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Ducharme: The Pacaso Puzzle

September 22, 2021

Robert Ducharme

This has nothing to do with Picasso, the great painter, but it is a bit of a puzzle, like his paintings.

Pacaso is the fasted rising company in American history to reach “unicorn” status, i.e. a company valued at more than a billion dollars, and how it did so relates to condominium associations.

In previous columns I have talked about the pros and cons (mostly cons) of short-term rentals in condominium associations, including the stream of people parking illegally, loud and disruptive moving in and out periods, occupants not knowing or abiding by condominium rules, etc. Pacaso is a company that has taken this to a different level and has created some problems along the way.

Here’s how it works. Pacaso buys homes, currently very high end ones, renovates them and then sells corporate shares in them. For instance that $600,000 condominium in your neighborhood might be purchased by Pacaso (or some other, similar company which will surely borrow the business model and start buying lower value properties), touches it up or renovates and then sells it. Unlike others who buy and flip homes, Pacaso doesn’t sell the whole home. Rather, it divides the sale up into corporate shares, into no more than eight $100,000 shares, making $200,000 in the process.

In exchange for your corporate share, you buy up to a 1/8th interest in the home which you can then use up to 44 nights per year, no more than 14 consecutive nights. But you can also “gift” your stays to friends and family members, essentially anyone you want. (It’s unclear how Pacaso enforces this, as you could call any renter a friend.)

Of course, someone needs to manage the property, make sure the home is clean, coordinate usage dates and more. Shockingly, Pacaso does that … for 12% of the purchase price and a monthly fee. Owners allegedly have to hold onto the home for one year, after which they can sell their 1/8th share.

There are, of course, some problems with this model. What happens if, for instance, you don’t get along with your fellow owners, and can’t find a buyer for your 1/8th share? The real concern is whether someone psychologically will want to have a “second” home that is really shared by up to 7 other strangers, moving in and out of “your” bathroom, sleeping in “your” bed, etc.

Some communities have fought Pacaso claiming it is violating town ordinances that ban short-term rentals and time shares. Towns have an interest in these suits, as the business model of corporate ownership allows Pacaso to avoid short-term rental business taxes, because they claim it is not a rental, but ownership.

In what may be a distinction without a difference, Pacaso claims these are not time shares as owners don’t own time, but actually co-own the property. Of course in a time share, you don’t own time; you own the right to use a piece of property for a designated period of time …. just like in Pacaso.

The reality is, of course, someone is making money trying to craft, as one person called them, “glorified time shares.” The concern of owners, of course, is such frequent turnover and multiple owners, can destroy any hope of community in a community association, with people constantly moving in and out, coming and going, and not taking any real interest in a community which they only visit 30 days a year.

What to do? Nothing at all if your Association is fine with short-term rentals. If not, I would suggest amending your documents to prevent fractional second home ownership. In other words, 4-5 people, such as siblings and their family can own a home. The difference is that under Pacaso, that family would not own the whole home. They would only own a fractional interest in it, which translates into a set period of time they can use it, unlike co-ownership when owners have the right to use the home all year.

So far, this has been used only for single-family homes, but you can be sure such an operation will come to condominiums.

Best to think about how to address this puzzle now, rather than after someone has invested a lot of money only to live in your community a few weeks a year.