a restaurant.
Esperanza has the highest number of on-site amenities and Montecristo has the least.
As shown in Table III-5, concierge service is standard at all projects. Pre-arrival
concierge services, such as stocking groceries in the unit prior to arrival is offered at five
projects. Valet and bell service is offered at five projects and shuttle service is found at
four. Two of the three projects (Capella and Esperanza) that have on-site golf courses
offer golf valets. Three of the four projects that do not have on-site golf courses offer
discounted green fees to local courses.
As shown in Table III-6, fractional interest projects in Los Cabos range from a
1/17 share (three weeks of ownership) to a 1/4 share (12 weeks of ownership). Five
projects offer a 1/8 share and three offer a 1/4 share. Grand Regina is the only project
that offers a 1/10 share (five weeks of ownership) and Esperanza is the only project that
offers a 1/6 share (eight weeks of ownership). Mision La Serena offers a 1/12 (four
weeks of ownership) and a 1/17 (three weeks of ownership) share in addition to a 1/4 and
1/8 share, and Montecristo offers a 1/13 share in addition to a 1/8 share. Prices range
from $160,833 for a 1/13 share at Montecristo to $660,000 for a 1/6 share at Esperanza.
More detailed pricing information is provided in Tables III-7 through III-8.
TABLE III-5
Member Privileges
Pre- Valet
Arrival Parking Golf Discounted Shuttle
Concierge Concierge Bell Svc. Valet Golf Service
Weighted
Project 1-Bed 2-Bed 3-Bed 4-Bed Average
2. Capella Residences
1/8 share n/a n/a $420,000 $490,000 $458,387
Avg. price per week n/a n/a $70,000 $81,667 $76,398
Avg. price per sq. ft. n/a n/a $1,093 $1,129 $1,113
Avg. weekly maintenance fees n/a n/a $1,833 $1,833 $1,833
5. Mision La Serena
1/4 share n/a $478,995 $556,995 n/a $520,595
Avg. price per week n/a $39,916 $46,416 n/a $43,383
Avg. price per sq. ft. n/a $871 $796 n/a $831
Avg. weekly maintenance fees n/a $1,350 $1,350 n/a $1,350
6. Montecristo Estates
1/8 share n/a n/a $245,883 n/a $245,883
Avg. price per week n/a n/a $40,081 n/a $40,081
Avg. price per sq. ft. n/a n/a $690 n/a $690
Avg. weekly maintenance fees n/a n/a $1,881 n/a $1,881
7. Villa La Estancia
1/4 share n/a $326,869 $625,563 n/a $376,651
Avg. price per week n/a $27,239 $52,130 n/a $31,388
Avg. price per sq. ft. n/a $604 $903 n/a $654
Avg. weekly maintenance fees n/a $617 $826 n/a $652
Average weekly maintenance fees according to size of unit are shown in Table
III-7. The overall average weekly maintenance fee is $1,436. Averages by unit size are
as follows: two-bedrooms ($1,125), three-bedrooms ($1,421), and four-bedrooms
($1,717). Only La Estancia reports an average weekly fee of less than $1,000. On the
upper-end are Montecristo ($1,881) and Capella ($1,833).
Approximate weekly sales prices are shown in Table III-8. Averages range from
$13,750 for a one-bedroom, to $44,629 for a two-bedroom, to $59,476 for a three-
bedroom, to $82,684 for a four-bedroom. The overall average is about $55,385, ranging
from $37,555 at Cabo Villas to $75,823 at Capella.
TABLE III-8
Average Weekly Prices, By Number of Bedrooms
La Estancia is the only project with two-bedrooms ($28,620) being sold for less
than $30,000. Grand Regina has the highest priced two-bedrooms ($65,000) and three-
bedrooms ($75,000) and Esperanza has the highest priced four-bedrooms ($82,500).
The overall weighted average price per square foot is $1,037. Average prices per
square foot for all projects according to size are shown in Table III-9. Averages by unit
size are as follows: one-bedrooms ($825), two-bedrooms ($1,084), three-bedrooms
($1,046) and four-bedrooms ($1,130).
Grand Regina has the highest average per square foot price ($1,693), followed by
Capella ($1,113) and Esperanza ($1,081). La Estancia ($680) and Montecristo ($712)
average the least per square foot.
General Conclusions
Based on contents of the three preceding chapters, and most importantly, on the
consultant’s 30 years of experience in the resort industry, it is recommended that
development proceed with a fractional interest offering on the subject property in
Manzanillo. Sell-out should be fairly rapid and the resulting profit significant.
The consultant endorses the client’s concept of a mixed-use project, including 30
whole-ownership condominiums and 48 fractional interest units. However, variations
from the client’s preliminary business plan include:
1. smaller units
2. a greater proportion of two-bedroom units and a smaller proportion of one- and
three-bedroom units
3. 1/12 shares in addition to 1/4 shares, with emphasis on the former
4. a different use plan and reservation system
5. higher construction costs, but also higher prices, resulting in a greater profit
6. a different building configuration
It is recommended that the 48 units include 12 one-bedroom units with 900 square
feet of interior space, 24 two-bedroom units with 1,350 square feet, and 12 three-
bedroom units with 1,800 square feet. A 1/12 share should be sold in 32 units, resulting
in 384 shares/sales. A 1/4 share should be sold in 16 units, resulting in 64 shares/sales.
There would be 448 total shares/sales.
Recommended starting prices for the 1/12 shares are $52,500 for a one-bedroom,
$78,750 for a two-bedroom, and $105,000 for a three-bedroom. For a 1/4 share, they are
$135,000, $202,500 and $270,000, respectively. These prices result in an estimated gross
• more of the price goes into the real estate • higher quality resort home for less cost
itself rather than to marketing and sales • more services
costs – about 50 percent versus 25 percent • better management and hassle-free
• more probable appreciation since is more • able to purchase the proper amount of time
akin to a real estate purchase than a that have vacations to use and discretionary
vacation purchase income to spend on, and not having the
• more time vacation home sit idle the vast majority of
• more services the year
• higher quality product • more flexibility of use and experiences due
• better image and more exclusivity to exchange
• higher documented satisfaction rates
The Product
As currently planned prior to the preparation of this position paper, the subject
property was to contain 78 units, including 30 whole-ownership units to be sold in the
first phase of development and 48 fractional interest units to be sold in the second phase.
As noted in Chapter I, emphasis in this position paper is entirely on the fractional interest
units.
The 48 fractional interest units were to be built in six distinct buildings. Three
buildings were to contain six three-bedroom units each. Three other buildings were to
contain one one-bedroom and five two-bedroom units each. This arrangement would
result in 15 one-bedroom units, 15 two-bedroom units and 18 three-bedroom units. Floor
areas were 1,200 square feet for a one-bedroom, 1,800 square feet for a two-bedroom,
and 3,000 square feet for a three-bedroom.
In accord with trends in the fractional interest industry in the United States (where
the vast majority of buyers of a project in Manzanillo are expected to reside), it is felt
that: (1) the 48 units should include a greater proportion of two-bedroom units and a
smaller proportion of one- and three-bedroom units; and (2) the current floor areas are
unnecessarily large.
The preceding configuration could very well change over time in accord with
effected market demand. However, this arrangement allows much greater flexibility in
meeting variations in demand than having each building only contain one bedroom type.
Size of Shares
There are at least eight sizes of shares being offered in the fractional interest
industry. They range from a 1/20 to a 1/4. Final profitability should not vary
significantly regardless of the size of share chosen. Larger shares typically require lower
marketing and sales costs, although generating lower prices per square foot. Smaller
shares typically require higher marketing and sales costs, although generating higher per
square foot prices.
A trend in the industry is toward smaller shares, especially in the 1/12 to 1/8
range. This size of share is appealing to the consumer because it more closely matches
The 48 fractional interest units would generate 448 shares/sales. Included would
be 384 1/12 shares in 32 units and 64 1/4 shares in 16 units. Some 112 shares would be
in one-bedroom units, 224 in two-bedroom units, and 112 in three-bedroom units.
Use Plan
Here again, we are faced with an issue of importance – how purchasers of a 1/12
share/four week/30 night product or of a 1/4 share/13 week/91 night product can use their
amount of time on an annual basis.
The challenge becomes creating a use plan that will balance: (1) certainty of
access with flexibility; and (2) high season use with low season use. Both balancing acts
will be necessary if the consumer is to perceive value and attractiveness with the product.
Some options that have been applied in other fractional interest projects include:
2. a fixed time use plan. This would be the most restrictive option. It would
offer 100 percent certainty, but no flexibility. Owners would have access to
the same weeks or month every year, e.g., always having the first week of
each quarter (1/12 shares), the entire month of January, April, July or October,
etc. With the latter option, prices would vary in accord with desirability of the
month.
3. a float within season use plan. Here, owners would have the right to choose
their weeks within specifically defined seasons, e.g., one week in every 12 or
Other issues relating to the chosen use plan (some of which are alluded to in the
preceding paragraphs) are:
1. should split week usage be allowed? And if so, should there be a surcharge?
2. should an internal exchange system be created to allow for lengths-of-stay of
more than one week?
3. should prices vary by season, or remain the same for all 1/12 and 1/4 shares?
4. should bonus time be allowed, whereby owners could use more than 30 or 91
nights per year, on a space available basis, for a nominal cleaning/reservation fee?
5. should owners be allowed to rent out their unused time? If so, should such rentals
be managed/controlled by the client, and at what fee?
6. should the offering be affiliated with an external exchange entity?
7. should owners of the smaller units be allowed to upgrade to the larger units at a
nominal surcharge if space is available when they want to stay?
Based upon our previous research findings and the success of other fractional
interest projects, it appears the most appropriate use plan would be a fixed-rotating
system. As described in the preceding page, this would ratchet use forward about one
week each quarter (1/12) or every month (1/4). Arrangements for internal trading also
should be allowed in order to allow for incremental stays of more or less than one week
at a time. And, additional space would be available for the 1/12 share owners due to
space available.
It is also recommended that a “floating unit” use plan be employed. This means
owners will be conveyed deeded ownership in a specific unit for legal/security purposes.
But, they would not always be using the same specific unit. This is common in the
shared-ownership industry, and is done in order to ensure maximum flexibility of access
throughout the year. And, as explained in a following section, the floating unit concept
simplifies the pricing schedule and hence, the sales process. There would be only six
1. Allow split time use, with a nominal surcharge for cleaning/reservation costs.
2. Offer a rental opportunity, but only through resort management (with perhaps
a 50-50 split of rental income).
3. Offer bonus time, on a space-available basis.
4. Offer discounts to owners’ friends in space available time in unused inventory
when owners are occupying their unit.
5. Do affiliate with an external exchange company. The most appropriate
options are Elite Exchange, Resort-to-Resort and Interval International.
6. In a tangentially related recommendation, establish a viable resale program at
the outset, with perhaps every nth sale being a resale if the amount of resale
inventory warrants it.
7. Do not allow owners of the smaller units to upgrade to the larger units even if
space is available and a surcharge is imposed, as this would diminish the
motivation to purchase a larger, more expensive unit.
Pricing
Setting proper prices for the two suggested fractional interest products is another
important challenge. This task is especially difficult due to the uniqueness of the subject
property and the lack of any comparables in Manzanillo.
Several different approaches can be used in setting prices, as follows:
1. Rack rates
One approach is to look at possible rack rates in the fractional interest units if
used as rentals. Such prices have not been established, but some rough estimates can
be made.
Let us simply assume that the year-round average rack rates might be $200
for a one-bedroom unit, $250 for a two-bedroom unit, and $300 for a three-bedroom
unit.
2. Comparables
As frequently noted, a fractional interest offering at the subject property will
pretty much be breaking new ground. We found in Chapters II and III that relatively
few such projects are in active sales in North America although many are being
planned/discussed. None exist at this time in Manzanillo. We also know, however,
that the concept is at the cutting edge of the resort real estate industry. Most existing
projects are in resort communities where prices for whole-ownership resort real estate
are high, and where the availability of such inventory is scarce. For the most part,
these two characteristics are not found in Manzanillo, and certainly not to the degree
as in Aspen, Vail, Telluride, etc.
As previously noted, we have somewhat arbitrarily divided the existing
industry into three pricing categories, including “traditional fractionals,” “high-end
fractionals” and “private residence clubs.” Due to the intended overall quality of the
proposed development, the views, the adjacent beach, the amenities, etc., it is
expected that “high-end fractional” prices are most appropriate. “Private residence
club” prices are not appropriate because of the lower real estate prices in the local
Prices for a 1/12 share in a one-bedroom unit would range from $45,000 with
a 1.5 mark-up to $60,000 with a 2.0 mark-up. For a two-bedroom, they would range
from $67,500 to $90,000. For a three-bedroom, they would range from $90,000 to
$120,000.
The 1/4 share prices would range from $135,000 to $180,000 in a one-
bedroom, from $202,500 to $270,000 in a two-bedroom, and from $270,000 to
$360,000 in a three-bedroom. These 1/4 share prices are perhaps too high due to the
large sizes of the shares and the fact that the mark-up is typically less for larger
shares.
1/12
• one $52,500 $700 $13,125 1.75
• two $78,750 $700 $19,685 1.75
• three $105,000 $700 $26,250 1.75
1/4
• one $135,000 $600 $11,250 1.50
• two $202,500 $600 $16,875 1.50
• three $270,000 $600 $22,500 1.50
Per week prices for the 1/12 shares would be $13,125 for a one-bedroom,
$19,685 for a two-bedroom, and $26,250 for a three-bedroom. For the 1/4 shares, the
per week prices would be $11,250, $16,875 and $22,500, respectively. The per
square foot price for the 1/12 shares would be $700, representing a 1.75 mark-up over
the presumed $400 for whole-ownership. The per square foot price for the 1/4 shares
would be $600, representing a 1.50 mark-up.
As shown above: (1) if a purchaser paid $78,750 for a 1/12 share in a two-
bedroom unit; (2) used the purchase the fully available 600 nights over a 20-year
period; and (3) financed the purchase at 20 percent down and 7.5 percent interest, and
did not pay off the loan early, the nightly charge for the 600 nights would be $330.
Such nightly rates for 20 years might raise the eyebrows of potential consumers
despite the quality of the units, the services provided, and the location.
Sales Pace
Anticipating a sales pace for any one-of-a-kind product or service is obviously
difficult. We found in Chapter II that the average number of monthly sales for fractional
interest projects disclosing such information in our most recent survey was about eight
interests. Only three projects reported a monthly pace of more than 20. Some 17 projects
reported an average monthly sales pace of five interests or less; 10 reported it to be
between six and 10; five reported it to be between 11 and 20; and two reported it to be
between 21 and 24.
So, what to expect at the subject property? If 32 units are sold as 1/12 shares, 384
shares would be generated. The 16 1/4 share units would generate another 64 shares, for
1 8 96 96
2 10 120 216
3 12 144 360
4 12 88 448
Miscellaneous Recommendations
Following are a series of miscellaneous recommendations that should enhance the
potential success of the proposed fractional interest offering at the subject property in
Manzanillo.
2. the units
a. two fairly similar master bedrooms in the two- and three-bedroom units
b. stacked washer/dryer in all units
c. extra 1/2 guest bathroom in all units
d. upscale finishings and furnishings
e. internet hookups
f. plasma TVs, complete entertainment centers, surround sound system, etc.
g. more emphasis on a great-room concept and bathrooms over bedrooms
and kitchen
h. upscale bathrooms with dual sinks, granite countertops, nice hardware,
floor heat, instant hot water, etc.
i. compact, but attractive kitchens with higher quality appliances, cabinets
and hardware, small wine cooler space, etc.
j. large outdoor decks and balconies
k. maximize views from all units
A. Product Costs
1. Number and type of units, as per previous discussion:
• 1/12 shares
• eight one-bedroom units with 900 square feet
• 16 two-bedroom units with 1,350 square feet
• eight three-bedroom units with 1,800 square feet
• 32 total units with 43,200 square feet, for an average size of
1,350 square feet
• 1/4 shares
• four one-bedroom units with 900 square feet
• eight two-bedroom units with 1,350 square feet
• four three-bedroom units with 1,800 square feet
• 16 total units with 21,600 square feet, for an average size of
1,350 square feet
• 48 total units, including 12 one-bedroom units, 24 two-bedroom units
and 12 three-bedroom units, for an average size of 1,350 square feet.
The total interior, saleable space would be 64,800 net square feet. If
we assume that only 75 percent of gross building space is used for net
building space, it means that the 64,800 square feet of net square feet
would require 86,400 square feet of gross space. The difference of
21,600 square feet would be used for corridors, walls, stairways,
elevator shafts, etc. Neither the 64,800 nor the 86,400 figure include
exterior patios or balconies.
3. Land costs: assumed at $1,846,150. This represents 61.5 percent of the total
land cost of $3.0 million (as per information from the client). The 61.5
percent is the proportion of total units planned in the overall development (78)
that are designated for the fractional interest units (48). The $1,846,150
represents only 3.8 percent of the estimated gross sales volume. The industry
average is about six percent.
5. Construction costs: assumed at $125 per net square foot. This is higher than
the client’s estimate of $80 to $100, but more in line with the high quality of
construction expected by today’s consumers as well as commensurate with the
suggested price.
Initial construction costs would be $112,500 for a one-bedroom unit with
900 square feet, $168,750 for a two-bedroom unit with 1,350 square feet, and
$225,000 for a three-bedroom unit with 1,800 square feet. Total construction
costs for the 48 units would be $8.1 million.
6. FF and E costs: assumed at $35 per net square foot. This is higher than the
client’s estimate of $18, for the same reasons as the higher construction costs.
Initial such costs would be $31,500 for a one-bedroom unit, $47,250 for a
two-bedroom unit, and $63,000 for a three-bedroom unit. Total FF and E
costs for the 48 units would be $2,268,000.
8. Sales office: assumed at $250,000. This cost may not be necessary if sales
are conducted off-site and/or if one of the units or some of the common space
is used during the sell-out period. At any rate, the space should be very nicely
furnished and large enough to allow for privacy during the decision-making
process.
9. Soft costs: assumed at 5.0 percent of appropriate hard costs, for a total of
$604,900. Such costs should include design, legal, permits, etc.
10. Contingency: assumed at 7.5 percent of appropriate hard costs, for a total of
$907,350
The many preceding assumptions result in the following product costs for the
48 fractional interest units. It is emphasized that most such costs simply represent
best guess estimates by the consultant at this time.
source amount
land $1,846,150
infrastructure $480,000
amenities, landscaping, garage $1,000,000
construction $8,100,000
FF and E $2,268,000
sales office $250,000
soft costs $604,900
contingency $907,350
financing $2,500,000
total $17,956,400
cost per unit $374,090
% of gross sales 37.2%
B. Operating Costs
1. Initial prices, as previously suggested, and assumed that all prices increase 7.5
percent annually:
• 1/12 shares
• $52,500 for a one-bedroom unit
• $78,750 for a two-bedroom unit
• $105,000 for a three-bedroom unit
• 1/4 shares
• $135,000 for a one-bedroom unit
• $202,500 for a two-bedroom unit
• $270,000 for a three-bedroom unit
• The overall weighted average price per share during the first year of
sales would be $96,425.
1 8 96 96
2 10 120 216
3 12 144 360
4 12 88 448
3. Total gross sales volume: estimated at $48,282,840, with this amount being
calculated as follows.
1 96 $96,425 $9,256,800
2 120 $103,655 $12,438,600
3 144 $111,430 $16,045,920
4 88 $119,790 $10,541,520
total 448 $107,775 $48,282,840
4. Marketing costs: assumed at 8.0 percent of the estimated gross sales volume
as per current industry averages, for a total of $3,862,625
3. Sales costs: assumed at 8.0 percent of the estimated gross sales volume as per
current industry averages, for a total of $3,862,625
source amount
marketing $3,862,625
sales $3,862,625
G and A $1,689,900
start-up $500,000
HOA short-fall $250,000
total $10,165,150
% of gross sales 21.1%