Fractional ownership is gaining traction in the Indian market pretty fast. Mostly because it’s a relatively affordable way to own a luxurious real estate property, which is otherwise a distant dream. According to the fractional ownership model, a real estate asset is divided into several investors who “co-own” the property as shares. Each of the owners holds a proportional stake in the asset as per their investment. 

Fractional ownership relieves your financial burden by sharing the maintenance and usage costs of the property. Accordingly, the rights are also shared. All the rights about the ownership stake are legally documented. A legal document regarding Fractional ownership clearly outlines the percentage of each shareholder, usage rights, responsibilities, and cost-sharing formulas to streamline the execution of the process.

This piece addresses the thorough and detailed legal structure of the Fractional Ownership investment model and draws a parallel connection with the Real Estate Mutual Funds and how it operates. Understanding the legal framework of fractional ownership/co-ownership helps investors take the right approach towards it.

What is the Legal Structure of Real Estate Fractional Ownership in India?

The legal structure outlines the rights of Fractional Real Estate Investors and how they should be exercised. Here’s a look at the prominent legal structure of fractional ownership according to RERA 2016. 

Tenancy in Common (or, TIC):

Tenancy in Common or TIC agreement holds us the first level legal document of the Fractional ownership module. In other words, it’s a binding agreement that holds the undivided interest of the co-owners in the entire property. Though TICs mention the flexibility of individual selling, there are places where TICs face challenges, especially during decision-making and exit strategies.

Limited Liability Companies (or, LLCs):

This is the second segment of the legal framework of fractional or co-ownership. The LLC document works as a shield of protection for investors from personal liability in case of debts or legal issues associated with the property. LLCs are better than TICs because they have more flexibility.

Real Estate Investment Trusts ( or, REITs):

Avoid the hassles of property management but still enjoy the monetary benefits as a shareholder with the REITs investment model. It holds productive assets and allocates them to the investors as shares and investors no longer need to worry about property maintenance.

Fractional Ownership Platforms or FOPs hold all sorts of properties that are governed by these three legal frameworks. Basically, you need to choose the framework that will govern the legalities of fractional property ownership. Accordingly, your usage and maintenance rights will be outlined. Before you make a plan and invest, it’s crucial to read through the specific details of the chosen structure.

Also Read: How does Real Estate Fractional Investment Works

Key Legal Documents: Navigating the Legal Agreements

There are crucial legal documents that define the rights and responsibilities of fractional/co-ownership:

• Operating Agreements or Bylaws: Call it the backbone or constitution of fractional ownership, it outlines the most crucial part of the ownership that includes percentages, voting rights, decision-making procedures, maintenance and repair responsibilities, dispute resolution mechanisms, and potential exit strategies.
• Offering Documents: These documents include property details, investment terms, allocation shares, and risk factors.

Evaluate the details thoroughly before signing any agreements to make sure that the ownership rights and expectations are ensured.

Also Read: REIT vs Fractional Ownership of Property

Ownership Rights and Responsibilities

As a fractional or co-owner, you own the following rights:

• Proportionate Ownership: This is defined based on your percentage of investment. Accordingly, you own part of your property percentage.

• Usage Rights: These are defined in the operating agreement, which outlines the process to use the property, as well as the duration and schedule.

• Voting Rights: This part of the document outlines the specific decisions that involve your voting rights regarding property decisions. Voting rights are required for renovations, rentals, or sales, based on the structure and governing documents.

However, real estate fractional investment legalities in India also involve certain responsibilities 

• Financial Obligations: Proportional cost sharing involves everything such as property taxes, maintenance fees, insurance, and potential renovations.

• Compliance with Agreements: Co-owners of the property are bound by the terms and conditions mentioned in the operating agreement and other legal documents.

• Dealing with Co-Owners: Co-ownership also entails respectful communication and adherence to the legally defined protocols when it comes to decision-making and dispute resolution.

Also Read: How to Start Fractional Investment in Real Estate India

Additional Legal Considerations

However, the legal framework of fractional ownership differs in certain situations. Despite having an established format, sometimes the framework might evolve based on several factors:

• Jurisdiction: Several rules and regulations of fractional ownership may vary from country to country, state to state, or even between different localities. It’s important to study the state laws and international laws ( in situations where you are investing in an international property) before you sign. 
• Type of Asset: The legal framework of fractional ownership might differ based on the type of assets you choose- commercial properties, vacation homes, or other types of assets.
• Specific Terms of the Agreement: To safeguard your individual ownership interest, specific provisions of the operating agreement, such as the buy-sell agreements, and other required materials can be revised and termed a special agreement.

Also Read: Benefits and Risks of Fractional Ownership in Real Estate

Leveraging Professional Advice

Fractional ownership is not easy to deal with. The legal considerations in Fractional Real Estate Investing need professional assistance for complete understanding. Regarding this, an investor can get in touch with the following professionals.

• Real Estate Attorneys Specialized in Fractional Ownership: They are professionals who can guide investors about the legal implications of different ownership structures, review documents, and ensure that the investors’ interests remain protected 
• Tax Advisors: Tax advisors can guide investors regarding the potential tax implications of fractional ownership based on the usage rights.
• Financial Advisors: They guide investors regarding the financial viability of a fractional ownership model so that it is easier to strategize the investment plan.

Also Read: How to Diversify Your Investment Portfolio

Fractional Ownership Investment Model Structure in India

Fractional ownership investment in India is a fast-evolving process with many possible structures available as per the legal framework. However, the best one suited for you needs prior consideration. Based on the type of property, the tax treatment legally applicable for the respective model, and above all your financial capability, your ownership structure is decided.

Some of the investment models offer tax benefits, which makes the property even more preferable. For example, countries like Cyprus and Mauritius offer tax benefits to Indian investors based on the Double Taxation Avoidance Agreements (DTAA) with India. At present, India has signed a comprehensive DTAA with 79 countries. As a result, Indian investors as well as investors from other countries enjoy tax benefits for investing in India and vice versa.  

According to the Income Tax Act, of 1961, specific tax relief is granted to the investors under Sections 90 and 91. It helps prevent double taxation and at the same time helps investors enjoy tax benefits out of their investment.

Here are the models of fractional ownership investment. 

Joint Ownership

• As the name suggests, joint ownership of a property is held by two or more people.
• Co-owners own equal rights of property usage, but cannot do any act that limits or threatens other’s interest.
• For selling, maintenance, or similar situations, individual shareholders can do so with the consent of other owners. It needs a “no refusal” clause signed by the other shareholders.

Co-operative Model

Structure

• Buyers/Investors form a cooperative society to purchase the property.
• Each member holds shares proportional to their ownership stake. It should be according to the regulatory compliance.

Ownership and Transfer

• Co-owners are shareholders according to their investment percentage.
• Shares transfer with the sale of ownership.
• Nominees inherit shares but under specific circumstances, the cooperative assigns a nominee to a specific investor.

Company Structure

Structure:

• Form a company and become shareholders. In this case, the company is the sole owner of the property and not the individual as a matter of fact.
• These regulations are defined under the Companies Act (1956).

Benefits:

• Easier share transfer compared to other structures (saves stamp duty).
• Share certificates are the testimonials of ownership.

Requirements:

• Company objectives must include property acquisition and usage.
• Board resolutions authorize shareholders to manage the property.
• Articles of association grant use rights to new shareholders.

Trust Structure

• Potential tax advantages via offshore trusts in countries with tax treaties (e.g., Mauritius, Cyprus).

Structure:

• Fractional owners create trust.
• The seller becomes a “settler” transferring ownership to the trust.
• Fractional owners can be both trustees (managing the trust) and beneficiaries (owning shares).
• Trust deed allows beneficiaries (fractional owners) to transfer shares with trustee approval.

Advantages

• Less complex than company structure, potentially avoiding some company formalities.

Transfer of Ownership

• A new fractional owner becomes a trustee, replacing the seller.

Also Read: What is Fractional Investment in Real Estate

Conclusion

fractional ownership presents a promising investment opportunity in the Indian real estate market. Understanding the legal framework is crucial, with structures like TIC, LLCs, REITs, and FOPs offering various benefits. Key legal documents define rights and responsibilities, while professional advice ensures a smooth experience. With models like joint ownership, cooperatives, companies, and trusts available, investors can leverage tax benefits under the Income Tax Act, 1961. Overall, fractional ownership is an accessible and affordable way to co-own luxurious properties, provided investors make informed decisions aligned with their financial goals.