Elizabeth Milias: Pacaso — an artful new real estate twist in Aspen
The Red Ant
When it comes to art, beauty is most certainly in the eyes of the beholder. And while highly collectible and valuable, works by Spanish artist Pablo Picasso (1881-1973) are no exception. However, a new real estate phenomenon named to honor the artist’s legacy of innovation is arguably a controversial movement in its own right, not unlike cubism, surrealism and expressionism were in the art world at the time.
Pacaso, founded in October 2020, has created a new category of second home ownership by turning single-family homes into unlicensed but legal mini multi-user resorts. Designed to capitalize on the high demand for second homes in luxury destinations where the pandemic real estate boom has priced many out of the market, Pacaso’s unique model is relatively straightforward. Pacaso creates a limited liability company (LLC) that purchases a luxury home, lightly refurbishes it, divvies the company up among two to eight owners, and sells co-ownership interests via its website. For 12% upfront and $99 in monthly management fees, Pacaso finds and vets all co-owners, handles all sales details, takes care of all furnishings, repairs, cleaning and property management, and enables owner scheduling via a proprietary app. Currently valued at $1.5 billion, this start-up is purportedly the fastest American company to achieve, in investment parlance, “unicorn” status, meaning a market valuation of $1 billion or more. Investors obviously love the model, and it’s coming to a resort town near you. In fact, Pacaso has already arrived in Aspen.
On Oct. 8, Pacaso, under the guise of “28 Smuggler Grove LLC,” closed on that local property for $9.1 million. One-eighth owner membership interests of the property-specific LLC that owns the three-bedroom, four-bath home on a quiet cul-de-sac off Midland Avenue are now listed for sale on Pacaso’s website. Interests are currently on the market for $1.34 million each, which get you up to 44 nights a year in this tasteful and newly remodeled 3,166-square-foot single-family residence. Buy as many interests as you’d like up to half-ownership, sign the owner operating agreement for the LLC, and you and your co-owners will then collectively own 100% of the the home. The only catch? You can only stay there for a maximum of 14 days at a time.
Pacaso’s novel model is gaining traction across the country. In addition to homes in Aspen, the website features available interests in LLCs that own luxury homes in Palm Springs, Scottsdale, Jackson Hole, Telluride, Lake Tahoe, Miami, Park City, Napa, Malibu, West Palm, Naples, Carmel, Santa Barbara and Vail, among others. In addition to paying Aspen’s 1.5% RETT upon the initial purchase, Pacaso takes good care of local real estate agents through payment of a 3% referral commission on sales and restricted stock options as a “referral equity bonus.” Interests in the home-owning LLCs are being marketed on the local MLS.
It has long been a desire of City Council to target second-home owners for special taxation because they do not reside in their Aspen properties on a full-time basis. An “occupancy tax” is regularly suggested to raise additional money for pet projects, such as more subsidized housing; the idea being to punish people who dare to pay their property taxes and bills yet leave their private homes empty until they wish to use them. But Pacaso second homeowners are a new breed. They own vacation real estate that they do not occupy full time, but Pacaso houses are not sitting empty. In fact, Pacaso homes will likely be occupied 100% of the time. And while the co-owners cannot rent out their interests on the open market, they can “gift” them to friends and family. What could possibly go wrong?
Aspen’s nemesis, the law of unintended consequences, is rubbing her hands in glee. So council doesn’t like empty vacation homes? Now imagine full vacation homes, all the time. The Pacaso owner code of conduct stipulates “no large parties,” “quiet hours 9p-7a,” no more than two dogs less than 80 pounds each, and recommends avoiding on-street parking. But since these are not Airbnb-type rentals, there is no lodging tax collection, no business licensing and therefore no agent of record for when something inevitably goes awry. They’re not commercial businesses so there’s no housing mitigation.
The interests being sold are not deeded-ownership timeshares, they’re interests in an LLC which holds the deed to the home, so these sales are not subject to the RETT, or are they? It’s unclear. Furthermore, what will the impacts be on our community services and infrastructure? And given the unprecedented service industry labor shortage and horrific commuter traffic on Highway 82, just who is going to service the revolving doors of these mini multi-user resorts?
Many jurisdictions are already fighting the Pacaso model in their communities; however, there are challenges with doing so. Pacaso is not selling easily regulated fractionals or timeshares, nor tenancies in common, rather interests in LLCs that represent true ownership of real property. It’s unclear what Aspen can or should do, if anything. And since many local real estate buyers already make their purchases using an LLC, often for privacy, it’s impossible to identify a “Pacaso home” until it’s too late.
Pacaso dramatically lowers Aspen’s real estate ownership barrier to entry, but comes with its own host of serious concerns and unintended consequences. Contact TheRedAntEM@comcast.net
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