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LEGAL
MATTERS
RESORTDEVELOPER.COM vacation industry review
JANUARY – MARCH 2015
By Richard F. Davis, Esq., and Carl J. Riley, Esq.,
Assets and REITs
The number and market capitalization of real estate
investment trusts (REITs) in the U.S. is on the rise. And with that growth,
the organizers of REITs and their investors are seeking new opportuni-
ties to invest in the growth of asset classes that have not traditionally
been held in REIT structures.
REITs are tax-advantaged vehicles, created under the federal
Internal Revenue Code, that must meet a variety of requirements,
including gross asset and income tests. Interests in real property and
rent derived from them qualify for purposes of these tests, as do real
estate mortgage loans and interest earned on those loans.
The timeshare industry is an exciting prospect that has already
attracted the participation of private equity funds and other institutional
investors, but has yet to capture the attention of many REITs. That
could change if opportunities can be structured to meet the requirements
of both REIT investors and interval ownership developers.
Timeshare Structures, Generally
There are several legal structures commonly used to create interval
ownership programs for real property.
Deeded interests in the physical real property of an undivided
interest based upon permanent periodic use of the property
Permanent interests organized through a holding entity such as a
nonstock club corporation, in which purchasers acquire
memberships entitling them to use of the real property, as well as
a share of any proceeds from sale of the real estate in the event of
the entity’s dissolution
Right-to-use programs with no permanent ownership in the real
property, but rather a limited-term right that expires at the end of the
defined term (25 years, for example), similar to a long-term lease
In all cases in the U.S., protective documents are recorded in the
chain of title and run with the land to secure the rights offered to
purchasers. The individual timeshare interests can be sold or
transferred by gift or bequest. In other countries, similar purchaser
protection may be available.
REIT Participation in Timeshare Projects
In all U.S. jurisdictions — and most foreign countries — interval-
ownership interests of the types described are treated by statutory law
and applicable regulations as interests in real property, and they
should also qualify as real property interests for purposes of the tax
laws governing REITs that limit the benefits available through REITs to
real property assets.
There are several approaches to the participation by REITs in
projects involving interval-ownership interests. Following are the most
frequent entry points for involvement.
The timeshare industry is an
exciting prospect that has
already attracted the
participation of private equity
funds and other institutional
investors, but has yet to capture
the attention of many REITs.
That could change if
opportunities can be structured
to meet the requirements of
both REIT investors and interval
ownership developers.
Timeshare