Two of the biggest issues facing shared property owners are:
How to split the expenses, and
Who gets to go on which days/nights?
It requires some hard work upfront but getting everyone onboard in writing, whether as a standalone document, or as part of an LLC operating agreement, is crucial to successful sharing. Without this kind of agreement it is likely that resentment will develop and the arrangement may fall apart.
At Resercal our mission is to make it easier to share sustainably. In this article we breakdown a strategy for equitable sharing of expenses and use.
1. Shared Expenses
Start by separating expenses into the following categories:
The non-negotiable base cost of ownership per year
If you are an owner you are obliged to pay an equal or proportional-to-ownership share of this number. This cost does not go up or down according to use, it is the cost of maintaining ownership. This number should include:
- Property taxes
- Base utilities (to keep the place in working order)
- A contribution towards essential capital improvements that must be made now or by a future date to maintain the value and insurability of the property.
- A contribution towards unforeseen expenses such as storm damage. Byron Ellis, managing director of United Capital Financial Advisers in an article on Realtor.com suggests setting a target of 1-3% of your property value for these.
The non-negotiable cost of ownership should be paid by all owners regardless whether they will use the place or not that year. The money should be collected upfront so that it is in the bank when bills need to be paid. Late payers place an unfair burden on other owners who are obliged to put up extra cash to cover missing funds.
Costs that arise from use of the shared property
- Utilities: heat, water, electricity, gas, cable.
- Regular cleaning and/or laundry service
- Wear and tear
If use is uneven these costs should be allocated according to use so that light-users aren’t paying for heavy-users.
These should be approved by the ownership group before any commitments are made.
- Upgrades - keep an eye on future maintenance costs.
- Income - some outside rentals could offset ownership costs.
- Donations - members may be open to additional donations to go into a capital improvements fund or towards a particular upgrade project. Donations should have no strings attached.
- Contributions of skilled and unskilled labor.
Once you have your annual budget broken down into the categories above, make a plan for payment. We recommend that the non-negotiable costs are paid upfront before members are allowed to use the asset.
Borrowing from the language of private clubs, we refer to the upfront annual payment as 'dues'. If the group agrees to pay for upgrades there would be an additional 'assessment' for that cost.
If there is income from rentals or donations there should be agreement on whether this goes into a capital fund, or if it is used to reduce the annual dues. Be sure to check with a tax expert as there may be different rates applied if you rent your property.
If the group agrees to accept donations or contributions of skilled or unskilled labor be sure to set expectations before the contribution is made. Donations should not provide the donor with extra decision-making power as to how the donation is spent.
2. Equitable Use
It's vital that everyone in the group feels as though they get a fair chance to use the shared asset, that it doesn't cost them so much that it doesn't make sense, and that others in the group aren't taking advantage.
Factors to consider:
- Is there an agreed-upon vision for how the shared property should be used?
- The size of the group. If there are 100 share-owners and 100 days in the season it's a different calculation than 6 with year round access.
- How long is the usable season? Is it year round or just the summer? Are there peak times when everyone wants to go?
- Can you be there all together or does it have to be one at a time? Some properties such as a beach house or a pool have space for all the owners to visit on the same day, but other resources have lower limits.
- Who can use the property? Is it just owners and immediate family? Are guests and rentals allowed?
Establish a use fee
With the non-negotiable cost of ownership figured out and paid upfront it makes sense (in most cases) to establish a “per diem” or “use fee”. This is not tied to a market rate, rather it is kept relatively low and simply acknowledges:
- That the booking member’s use blocks another owner’s potential use at that time
- That there are expenses that arise from use (utilities, wear & tear, cleaning)
If a property has some dates that are more in-demand than others, or allows guest visits, then additional use rates can be added.
The group should work together to establish the use fees and where the collected money goes.
We recommend that use fees cover usage costs (2 above) and that the excess goes toward reducing the cost of ownership.
This system works well because infrequent users aren’t on the hook for usage costs and they can see their annual costs go down. Frequent users are paying for what they use and, when they compare what they spend in total it should still look like a great deal against comparable market-rate rentals.
Allocation of Use
We’ve seen several mechanisms for equitable allocation of use, appropriate for different circumstances:
- Open reservations with limits. Group members can reserve any open date in the calendar as long as:
- Their ownership costs are paid before they start booking use
- No bookings are made before an opening date for the year/season.
- They abide by a maximum-allowed number of consecutive nights or peak dates in a month or season.
- Allocation with changes allowed. The group works out a rotation so that the allocated dates rotate each year. Changes occur when:
- A member decides not to use a particular allocation and releases it so that anyone else can reserve those dates.
- Two members decide to trade allocations.
- A points system. When the owners pay their share of ownership costs they get a budget of points for that year. Peak times “cost” more points than off-peak times. Additional points may be released partway through the year or season.
Choose the system that works best for your situation and don’t be afraid to pivot to another option as needed.
Scheduling & Reporting
You can use a paper calendar or an online tool, but be sure to schedule use so that there are no accidental double bookings, and so that you know how many days of use the property is getting annually.
Our online web app, Resercal provides a secure login for all members to a private reservations calendar where members can see current availability and make their own bookings.
There’s a report of use page, and editable rules and information pages. Manager-level features allow for editing member reservations, temporary suspension of members, setting a cancellation deadline and more.
Before we built Resercal we used Google Calendar and prior to that we relied on a paper calendar and phone call reservations system.
Whatever tools you use be sure that they promote equitable use and that the time commitment required is manageable.
The effort invested in setting up a sustainable system for sharing property will pay off over the long-term. Be sure to involve all owners in the decision-making process and make it easy to follow the rules for booking use and paying expenses.
In a follow up post we will examine the pros and cons of different ways to structure shared-ownership of vacation property.