They are the perfect, and often
desperately needed, vacation option: homes that provide every imaginable amenity
in dream locations. Images of snow-decked ski chalets or oceanfront villas
surrounded by palm trees allow you to picture yourself, your family—even your
in-laws—in this perfect home in this perfect setting, living the perfect
romantic ideal.
The enormously popular, rapidly growing, highly lucrative and
self-regulated private destination club is an industry whose raison d’etre
promotes the ideal of the romantic vacation. And many clubs include all the
trimmings—private jets, luxury cars, butlers, chefs, housekeepers, destination
hosts, experienced vacation guides—to enhance the vacation "experience." But all
the glamour of these perks cannot compensate for a potential member’s practical
disappointment with his non-equity purchase.
"There may be some underlying concerns with non-equity
destination clubs that have not yet surfaced," says Richard Ragatz—president of
Ragatz Associates and founder of the Ragatz National and International
Fractional Interest Symposia—considered one of the most authoritative voices in
the residence club industry. "And those are with common sense issues, issues of
caution, really, that deal with simple, financial questions. Here are some
questions I would ask if I were planning on joining a non-equity club," he
offers. "First, I would ask how I could be assured—when, how and in writing—of
getting my 80 percent of the membership fee back when I left the club. I would
want the ‘4 in, 1 out’ rule explained, and how that might impact my leaving the
club when I wanted to. Second, I would want to experience the club and its menu
of options for myself before choosing. I would want to know how well they
operationalize their services. Third, I would want to be sure I could resell my
membership once the membership cap is reached, or, if there is no membership
cap, I would still want to know if I could resell it and what the processes
would be to do this. Fourth, and probably most importantly, I would want to know
how the club itself is financially assured. That is a crucial question given the
fact that with non-equity clubs, you are purchasing a membership bond, not a
real estate equity deed. If the club were to go out of business, how would I get
my money back?"
Howard Nusbaum, president of the American Resort Development
Association, echoes this concern. "My bottom-line question to all the
destination club promoters is: How is your club financially secured? Club
promoters continually say that timeshare laws do not cover this product; if that
is true, then what laws or provisions are in place to protect consumers?"
Nusbaum says that before consumers pay hundreds of thousands of
dollars for membership, there should be a level of transparency with regards to
club assets, operating expenses and fees, and the overall financial health of
the club. "In short, people have the right to know how the promise of a refund
is being backed and what their annual dues really pay for," he says. "As a
comparison, consumers know that if they purchase a hammer in a hardware store
and the hardware store goes out of business, they can still use the hammer. But
if potential members buy membership in a club and the club goes out of business,
they will be left with a useless membership bond, which, unlike the hammer,
won’t work at all."
Many of the concerns expressed relate to how the destination
club industry was conceived in the first place. Jim Whitteron, president of
Spring Creek Partners, a well-established private residence club
development/marketing group, says, "The origin of the destination club was a
relatively simple process: Promoters bought vacation homes in beautiful areas,
set up membership rules and then marketed their wares. Most of the originators
were real estate investors, attorneys or promoters. There were no outside
regulators, hotel management partners or institutional investors who could
question backgrounds or scrutinize long- and short-term development plans.
"And despite this lack of progress," notes Whitteron, "these
clubs were immediately successful, giving rise to concerns about the future of
the non-equity destination club industry as a whole. It will take just one
destination club to expire, due to inefficient money handling or the inability
of many members to leave a club when they want to—or both—that will bring about
a possible abrogation of member and potential member trust, which will be
difficult to heal."
Jon Haahr, founding partner and managing principal of Silver
Portal Capital, an investment firm serving the private residence club industry,
has similar concerns both for the potential member of the non-equity club and
for the industry. "Demographic and secular drivers for vacation real estate are
so powerful that they will overcome a multitude of mistakes, but violation of
the public trust or investor confidence aren’t among them. Fractional vacation
ownership is an area in which potential members have a significant amount of
interest, but only a modest amount of understanding."
To maximize the long-term opportunity then, potential members
need to focus on their own education and look to successful industry road maps,
Haahr adds. "The maturation of the public REIT [real estate investment trust]
market over the past decade provides a good road map in many ways.
"From an industry perspective," Haahr continues, "sponsors and
industry influencers must take an institutional rather than a retail
perspective. Their goal should be to create companies that will deliver the
quality product represented and be able to withstand financial scrutiny at the
most sophisticated level. The benefits of such a strategy are clear—a high
degree of satisfaction by the members and the investment sources."
The positive news is that there are some non-equity destination
clubs whose founders are aware of possible industry downsides and have taken
steps to mitigate against them. Some have dividend programs and real estate
appreciation dividends in order to give members a return on an annual basis.
There are also hybrid clubs whose organizational templates
allow for deep fiscal transparency. The idea for Destinations Private Resorts
was conceived by Stan Dobrin, a Harvard MBA and former mortgage banker and commercial real estate developer. His idea was to do everything himself, from
the ground up. He bought the lots, hired the architects and was part of every
phase of the plan and concept for the multimillion-dollar homes. His members
knew where all the money went, from start to finish. He completed one home, and
had others partially completed, but recently merged Destinations with
Crescendo.
Crescendo is a destination club structured as a REIT with usage
rights. "Full transparency is imperative: We know where every penny goes every
day, and so do our owners," says Chris Soderquist, one of the founders and chief
operating officer of Crescendo. "They are members only in the most superficial
sense. In reality, they own the club. Unlike the first-generation destination
clubs, the members share in the appreciation of our entire real estate
portfolio. And we are an investment vehicle, subject to all the securities laws,
which require us to run our business as fiduciaries—not entrepreneurs—of our
investors’ money."
Other hybrids are BelleHavens and Solstice, both equity
destination clubs where members purchase an equity position in the club itself.
Graham Kos, founder of Solstice, whose background is in financial investing at
the Chicago Board of Trade, says, "From the beginning, we accepted the notion
that we should not try to be all things to all people. I think we are unique in
that we might be the only club that does not start with the premise of bigger is
better. I am more of the opinion that bigger is just bigger," he says. "I see a
somewhat dangerous approach by some clubs in this industry to gain critical mass
through leasing of properties and then needing to backfill membership on a very
accelerated basis to support their infrastructure. This appears somewhat
disingenuous in appearance of scale and substance, but more importantly, I think
it can carry with it an unacceptable level of financial risk. We believe in and
we practice absolute transparency."
For the potential buyer—as either member or owner—of any of the
private destination clubs, it is important to cast the romantic vacation ideal
aside, at least for a while, and let the practical side take hold. Ask the
worst-case scenario questions, try the product out, speak to the presidents and
CFOs, and other members/owners. Caveat emptor is valid in all purchases, but
with lifestyle purchases that cater to desire, not need, doing the research is
all the more critical.
