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Tim Carl, Local Tastes: Pacaso: How fractional ownership will alter the Napa Valley | Home and Garde
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Tim Carl, Local Tastes:

Pacaso: How fractional ownership will alter the Napa Valley


Tim Carl, Local Tastes: Pacaso: How fractional ownership will alter the Napa Valley

Fractional-ownership startups such as Pacaso have the potential to transform communities of the future, morphing neighborhoods from places where people primarily live and work into a patchwork of traditional homes mixed with corporate-owned homes where investors visit for short stays.

Pacaso uses a “fractional home ownership” model to purchase private houses and convert them into limited liability corporations, or LLCs. Pacaso then sells shares of these corporate houses to multiple investors, each of whom can stay at the location for a set number of nights per year so long as each visit is no longer than two weeks. Investors can “gift” stays to friends or family and sell their shares after one year and either profit from any gain in the home’s value

or have to cover any loss in value. Pacaso makes its money by receiving a percentage of the purchase price and monthly service fees for management, maintenance and cleaning.

Since launching in 2020, Pacaso has initially focused on properties in northern California’s Wine Country. The founders of Pacaso — Austin Allison (who has a house in Napa) and Spencer Rascoff, both former executives at Zillow — often highlight their ties to and appreciation of the Napa Valley as the reasons they chose it as their initial launching ground.

“Pacaso currently serves or is marketing 14 homes across Napa and Sonoma counties…and [now] operates in 25 top second-home destinations across the U.S.,” Mark Zucconi, a spokesman for the company, wrote in an email.

On April 6 Pacaso filed a federal lawsuit challenging St. Helena's determination that its shared homes amount to timeshares, which are prohibited by city code, as reported by the St. Helena Star.

In June, the court dismissed one of the lawsuit's five “causes of action” brought by Pacaso. The remaining actions have

not yet been ruled on.

“Pacaso looks forward to a determination of the merits of its claims and an end to the City's latest chapter in its history of wrongfully restricting access to its housing market, and remains confident in the strength of its case,” Zucconi wrote.

Local opposition

The homes already converted to Pacaso LLCs in the Napa Valley are causing concern among neighbors. The local opposition group, “,” is collaborating and strategizing with other communities to oppose what they see as an existential threat. Their website states, “Pacaso is the newest way for Silicon Valley bros and venture capitalist vultures to make a quick buck at your expense.”

Part of the opposition strategy is to surround the properties with creative yard signs that denounce Pacaso and plead with potential investors not to buy.

“Between traditional timeshares, bed and breakfasts, hotels and now this, we are at about 50% residency in this town [that is, only half the homes contain year-round families],” said Lesley Stanton, a St. Helena resident who opposes Pacaso. “My kids grew up here, but they will never be able to afford to buy a home here now that investors are driving

prices of single-family homes to such insane levels.”

Stanton lives directly across the street from one of Pacaso’s LLC homes. She says she has only met one investor and that the other investment slots remain yet unfilled.

“In response to community feedback, Pacaso in June announced that it will not purchase any home worth less than $2 million in Napa and Sonoma counties,” wrote Zucconi.

The pros and cons

Fractional homeownership does have potential benefits — additional buying options for would-be buyers, increased real estate prices for sellers and agents, an influx of capital for renovations, nominal fees to the city and county, and a few more tourists to support local establishments.

However, many believe fractional homeownership has ruinous potential with a loss of transient occupancy tax dollars, less housing stock for families and workers, astronomical real estate prices for buyers, fewer families with school-age children and less room for lower-middle class families, and they envision this as another blow to an already fragile community, fearing that neighborhoods will be transformed into glorified sprawling hotel complexes for the well-off who shun anything that might hinder their future

investment potential or short-term comfort.

The disruptor club

When I was a business consultant at one of the world’s top three such firms, I worked with some very smart and successful people. During that time I often found myself in places such as London, New York, Munich and Singapore working with teams of other consultants who focused on solving tough business problems. During those days I was struck by the ferocity and intensity of many of those whom I met.

I was also surprised that the most aggressive of my colleagues and clients were often less motivated by the acquisition of additional wealth but instead aspired to become bearers of a new type of status — “disruptors.”

The idea of disruption is nothing new in the world of business. iPhones, Amazon and more recently Discord, Robinhood and Zoom have all found niches to exploit, allowing their founders and investors to become rich – or richer. But maybe, more importantly, they now can claim to be members of an elite disruptor club.

Getting into the disruptor club requires three key elements. First, the business idea must appear novel. Second, investors must find the idea compelling enough to justify

large sums of cash to fuel and support rapid expansion. Last, there must be a path to exit (i.e., going public) before having to deal with the fallout of the disruption and/or have to manage a long-term company. These disruptors are “idea people” and not in the business of running a monotonous company or dealing with protracted court cases.

Of course, failure is always a possibility with these endeavors — think, or, all of which disintegrated in the dot-com bubble of 1999. However, most successful disruptor entrepreneurs tend to embrace failure along the way as another badge of honor so long as they eventually succeed. Mostly these types of disruptive enterprises fail to get off the ground, but for those with enough luck, capital and good timing, gaining access to the disruptor club is possible.

Beyond money

In my experience, the people aspiring to hold such a title come from well-off families and have attended esteemed colleges such as Harvard and Stanford. Because being rich and academically accomplished are already checked off their lists, they seek new ways in which to differentiate themselves. For the few in the club who come from less privileged backgrounds, being admitted to the club is a source of validation and acceptance. Either way, victory and

adoration, not money, are their primary drivers.

No matter where they came from, those aspiring disruptors often fall into two general camps that my consulting buddy referred to as the “will do better later” and the “it’s all going downers,” as in, après moi le déluge.

The “will do better later” camp converts the very meaning and purpose of their lives into the actions they would take after becoming members of the club. They talk about all the good they’ll do after becoming wildly rich and even more influential than they already are — how they’ll conduct motivational TED Talks and help to lead change for the better, become leaders of a new and improved world and share with others just how they did it. By adding just a little x, y or z, anything could be possible, they say.

The other camp — the “it’s all going downers” — are those attempting to get as much from the world as they can before it falls apart either from climate change, a pandemic, economic collapse or war.

Regardless of which camp, the preferred early-phase strategy of disruptors (think Uber, Airbnb, and Lime) is to rapidly descend on a select community and overwhelm it. Once onsite, they then deploy their technology or services before local governments, regulators or the community know what has hit them.

Because these products and services are novel and unexpected, the laws regulating their activity are often inadequate to stop or even slow the first massive onslaught. This “shock and awe” phase intends to gain market share and also shows competitors and critics that the changes brought by these startup companies are, if not inevitable, at least unstoppable.

Phase two includes dealing with legal challenges, outraged communities and shell-shocked existing competitors, while at the same time continuing rapid expansion.

Phase three is when the startup company has reached enough market share that it transitions from a private firm to a publicly traded firm on Wall Street. This is accomplished either through an initial public offering (IPO) or more recently using special purpose acquisition companies (SPACs), which is basically a fractional ownership model for taking companies public.

Disruption is nothing new

The California Gold Rush of 1849 had its disruptors, too. With the lure of getting rich overnight, thousands of speculators swarmed into the state, each staking claims and panning for gold in the rivers and streams of the Sierra Nevada. Less than a decade later, the easy gold was gone and disruptive innovators were deploying new tools and

techniques to find and extract the precious metal. One that was particularly effective was hydraulic strip-mining.

The process of hydraulic strip-mining involved rerouting rivers and streams to pressurize huge hoses that were used to erode entire mountains in a quest for the gold within. After only a few short years, entire rivers systems and streams lay dry while downstream tons of debris blackened and choked the waterways, killing fish and fowl and devastating entire communities.

A series of successive time-consuming court battles ensued as towns tried to stop the process. But because the owners of the mines (by then often large collections of investors who bought up mining rights) argued that the laws on water rights at the time were in their favor, little changed.

Eventually, in 1882, in Woodruff v. North Bloomfield Gravel Mining Co., the judge presiding over the case ruled that such mining debris posed a danger to downstream lands and ruled to limit hydraulic mining operations in California in what is often considered the first major environmental law in the state.

Although welcomed, the ruling was too little too late. By then the damage had been done and many of the mining operations — reading the writing on the wall beforehand — had already moved on.

Pacaso is not the end, but only the beginning

The founders and investors of Pacaso have one primary strategy when it comes to getting what they want. In the Sunday edition of The New York Times they’ve taken out

entire-page ads with a single message: “Pacaso, ownership at a fraction of the cost.”

This says two things about their effort: They are super-well funded (currently estimated at over a $1 billion valuation) and they have one primary strategy for completing phase one of their efforts, which centers on “ownership.”

Because many communities have restrictions for timeshares, the idea of ownership is the linchpin of Pacaso’s effort. And some experts are pointing out that they may be technically correct in that having stake in a timeshare is not exactly like having a small stake in a property, although this seems strange to others, considering the timeshare-like attributes assigned to investors.

Because the real estate market is enormous — estimated $70 trillion in the United States alone — expect a flood of startups seeking to gain access to this lucrative market. At first, these will focus on higher-end properties and tourist destinations such as the Napa Valley, but that is only the beginning. Why stop there? Why not make all homes some sort of investment opportunity for Wall Street? Heck, what

are banks anyway, some might say. Imagine that all future homes are owned not by individuals but by corporations whose sole function is to provide a profit to their shareholders.

Converting homeownership into rolled-up diversified investment portfolios that are owned and controlled by private companies or publicly traded corporations has the potential to eliminate, or at least hinder, one of the last hallmarks of upward mobility for the poor and middle-class — private homeownership. Others view fractional ownership as a way for those unable to purchase entire homes on their own to get in on booming real estate markets that are appreciating quickly.

Some see fractional ownership as the future of nearly everything one can own. Others, however, view the future world differently. They see a world where individuals might gather and live lives with deep connections to the places they reside, not view them as temporary investments that might be bought and sold with most of the “value” eventually distributed far outside the area.

Which version triumphs? Only time will tell.