When Strangers Become Family: Villages Worry About Rise In Fractional HomeOwnership

It’s all very attractive. Owning a sunny vacation house on the beach in Miami, or a luxe ski chalet near the slopes in Sun Valley, or a countryside retreat near the vineyards of Napa at a price that is suddenly affordable. And for many people who have dreamed of owning a great second home — even in the Hamptons — a growing segment in the real estate industry is making that possible.

Yet, not without its share of controversy.

Fractional homeownership is being touted as an affordable way of getting the vacation home of one’s dreams. The way it works is an individual, or a family, agrees to invest in a house and partner with several other individuals or families to form a limited liability corporation (LLC) that owns the property, thus sharing the purchase price and maintenance costs, while sharing the use of the house on an agreed-upon schedule.

The concept of making a second home affordable by a couple of families, or a group, chipping in to buy a piece of real estate is not a new idea, and many friends or relatives have found ways to share a house by the shore or in the mountains without killing each other.

But there is evidently a number of people out there who don’t have the friends or family members interested or able to invest in a property.

Companies like Pacaso — which started in California and is perhaps the most recognizable of a small handful — have emerged very recently to help facilitate shared homeownership in resort communities across the country. Pacaso’s role is bringing people together, and then arranging the purchase of the property through an LLC, and, for additional fees, setting up a management team for the home that would maintain the house and property, and offer a suite of services including scheduling, stocking the shelves with your favorite foods, and even providing an in-house chef to prepare meals for weary vacationers.

“We furnish dishes, knives, furniture, anything somebody needs to live in a house,” Pacaso spokeswoman Martha Thomas said in a recent phone interview. “You don’t even have to worry when landscaping needs to be done.”

The company even offers an app to help you schedule your stays — no longer than two weeks at a time — with your fellow co-owners.

But, if you think this all sounds like timesharing schemes from the 1970s and 1980s, you would not be alone. The growth of this segment of the real estate industry has been so rapid, it has unnerved municipalities on either side of the country, including North Haven Village, which in January adopted a local law attempting to ban them from the village.

“One of the board members saw this article about Pacaso a couple of months ago,” recalled North Haven Mayor Jeff Sander. “Folks in wine country were up in arms and protesting pretty heavily.”

He sent the article to the village attorney with the caution that “this looks like something that could be headed for the Hamptons. The format is ideal.”

North Haven is, virtually, entirely a residential village, and was incorporated in 1931 specifically to keep it that way. The exception is Peerless Marine, a business that existed before incorporation and is considered pre-existing and non-conforming. The village also has very strict rental laws and has long ago banned timeshares to keep commercialization at bay.

The concerns Sander and the Village of North Haven have are similar to those expressed in other areas: the disruption to residential community life through increased traffic and turnover at a fractionally-owned house, and, perhaps to a lesser degree, a potential for loss of revenue to the village from lack of mortgage tax and Community Preservation Fund contribution, as shares in the house are sold or traded within the LLC.

“If owners trade shares, the property actually never turns over,” Sander said. “How do you collect CPF money or mortgage tax?”

But the focus of the new local law is clearly an attempt to protect the peace and quiet of the village’s neighborhood, and language in the law underscores that notion: “Fractional ownership, time sharing, or interval ownership projects have the same character as commercial hotels, motels, lodges, and other commercial occupancy uses due to their transient nature and multiple short-term (less than six months annually) occupancies. Such commercial or quasi-commercial like use is inappropriate in residential areas due to the increased traffic generation and multiple occupancies disturbing the peace and quiet of residential neighborhoods.”

An incursion of multiple fractionally-owned homes could work to erode the neighborhoods, observed Sander.

He and others have pointed to the inherent disturbance a fully subscribed, fractionally-owned home could present. Typically, the Pacaso model sees eight parties sharing the house, with a maximum of two-week stays, and each party gets a total of six weeks per year. All owners agree to Pacaso’s code of conduct, which prohibits large events or parties that would disrupt the communities, or rentals for any length of time.

Even still, that translates to dozens of times a year a family is moving in or moving out, plus the attendant service personnel that are required to facilitate the changeovers, Sander noted.

“It could be bad if it takes off,” he said. “Imagine if it was 20 percent in a neighborhood, it could change the dynamic.”

To date, Sander said he is unaware of any homes in the village that use this model and, for the record, Pacaso’s Thomas said the company had not planned to plant a flag in the Hamptons just yet.

“The Hamptons is a market we’re not currently looking into,” she said, adding, “The caveat to that is we want to be in all the top markets.” The implication is they are leaving the door open for future expansion, which could include the East End.

“Not that the Hamptons have a lack of desirability, but we’re a young company and are still growing,” Thomas said.

Indeed, the company was started in October 2020 by Zillow co-founder Spencer Raskoff and entrepreneur Austin Allison. By September 2021, the company had a valuation of over $1 billion. At this point, the company is in 30 markets, the vast majority in resort communities in the United States, like California’s Napa and Sonoma counties — where they got their start — and places like Palm Springs and Aspen, Thomas said. More recently, it expanded to the Atlantic coast in Florida and Hilton Head, South Carolina. Plus, they have established an outpost in Spain. When asked if they intended to advance further in Europe, Thomas said, “Our goal is to become the top second-home destination in the world.”

And while Pacaso may not be moving into the Hamptons anytime soon, one local fractional homeownership opportunity did turn up in a recent internet search. On the site welcometocompany.com, the owner of the house at 78 Noyac Bay Avenue in Noyac is currently seeking what appears to be up to six parties to enter into an ownership agreement to share the property, offering each party eight weeks a year to enjoy the house.

The structure and the pitch are similar to Pacaso’s.

“Imagine arriving at your vacation home with your clothes already hanging in the closets, the food you requested stocked in the refrigerator, all systems go without lifting a finger,” reads text on the site. “This is the considered life.”

The text goes on to describe the house — which sits on the beach overlooking Noyac Bay less than a mile east of the Morton Wildlife Refuge and adjacent to preserve land — as having five bedrooms, four baths, a pool and a spa. Photos show it is a contemporary design, brightly lit with sunshine, and walls of windows looking out past Jessup’s Neck and on to the North Fork. And, like Pacaso, the company offers a number of services for additional fees, including maintenance, private chefs, caretaker, boat rental, and event organization.

The site had been put up about two years ago and, as of last month, showed it had 46 visitors.

There is no indication how many — if any — shares had been sold, or what they would cost. The owner, Charles “C.J.” Follini, did not return several phone calls for comment. In addition to the home in Noyac, the site also lists an apartment in the Flatiron Building in Manhattan as being available for fractional ownership, and promises properties in Nantucket, Aspen and Palm Springs will soon be available.

If the business model for the Noyac house is similar to Pacaso, then the company makes its money on the ongoing maintenance and management fees, as well as an initial markup on the price of the house. In Pacaso’s case, said Thomas, the company locates a house, finds partners who will guarantee at least 50 percent of the available shares, and only then commits to the house, marking up the total cost to the LLC by 13 percent and dividing it by eight to come up with the per-share cost. Thomas said the company’s properties are averaging about $915,000 per share, which would include the costs of furnishing and any construction work to get the house ready for the new owners to move in.

On the site currently, among a couple of dozen other listings, are a five-bedroom, five-bath house with pool in Palm Springs available at $285,000 per share (only two shares left as of last month), a five-bedroom, seven-bath house near the peaks in Aspen for $2.638 million per share, and a “modern deco estate” in Miami with a whole-house price of $7.95 million — if you were interested in buying the place yourself — with an estimated per-share price of $1.185 million for one-eighth ownership.

It is unclear what the share value of the Noyac house is, but records indicate it was purchased by Follini in 2002 for $1.6 million. It has been on and off the market in recent years, at times offered for sale between $11.55 million and $13.9 million, according to the real estate publication Curbed, and had been offered for rent year-round at $600,000.

The concern about fractional homeownership has been piqued in at least one other local village, with Sagaponack Mayor Donald Louchheim confirming his board will begin to look into it. Elsewhere, the issue does not appear to be on the radar. Sag Harbor Mayor Jim Larocca, for example, said he had not heard of it until he read about it in The Sag Harbor Express.

“I’ve never heard a complaint from anyone,” he said. “This hasn’t been raised as an issue by anybody.”

And while there may not be a real urgency in the Hamptons, a battle is being waged in California wine country, the results of which may eventually have an impact on local legislation.

One skirmish in particular has been covered by The Wall Street Journal, The New York Times and NPR, and features a group of neighbors who, when they discovered a modest house on their cul-de-sac had been bought by Pacaso, launched a campaign of writing protest letters to the local newspaper, rallied on the street with signs and posters denouncing Pacaso, and lobbied the local Sonoma City Council to create legislation to try to stop the company’s advance. In fact, the city council approved a new “urgency ordinance” at the end of January that specifically outlaws timeshares and houses that are managed like timeshares, i.e. fractionally-owned homes.

“We stopped them on our street,” said Carl Sherrill, who lives just down the cul-de-sac from the home on Old Winery Court, just outside City of Sonoma limits, where Pacaso had been advertising shares for sale. “We put up huge signs, left our garbage cans out, even put a big truck in the road with a big sign.”

Sherrill notes that Pacaso has taken the house on his street off the market, and believes it was a move largely made as a result of the neighborhood protest, suggesting no one would want to live in a vacation house where it was clear the neighbors didn’t want them. Signs put up included those reading: “Pacaso timeshares are not welcome in our neighborhood” and “Hey Pacaso! Even The Wall Street Journal says you’re a timeshare.”

“There’s rumors they may have sold one share,” scoffed Nancy Gardner who, along with Sherrill, helped form the neighborhood group Stop Pacaso Now.

Thomas confirmed the company had temporarily taken the house on Old Winery Court off the market, saying it was done for “marketing purposes,” but said it would eventually again be made available for shares.

One of the biggest criticisms out west is that, considering the need for affordable housing in areas like Napa and Sonoma, Pacaso is both taking up neighborhood housing in those areas, and inflating housing prices by paying a premium above market value for houses, said Sherrill and Gardner.

Indeed, in addition to neighborhood disruption, one of the tacks the City of Sonoma ordinance takes is arguing that Pacaso is a threat to the available affordable housing stock by taking neighborhood houses and converting them into vacation houses that behave like timeshares. In the introduction to its new ordinance, the city council specifically cites a “severe housing crisis in the state,” where demand for housing outpaces the supply and the fact that the city is experiencing a “housing emergency due to its relative isolation, limited housing supply and desirable location.”

Sound familiar?

But Pacaso argues it is actually beneficial to the community, and not a burden.

“We redirect people who might want a mid-level house as a second home,” Thomas said. “It helps to eliminate some of the pressure on more affordable housing.”

That may be true in some cases, but not all.

“Nancy and I have visited several of the Pacaso houses,” Sherrill said. “The ones we saw are homes in family neighborhoods, down-to-earth, two or three bedrooms. Mostly not that special, until Pacaso does things like add pools, new kitchens and landscaping.”

But Gardner said she sees a shift in Pacaso’s thinking.

“I think they’ve learned their lesson, not to buy in residential areas,” she said. “Instead they’re looking for property in more isolated areas.”

Thomas concedes they may have made mistakes in the past.

“We did purchase a mid-range home when we started,” she said. “We came to believe we shouldn’t compete at that range and eventually sold it for whole homeownership.”

The model now, Thomas said, is to seek houses that are much more high end.

“Right now, we’re looking for homes that are two-to-four times the median price,” she said, noting the attraction for the company’s market is that they have access to a luxe home they could never afford otherwise. And by focusing on the higher end properties for fractional ownership, they are able to recruit the clients that may otherwise be targeting more modest homes in neighborhoods as second homes.

Also, noted Thomas, the larger resort homes they are seeking are frequently not used much during the year; but, with a fully subscribed house, that empty asset would be used and, with it, the owners bring an infusion of cash into the community year-round.

“These owners make a big investment, they want to establish roots and relationships,” Thomas said. “They go out to the businesses and they spend money.”

Still, municipalities have enough concerns about changes to their communities that they are creating legislation, or refining existing legislation, to keep Pacaso and other similar businesses out; and Pacaso is fighting back.

After the City of St. Helena — located in the heart of Napa Valley wine country — cited Pacaso for violating the city’s law banning timeshares, the company — which in April 2021 owned or managed five houses in the city — filed a lawsuit saying the city was obstructing homeowners’ rights to enjoy their property.

Quoting from a February letter from the city attorney to Pacaso, the Napa Valley Register reported that the city determined “Pacaso appears to be operating, facilitating, and selling timeshares,” contrary to city code. Further, the letter noted, “Simply calling them co-ownership arrangements doesn’t change that fact.” In the same letter, the attorney wrote, “A timeshare by any other name is still a timeshare.”

The code defines a timeshare as “an ownership or leasehold estate in property devoted to a timeshare fee (tenants in common, time span ownership, interval ownership) or a time-lease share.”

But, according to The Register, Pacaso responded — noting co-ownership via an LLC is a common practice and that 36 percent of second homes in Napa Valley were owned by LLCs — “As Americans we have a constitutional right to privacy and to choose whom we own real estate with. Selectively enforcing against Pacaso and LLC co-ownership is unjust and a very slippery slope.”

The outcome of that case will likely shade future discussions in other municipalities about owners’ rights and the actual function of a fractionally-owned home — at least as perceived by the court.

Recognizing that they can’t specifically regulate ownership of a property, both the City of Sonoma and the Village of North Haven are sensitive to the fact that their regulations need to address how the property is used. The village’s law also strives to get at the use of a property, rather than just relying on who owns it.

In its prohibition of fractional ownership, timesharing or interval projects, the law identifies three aspects, the existence of which would signify a violation, including: If the ownership were divided among three or more unrelated property owners; if the use of the property was transient in nature and based on an arranged schedule; and if the property is managed by a third party for a fee.

Two local attorneys, much of whose business is in real estate, questioned the ability of such a law to successfully ban fractionally-owned homes, or even if they should be banned.

“Based on New York law, it would likely be subject to a challenge,” said Sag Harbor-based attorney Tiffany Scarlatto, who stressed that use, rather than ownership, is the subject of zoning law.

“As long as the use is still single-family, there is nothing illegal,” she said.

Bridgehampton-based attorney Adam Miller agreed.

“How do you enforce something like that?” he asked. “People buy homes and they share them. It’s something that’s already being done.”

Miller observed that nearly 70 percent of the homes in the Hamptons are second homes, and suggested that fractional ownership “is to be expected in a resort community.”

“Municipalities should be more user-friendly,” he said. “I think we have bigger problems.”

Enforcement, he said, should clearly come if the residents of the houses violate any laws.

It appears it may be a while before North Haven’s new law will be tested. But as varying opportunities in real estate continue to present themselves, and pressure that threatens to change the dynamics of neighborhoods increases, local municipalities are pressed to face challenges to traditional uses in their communities.

“I think this needs more of a legal look than what we’ve done so far,” said Sander, who acknowledges there are “tons” of properties in the area that are owned by LLCs, and that enforcing the new law could be a challenge.

“We have all kinds of homes here owned by LLCs,” he added. “We don’t know if it’s 10 owners, or a husband and wife.”

The mayor said he understood the attraction of fractional homeownership, noting the convenience of it and how the East End of Long Island, with its proximity to New York City and its stock of luxury homes, could easily be a target for a company like Pacaso. He suggested “something bigger” may need to be done if fractional homeownership begins to get a foothold in the area — perhaps something that would address all the municipalities in the Hamptons.

“We wanted to put a law on the books,” he said. “At least we hope it will slow them down.”