Case Study: A Condo-Fractional Mix in Santa Fe

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The market for fractionals collapsed within months after Dallas-based developer Unity Hunt completed construction work on El Corazon de Santa Fe, a 72-unit project in Santa Fe, New Mexico, in 2007.

Demand dried up. For years, the only buyers in the market were "bottom feeders," looking to score deals, said managing partner Rob Harper.

"Everybody wanted to be the guy who got something for 50 cents on the dollar," Mr. Harper said in an interview with World Property Channel. "We knew we were out of the game."

El Corazon de Santa Fe was designed with 50 units allocated for whole ownership and 22 for fractional. There were no similar fractional products in Santa Fe, but Mr. Harper's research suggested the mix made sense for the location 

"Fractional was still emerging as a product type," Mr. Harper said.

When the crash hit, Mr. Harper cut the marketing budget and went into "tread the water stance."

"We made the decision we were not going to lower prices," he said. "We felt we had a duty to the people who had purchased with us."

In 2011, Mr. Harper decided to link with Fairmont Hotels, which was cautiously looking to add projects for Fairmont Heritage Place, its private residence club label. Fairmont launched the brand in 2003 with a property in Acapulco; by the end of 2008, there were four properties under the Fairmont Heritage Place banner.

Fairmont's strategy is to focus only on projects that add value to the chain's hotel portfolio, said Barry Landsberg, executive director, residential marketing & sales, for Fairmont Raffles Hotels International.

"We'll look at standalone [projects], but they have to enhance the distribution in the hotel side of the business," Mr. Landsberg said.

Today, there are eight properties under the Fairmont Heritage Place label, including two added this year--the Fairmont Heritage Place Mayakoba in Mexico and the Fairmont Heritage Place The Palm Dubai.

But Fairmont is moving cautiously on fractional projects, focusing on properties that offer value to the hotel network. Of the 40 residential properties Fairmont has in the pipeline, the majority are focused on whole ownership, Mr. Landsberg said

"The fundamentals of the overall market have to be there [for fractional]," Mr. Landsberg said. "You have to have the second home demand and the scarcity of inventory."

El Corazon de Santa Fe is located in the heart of historic Santa Fe, where there are few large projects. To meet Fairmont standards, Mr. Harper had to spend capital to upgrade the facility, including the clubhouse, fitness room, furnishings and fixtures; and extend the management hours. But the affiliation with Fairmont gave the project "instant credibility in eye of potential buyers" and lowered the "perception of risk," he said.
 
Since 2011, El Corazon has sold about 15 shares, Mr. Harper said; about 60 percent of the fractionals have been sold. Today there are 16 units in the fractional program with another six reserved by the developer.

One-eighth fractions are typically priced between $135,000 and $185,000; units range between 1,150 square feet and 1,800 square feet. (In fractional deals, buyers purchase a share of whole ownership in the unit.) Whole ownership units in the project sell for between $400,000 and $700,000.

"The market is in recovery, but it is still cautious," Mr. Harper said. A vacation home is still a "discretionary purchase."

But there has been a "dramatic" change in the fractional buyers, he said.

"By far, the preponderance of sales we made [in the early days], buyers were taking out home equity loans," he said. "When home equity loans went away, we saw a real chill in the marketplace."

Today the project is attracting the type of high net worth individuals who ignored fractionals in the past, he said.

"Now the buyer who has the wherewithal to stroke a check for a million is looking at us," he said.

Sales are still "struggling," but he sees a rebound in interest and activity.

"Everybody is more optimistic," he said.