Business is coming back for Minnesota's fractional real estate industry

Dreaming of a place at the lake, but don't want to shoulder the ­burden of maintaining it and paying for it ­yourself?

For some, co-ownership through an unusual model called fractional ownership is the answer. It's a concept that's akin to a timeshare, but often comes with deeded ownership. Such arrangements were wildly popular before the recession, but the sector crashed exceptionally hard and has been among the last areas of the real estate industry to recover.

Now there are signs that fractionals are starting to come back. "It's as if a light switch was flipped," said Lavonne Christensen, the sales agent for Odyssey Development in Duluth, which specializes in owning and managing resorts.

While the volume of fractional transactions remains far below pre-recession levels, some think the concept is on the verge of a rebirth as millennials who have embraced the sharing economy start thinking about owning a place at the lake.

Christensen pointed to one of her company's properties, a small resort on the North Shore of Lake Superior, and said shares have been selling quickly. "I'm going to start a waiting list."

Fractional ownership is just one variation of real estate with shared ownership. The category includes private residence clubs, timeshares and destination clubs, but there are no hard and fast rules that define each label.

Often, a fractional interest is associated with projects where the real estate is divided into shares that are deeded individually to buyers. Destination and residence clubs often sell multiyear memberships that entitle owners to tap into a network of vacation homes in multiple locations. A timeshare is typically a situation where there are more than 26 owners.

In an annual survey of more than 304 fractional projects and residence clubs and six destination clubs, Ragatz Associates found that only 68 of the properties made sales in 2015. Total sales volume was $505 million, down slightly from the two previous years and nearly a fifth of what was sold during the peak of the market in 2007.

Dick Ragatz, the firm's president, said the industry crashed particularly hard compared with other segments and has been among the last to recover in large part because of limited access to financing for such projects. "Demand is increasing slightly, but it will never be what it was before the recession, not for a long time if ever."

Before the recession many buyers were using home equity to pay cash for their shares, which average $105,425 for fractional projects and $363,550 for private residence clubs, according to the Ragatz survey. Then, as now, access to financing has been an issue for such purchases.

A lake place is a completely elective purchase and so sales of recreational properties have lagged the housing market recovery in the Twin Cities and other metro areas. With the housing recovery approaching the half-decade mark, the market for second homes is gaining some momentum.

At Duluth-based Odyssey Real Estate, fractional sales have rebounded. So far this year, the company has had $17.5 million in sales compared with $11.2 million last year. Odyssey has had 95 transactions so far this year, with about a third that fractional ownership.

"It's [been] kind of a slow, slow ride," said Odyssey founder Bob Ryan. "The real estate recession was an alarming thing for many people because they lost a lot of equity in their homes. That was an equity source to purchase a vacation home."

The company's primary focus has been developing and managing resorts in northern Minnesota. Though Odyssey has been involved with five fractional ownership projects, including Trapper's Landing Lodge on Leech Lake and Grand Superior Lodge, resort operations remain the biggest part of Odyssey's business. The company manages the properties it develops.

One of the company's most successful projects was ­Larsmont Cottages, a $30 million development with 40 units on the shores of Lake Superior just north of Duluth. Christensen, the Odyssey sales agent who marketed the project, said that when the 40 units, mostly divided into quarter shares, came online in 2005 and 2006 the project sold out quickly. Prices started at $150,000 for a three-bedroom quarter share and peaked at $175,000. Resales started right away, with some units selling for $35,000 more than the sellers had paid.

By the time the recession rolled around demand evaporated and several shares sold for as little as $135,000 per quarter share. Today, demand is back and there's a waiting list for shares of buildings that face the lake. Christensen said that so far this year there have been 10 resales with an average price of $162,000.

Ryan said that in some respects the fractional market has come back a little stronger because they're at a lower price point and another level of maintenance fee. The company's newest project is Breezy Point, a Two Harbors resort with 12 cabins on 12 acres and more than 1,000 feet of private ledge rock.

Odyssey bought the resort in July 2015 and did a six-month, multimillion-dollar renovation of the cabins and started marketing quarter shares of those 12 cabins last fall. Prices range from $74,000 to $134,000, and Odyssey has already sold 25 of the 48 shares.

Much of that demand was fueled by families who had been regular customers of the resort and wanted to maintain a connection, but a large share are new leads who want a long-term connection to the North Shore.

At the opposite end of the price spectrum, Twin Cities-based Elite Destination Homes currently has a pool of nine houses in Paris; Los Cabos, Mexico; Turks and Caicos Islands; and New York City that are shared among 60 fractional owners.

Founder and CEO Bill Bisanz, said buyers have paid $130,000 to $600,000 each depending on the property and their ownership interest. He said that while the business, which he started 11 years ago, definitely softened during the recession and some owners decided to divest, the business is back. Since the beginning of the recovery in 2012, he's had 36 sales.

"People are attracted to us because we are unique, and it feels like a friends and family business model with clear rules that govern it," Bisanz said.

Andy Sirkin, a San Francisco lawyer who specializes in fractional ownership deals, said that during the recession the biggest projects took the biggest hit in many cases because the properties weren't well managed and didn't have the proper reserves to maintain them.

He predicts that as millennials and others who have embraced the sharing economy move beyond buying their first home, they'll turn their attention to making an investment in a vacation home. He expects fractional interests to be particularly attractive to them because of their willingness to share their second home with other owners.

He said the model will hold particular appeal because it limits the amount of time and money they'll have to invest. And, as time has shown, such investments can be volatile.

Bisanz likens fractional ownership to other forms of recreational spending. "It's more like owning a boat," he said. "No one owns a boat to make money, they do it [in]case they want to have fun."

Jim Buchta • 612-673-7376