ReSORT LAW

The Move Toward Trust Ownership

February 2004

By W. John Funk*
for Developments Magazine

Traditional Deeded Programs

Many traditional vacation ownership programs are designed to convey title to the transferred interests by means of a deed. Interval interests, fractional interests and club memberships are sold on this basis. They are marketed as tangible evidence of the purchaser’s ownership interest: a piece of the rock. The sales force is trained to say that the purchaser is buying real estate, a tangible asset, and imply that somehow the value of the purchase has been enhanced.

True, there is something reassuring about a deed. It gives a feeling of permanence. However, it is an illusion. The value of any vacation ownership interest is tied up in the system of rights and obligations that assure that the owner will have a right to use the “real estate” when he or she is entitled to. That system is intangible. Its quality will contribute to the success of the program as much as the resort’s location, management and recreation facilities.

And there is a downside to deeds. The conveyance of interests is expensive: title updates, deed preparation, title insurance, transfer taxes and recording fees. If there is a mortgage, not only does that add to the cost, but in many states the cost of foreclosing an interest in the event of a default is prohibitive. The same is true for the failure to pay assessments. Frequently, liens must be recorded and foreclosed in the same manner as mortgages are. Not only are the initial conveyances by the developer expensive, but so are resales by the owners.

Trust Programs

An alternative approach, which is gaining in popularity around the country, is to establish a trust program. Under such a program, the legal title to units subject to a vacation ownership regime is conveyed to a trustee who holds title for the benefit of the vacation owners. Instead of a deed, each purchaser is issued a certificate of beneficial vacation ownership interest which entitles him or her to all of the same rights and subjects him or her to all of the same obligations as would exist for a deeded owner. The trust certificates do not have to be recorded in the registry of deeds, thereby avoiding real estate conveyancing costs and ancillary costs such as securing partial mortgage releases. In some states, the transfer of a beneficial rather than a deeded interest may not trigger real estate transfer taxes.

Typically, a conveyance of a beneficial interest involves a notification of the trustee on a simple form, an entry in a register maintained by the trustee and the issuance of a certificate to the new owner. If a security interest is given to secure financing, the security interest is listed in the register and is perfected in the manner required by the Uniform Commercial Code (UCC) as intangible property.

The same procedure applies for a lien arising from a failure to pay assessments. In the event of a default under security agreement or in payment of assessments, the holder of the lien is permitted to sell the beneficial ownership interest in a commercially reasonable manner under the UCC, and does not have to comply with the more complicated and expensive process of foreclosure on a mortgage of a deeded interest.

The trustee can be an individual or individuals or a corporation or other form of entity as permitted by state laws. The trustee has the responsibility of holding title, maintaining the register, appointing the manager of the resort and voting the beneficial ownership interests in the governing body of the resort. For guidance, the trustee looks to the will of the majority of the beneficial owners in voting, or in the absence thereof, its determination of what is in their best interest. The trustee may use agents to perform its duties. The costs of the administration, including fiduciary insurance for the trustee, are paid for by the beneficial owners as part of their annual assessments.

Initially, the developer appoints the trustee or successor trustee. But when the developer is no longer involved in the program, that right would pass to an owners’ association or other similar entity or group. If the beneficial owners chose to terminate the vacation ownership program, the deeds to the affected units reside with one title holder, the trustee, and the units may be easily sold with the proceeds distributed to the beneficial owners in proportion to their interests.

Clearly, the trust approach is a cost effective way to manage a resort, and as such, it is gaining acceptance in the industry. Potential purchasers see its advantages and major lending institutions are comfortable with it as an ownership vehicle.

Trust Conversion Of A Deeded Program

Because of the advantages of trust ownership, some resorts are converting midstream or even after they have been substantially sold out. First, a trust must be created by the developer or association which holds unsold inventory and foreclosed deeded interests. Next, a trustee or trustees must be appointed. These actions are simple and inexpensive. Then, the unsold inventory and foreclosed deeded interests are conveyed to the trust. From that point forward, all vacation ownership interests are transferred to new owners by means of a certificate of beneficial vacation ownership interest. Additionally, owners reselling their interests are encouraged to have them conveyed first to the trust so that beneficial interests can then be transferred to their purchasers.

From the standpoint of a seller, the conveyance into the trust does not represent additional cost, but ensures the new owner a cost effective way of transferring his or her interest in the future. The same benefits accrue to owners who wish to gift their interests to their family members. Over time, a substantial number of interests will pass to the trust with all the attendant benefits.

Conclusion

In short, the trust approach to creating and administering a vacation ownership program offers significant advantages to developers and interest owners alike. Trust ownership should be considered for any new resort or for any expansion of an existing resort. In addition, it is never too late to convert an existing resort to trust ownership, even if it is past the development stage. The process is simple and cost effective. Most importantly, trust ownership can increase the marketability and value of vacation ownership, leading to increased sales and a heightened level of customer satisfaction, which are the ultimate goals of any hospitality business.

*W. John Funk is admitted in New Hampshire, Vermont and Massachusetts.

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W. John Funk
You may contact
John Funk at 603-545-3607.

Related practice area:
Resort Law