The Complete Guide To Fractional Ownership
Owning a business was once thought to be something that only high-net-worth individuals (HNIs) should do. But more people can now invest in and profit from commercial real estate thanks to the advent of the notion of fractional ownership. What precisely is fractional ownership, then? Let’s examine this. When two or more people or entities jointly possess a piece of property, it is said to be in “fractional ownership,” also known as “co-ownership” or “shared ownership.”
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If the underlying asset is completely title secured, fairly valued, and managed by professionals, rental, project finance, and early buying can all be held on fraction. For investors who wish to insure against pure stock or other debt investments, this might be the largest alternative investment. Middle-class Indians can own several investable homes through fractional ownership, turning them into tradeable financial assets in the future.
Mehta goes on to describe the benefits and drawbacks of fractional ownership:
Liquidity: Fractional ownership enables people to invest in an asset class that is typically less liquid, difficult to manage, and out of their price range;
Risk diversification: Because relatively little money is needed, investors can spread out among several properties and put together a well-diversified portfolio of various kinds of real estate assets;
Income stream: The portion of your fractional portfolio that is invested in such rent-generating assets produces a consistent and long-term income stream because many of these properties are leased for longer periods of time by dependable tenants.
Cons
Alternatives to financing: Given the novelty of the idea, it might be challenging to obtain a mortgage for such a purchase;
Less flexibility and freedom: It might be difficult to coordinate maintenance, repairs, and interior design with all the co-owners. Additionally, the other fractional owners must agree to the sale of the property, which can occasionally be difficult;
Longer tenure: Due to the nature of these investments, a longer term is necessary.
Tax implications
“When a special purpose vehicle (SPV) is exited, capital gains tax is due on the sale of the SPV’s securities. For long-term investors, the appropriate capital gain will be 20% with an indexation benefit. Reinvestment is not available for now, but SEBI is looking into it. Additionally, the investor’s income is increased by rental income, which is then taxed according to the investor’s particular tax slab.
Do you foresee any potential problems if you decide to sell your business?
Exit before maturity (post lock-in applicable on certain platforms): Investors can choose a secondary sale in which the fractional platform assists the transaction if they want to exit their investments before maturity (after lock-in applicable on some platforms). Property is listed in the portal for resale, and the platform looks for a potential buyer. The fractional platform will oversee the secondary market, which will be open to all users;
Exit on maturity: SPV finds a suitable buyer and distributes the money proportionately to investors.
Only once at least 75% of investors approve the sales do complete asset sales take place.
What effects will the standardisation of SEBI have?
By adding a new chapter to the REIT regulations and categorising fractional ownership platforms (FOPs) as MSM (micro, small, medium) REITs, SEBI’s plan will regulate FOPs. For trustees, sponsors, and investment managers, MSM REITs must have separate and distinct entities having a minimum net worth of Rs 20 crore and Rs 10 crore, respectively, in accordance with the present regulations.
Investors would gain overall from the regulatory control by receiving fair and transparent pricing, liquidity & exit opportunities, and a strong risk management framework. Additionally, the REIT Regulations’ regulatory framework will be expanded to cover FOPs in order to give SEBI-registered REITs the same tax advantages. The segment would institutionalise, become more liquid, improve price discovery. And draw more capital into the real estate market from ordinary investors if the proper regulations were in place.
Different models require different paperwork for fractional ownership:
Joint model: Each co-owner keeps possession of the asset and the right to utilise it without compromising the interests of the other owners. One co-owner may sell their share of the property with the consent of the other co-owners. There are no “first-refusal right” agreements between the co-owners;
Cooperative society model: Before any prospective investors can buy an asset, they must first create a cooperative society. The purchase will then be made on their behalf by the cooperative society. A membership in the society and a portion of the property are given to each investor. When one co-owner decides to sell off their shares in the cooperative society. The shares will be transferred to the new fractional owner;
Company formation: According to this strategy, a business should be incorporated and owned by the holders of fractional shares. The business now fully owns the property that was previously owned in a fraction. The business must abide by all rules and regulations under the Companies Act;
Trust formation: When creating a trust, potential fractional owners must name the property seller as the trust’s author. The seller shall execute a trust deed on behalf of the intended fractional owners. There are specific guidelines for drafting the trust deed in order to keep this model successful.
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