Equity vs non-equity DCs

[PerryM]

Here is what the DC industry needs:

Audited financial statements. CFO and CEO must sign off on accuracy subject to harsh legal penalties for material inaccuracies. (Sarbanes Oxley)

And:

Maintain net assets at a level which is greater than aggregate refundable member deposits.

Or:

Protect refundable deposits with some combination of insurance, surety bond, letter of credit, or personal (asset backed) guarantees.

Sounds like just sound business practices on the DC's part to protect their customers from the management's mistakes. Who could argue against that?

P.S.
I'd like an agreement where the principals of the DC personally pledge assets to repay the refundable portion of the membership fee.

I'd like a 2007 BMW M3 as collateral please (my son's is a 2002). Or, heck, a college tuition fund in my son's name. The list is endless. Maybe we could make it kind of a game. The principals put up various assets, with color photos, and we get to have first dibs on what we'd like to take from them if they screw up the DC.

I like this.

 

[m61376]

Do people really not care if a DC is equity vs. non-equity? Isn't that like saying an secured vs. unsecured loan is the same? I don't know much about DCs. I do know that there is a lot of buzz about them and evidently many people on this board love them. When you are forking out $100k, what do you actually own?

Thanks for posting this. I am a relative newbie here and my head has been spinning with this. Admittedly, it has looked very tempting but I just couldn't get past the question of what was I actually purchasing? Glad to see I am not the only one....

 

[smbrannan]

The DC could, in fact, issue a surety bond to protect member deposits.

The surety would be an insurance company (not a bank). The insurance company earns money by assessing the risk of default, pricing the risk properly (collecting premiums) and diversifying their risk exposure. They expect to incur losses on certain bonds (they are undercollateralized), but they make enough in premiums to offset this exposure.

Doesn't matter if a bank or an insurance co provides this, either way the risk exposure is subordinate to any mortgages that the DC has on its properties. That makes this a high risk proposition for any financial institution.

Combine that with the fact that the DC is likely to be a relatively new company without a long track record of performance and you have the makings of a very expensive surety bond, or standby letter of credit, or financial guarantee or whatever the piece of paper is called.

Over the past few years there has actually been significant growth in lenders willing to take second lien positions in the junk-bond market. They are earning an annual fee of about 6% for this risk. As a first approximation, this is what a DC might be looking at as an annual cost to provide Perry with the downside protection he wants.

 

[puffpuff]

Thanks for posting this. I am a relative newbie here and my head has been spinning with this. Admittedly, it has looked very tempting but I just couldn't get past the question of what was I actually purchasing? Glad to see I am not the only one....

I think you should approach any DC as a non-equity club from a mental perspective to start, whether it is equity or not in reality.

Then you should look at the club themselves and see if their destinations and operational aspect meets your needs.

For example, HCC is good for those those who can plan way ahead and take one week blocks at a time . There is tremendous value if you can fit that profile. On the contrary, PE Premium has a better reservation system , but your cost per night is way higher unless you spend 28 days or more. If you are a heavy user , PE is likey to come out ahead.

There are signifcant differences between the clubs to warrant your attention to this. If after you have selected the club you like and that club happens to be equity based, than theoritically you have more protection as an added bonus on the surface.

I personally do not think that equity or non-equity should be the main determining factor. If it concerns you that much ,chances are DC are not for you at this time as it is still a unregulate and young industry. I am personally quite comfortable to be in non-equity based club. IN fact, I am not sure, based on the current equity models presented, that equity clubs at the end of the day is really that much different or better, although the presentation on paper appears more secure.

Join a club you really feel fits into your llfestyle, and enjoy it. There is a lot of debate here on the security of the deposit, and only time will tell who is right.There is no guarantee in life and you do the best you can with info at hand, and everyone's risk appeitite is different. For maximum safety, dont join any DC. The safest is to serach VBRO.com and just rent each time.

One of the key features of a DC is that their MF remains relatively constant ( cpi increases ) in dollar terms over time, so I think 10 years from now, as you look back, you will see the MF of today dirt cheap compare to a plain rental program 10 years from now. That is one imporantant reason for me to join now and "take the chance".

Good luck to you.

 

[travelguy]

Here is what the DC industry needs:

Audited financial statements. CFO and CEO must sign off on accuracy subject to harsh legal penalties for material inaccuracies. (Sarbanes Oxley)

And:

Maintain net assets at a level which is greater than aggregate refundable member deposits.

Elsway & PerryM,

I cannot speak for the DC industry but I can speak about High Country Club since I have done due diligence and am a member.

High Country Club DOES have audited financial statements as required by the DCA (signed as per generally accepted accounting principles, Sarbanes Oxley not applicable to private companies).

High Country Club DOES have asset levels greater than the refundable member deposits as required by DCA standards.

As I keep saying, contact HCC to get the real story!

 

[PerryM]

Elsway & PerryM,

I cannot speak for the DC industry but I can speak about High Country Club since I have done due diligence and am a member.

High Country Club DOES have audited financial statements as required by the DCA (signed as per generally accepted accounting principles, Sarbanes Oxley not applicable to private companies).

High Country Club DOES have asset levels greater than the refundable member deposits as required by DCA standards.

As I keep saying, contact HCC to get the real story!

Then is should be simple to buy a bond, I'd then be very interested in their club. Until then some of the Nigerian eMails I get sound more interesting.

 

[Steamboat Bill]

Then is should be simple to buy a bond, I'd then be very interested in their club. Until then some of the Nigerian eMails I get sound more interesting.

I know you have asked for this....perhaps it is time to call Heath at HCC and ask about this issue and tell him you would pay extra for it. If it is reasonably (<$200 per year) then they can offer it to all members. I am not interested in paying extra for this, but I would be happy to have it as an included member benefit.

 

[PerryM]

I know you have asked for this....perhaps it is time to call Heath at HCC and ask about this issue and tell him you would pay extra for it. If it is reasonably (<$200 per year) then they can offer it to all members. I am not interested in paying extra for this, but I would be happy to have it as an included member benefit.

I did speak to Heath a while ago (has it been almost a year?) about some kind of protection for the deposit. I got no answer back at that time. I don't know if a bond was ever brought up. This is not a new idea of mine to address the security problem with DCs.

If HCC can find all the members they want who don't have this worry then that savings is passed on to the investors. Maybe another DC might be interested.

I think 90% of all new business fail within 10 years. The DC industry isn't even 10 years old and it too is subject to the cold reality of statistics.

It will be interesting to see the marketing gimmicks/tools that are brought out as DCs want to branch out to an ever widening group of folks - some, like me, would take the chance if the companies worried less about themselves and more about new customers.

To me it's very simple; the DC industry could care less about my security needs then as to their bottom line. BelleHavens is the sole exception. Unfortunately other timeshare purchases prevent me from even thinking about joining them at this time.

 

[smbrannan]

I did speak to Heath a while ago (has it been almost a year?) about some kind of protection for the deposit. I got no answer back at that time. I don't know if a bond was ever brought up. This is not a new idea of mine to address the security problem with DCs.

If HCC can find all the members they want who don't have this worry then that savings is passed on to the investors. Maybe another DC might be interested.

I think 90% of all new business fail within 10 years. The DC industry isn't even 10 years old and it too is subject to the cold reality of statistics.

It will be interesting to see the marketing gimmicks/tools that are brought out as DCs want to branch out to an ever widening group of folks - some, like me, would take the chance if the companies worried less about themselves and more about new customers.

To me it's very simple; the DC industry could care less about my security needs then as to their bottom line. BelleHavens is the sole exception. Unfortunately other timeshare purchases prevent me from even thinking about joining them at this time.

Folks - the economics of a surety bond just don't work. Somebody would need to pay the insurer an annual fee of about 6% of the amount guaranteed. If the gtee is for 80% of the deposit, that means that the annual guarantee cost would be about 4-5% of the original deposit.

Given that maintence fees are about 8-10% of the amount deposited, this would leave too little for the DC to profitably operate the properties.

If the member pays the insurance cost, then this would materially increase the cost per night of membership.

 

[PerryM]

Folks - the economics of a surety bond just don't work. Somebody would need to pay the insurer an annual fee of about 6% of the amount guaranteed. If the gtee is for 80% of the deposit, that means that the annual guarantee cost would be about 4-5% of the original deposit.

Given that maintence fees are about 8-10% of the amount deposited, this would leave too little for the DC to profitably operate the properties.

If the member pays the insurance cost, then this would materially increase the cost per night of membership.

How about some personal assurances from the investors - a letter pledging assets to be turned over to the DC in the event of the DC dissolving and not enough funds left to pay the membership fees due back to the members.

Right now a DC is just a pile of legal papers with banks owning the DC. Those banks will suck up every penny before the membership fees are returned.

I've got to believe that there is an inexpensive way for the members to have a modicum of protection.

But, this is exactly the reason I've bought timeshares that cost more than DCs - I have a deed to them and consumer protection laws by the pound in the form of real estate laws.

DCs are totally unregulated - I could start one this morning and be competing in the DC market. I don't need any credentials, no security deposits, I don't have ONE law to protect the DC member.

Yet the DCs expect me to write checks of $60k - $750k. Go figure.

 

[Elsway]

Doesn't matter if a bank or an insurance co provides this, either way the risk exposure is subordinate to any mortgages that the DC has on its properties. That makes this a high risk proposition for any financial institution.

Combine that with the fact that the DC is likely to be a relatively new company without a long track record of performance and you have the makings of a very expensive surety bond, or standby letter of credit, or financial guarantee or whatever the piece of paper is called.

Over the past few years there has actually been significant growth in lenders willing to take second lien positions in the junk-bond market. They are earning an annual fee of about 6% for this risk. As a first approximation, this is what a DC might be looking at as an annual cost to provide Perry with the downside protection he wants.

The second lien "bonds" you are referring to are actually loans (issued in the institutional leveraged loan market), not junk bonds. Second lien loans are coming to market at Libor +5-6% (they are floating rate, rather than fixed coupon).

In the junk bond market you can buy disaster insurance bonds isssued by insurance companies. The bonds are usually one year maturity with a juicy coupon. If the insurance company gets hit by a major claim associated with a major hurricane, the bonds become worthless. Essentially, junk bond investors are reinsuring the insurance company against material losses associated with a major storm.

Lloyds of London will insure practically anything. Including - Jimmy Durante's nose, Keith Richards fingers, Celine Dion's vocal cords, etc...

My point: there is an insitutional market for the transferrance of all forms of risk. Yes, if it is a big risk, you will pay more for insurance. Given the gate mechanism of destination clubs (the 3 in 1 out policy), the risk of failure seems low (IMO) - unless a club repeats the mistakes of Tanner and Haley and over promises.

The one club which seems to be over-promising (under charging) at the moment is HCC. This particular club appeals to alot of people on this board - but I am skeptical that they can continue to offer such superior value (one recent poster on this board believes HCC offers a product which is comparable to Exclusive Resorts, but at a small fraction of the cost). This, to me, is a risky proposition (most people don't seem to mind the risk because the membership costs are so low).

 

[PerryM]

The second lien "bonds" you are referring to are actually loans (issued in the institutional leveraged loan market), not junk bonds. Second lien loans are coming to market at Libor +5-6% (they are floating rate, rather than fixed coupon).

In the junk bond market you can buy disaster insurance bonds isssued by insurance companies. The bonds are usually one year maturity with a juicy coupon. If the insurance company gets hit by a major claim associated with a major hurricane, the bonds become worthless. Essentially, junk bond investors are reinsuring the insurance company against material losses associated with a major storm.

Lloyds of London will insure practically anything. Including - Jimmy Durante's nose, Keith Richards fingers, Celine Dion's vocal cords, etc...

My point: there is an insitutional market for the transferrance of all forms of risk. Yes, if it is a big risk, you will pay more for insurance. Given the gate mechanism of destination clubs (the 3 in 1 out policy), the risk of failure seems low (IMO) - unless a club repeats the mistakes of Tanner and Haley and over promises.

The one club which seems to be over-promising (under charging) at the moment is HCC. This particular club appeals to alot of people on this board - but I am skeptical that they can continue to offer such superior value (one recent poster on this board believes HCC offers a product which is comparable to Exclusive Resorts, but at a small fraction of the cost). This, to me, is a risky proposition (most people don't seem to mind the risk because the membership costs are so low).

So my question is how much would HCC's investors have to cough up to have something to 100% guarantee the $48k I would get back as a new HCC member? (80% of the $60k membership fee)

If that amount is $1,000 initially and maybe $500 per year this sounds like something the investors should consider to open the flood gates for more members.

However, if it's $20k and $10k per year that's not something they want to pay for. (Ok, the consumer pays for it, I know)

 

[PerryM]

Yanking that chain..

Maybe the DC industry could take a concept from the airline industry – a-la-cart service. We just flew American and had the opportunity to pay $5 for a bag of chips to go down with the FREE can of Coke. Mmmmm, lunch.

So maybe the DC industry could put an asterisk next to the membership fees:

HCC Membership Fee….

Associate $30,000*
Affiliate $40,000*
Private $60,000*

* Optional 20% additional fee if you expect a snowball’s chance in hell of getting your membership fee back if we go belly up.


Something like that.

(HCC owners you know I’m just yanking your chain and don’t mean this aimed at you or HCC)

 

[smbrannan]

The second lien "bonds" you are referring to are actually loans (issued in the institutional leveraged loan market), not junk bonds. Second lien loans are coming to market at Libor +5-6% (they are floating rate, rather than fixed coupon).

Correct - but everybody knows something about junk bonds - not true of the "institutional leveraged loan market" - and the two markets are quite similar. I was just trying to avoid confusing people.

My point: there is an institutional market for the transferrance of all forms of risk. Yes, if it is a big risk, you will pay more for insurance. Given the gate mechanism of destination clubs (the 3 in 1 out policy), the risk of failure seems low (IMO) - unless a club repeats the mistakes of Tanner and Haley and over promises.

Do you think this risk should be priced lower than 6%

 

[Elsway]

According to the CEO of Ultimate Resorts:

There are 6 million baby boomers in the US with net worth of $1 million or greater and annual income over $200,000. Industry insiders are expecting 10% to 20% of this market segment to join a destination club over the next 10 years. As a result, the destination club market will grow rapidly from ~5,000 members today to over 500,000 within ten years. This results in $100 billion of sales potential. There is alot at stake here.

Based on recent discussions on this board it appears that the main objection that people have to DCs is the lack of security of the membership deposit. I'm certain that the DCs are aware of the concerns of potential members, and I believe they will derive new and better ways to address issues related to deposit security. If they don't take appropriate steps on their own (based on the financial incentives), they will probably be forced to act (by the government).

 

[PerryM]

Points ....... lots of Points .....

My other hope is for the DCs to drop the week system and go for a Point system. Heck we’re back to WorldMark; just buy the number of Points you need and make reservations for your vacation needs.

Eg.
Perry’s DC buys a $1 M condo. Each day of the year is related to daily rental rates and a number of Points is assigned. Add up the rental rate for each day for the year. Lets say that, as an example, 52 weeks of $5,000 for each week = $260,000 dollars to rent every day of the year.

Divide the $260,000 into $1,000,000 and you get $3.85 per Point to buy.

If I just need 5,000 Points then I pay $3.85 per Point = $19,250. That’s all I need to pay. If I need a 1 week in a 4BR penthouse that might require 20,000 Points and I pay $3.85 each = $77,000. Next year I could spend July in an off season.

This is why these crazy $200,000 per memberships will never get into the huge numbers to dominate the industry. It’s far more flexible to offer Points and allow folks to buy what they need not what investors in the DC demand.

Someone will do this – it really is just a WorldMark and folks own a small fraction of the deeds.

 

[puffpuff]

I believe a DC called Cresendo is already doing a point system program. not exactly a la carte as you proposed.

 

[smbrannan]

According to the CEO of Ultimate Resorts:

There are 6 million baby boomers in the US with net worth of $1 million or greater and annual income over $200,000. Industry insiders are expecting 10% to 20% of this market segment to join a destination club over the next 10 years. As a result, the destination club market will grow rapidly from ~5,000 members today to over 500,000 within ten years. This results in $100 billion of sales potential. There is alot at stake here.

This suggests that one ought to be looking for opportunities to invest in DC's rather than buying memberships.

 

[PerryM]

I believe a DC called Cresendo is already doing a point system program. not exactly a la carte as you proposed.

DC’s are just another flavor of fractional ownership.

To me, the best system out there is WorldMark. It has some problems but someone just needs to copy their system and instead of buying condo buildings buy individual condos, homes, boats, jets, cars, space ships, anything that has a rental rate and can be appraised as to its current value can be included.

You just don’t call it a timeshare – call it a DC.

The club hires real estate agents to buy properties and then figure out a rental rate per day – it’s really child’s play.

A “member” buys the Points they need and they own a tiny portion of the deeds. The member can sell the Points on eBay and the DC has the ROFR and can get into resales if it wants.

That DC would explode since they can sell the dream of a holiday week to many folks and they decide where to vacation today. Need a lift on a jet to the condo, no problem, pay for it with points. Want to use a sailing yacht – no problem. Just don’t call it a timeshare but a DC and folks will gladly hand out the money.

But the members are owners and the investors just get a percentage of the action.

P.S.
Members can rent Points to other members, can bank unused points into next year, can borrow Points from next year's usage. Flexibility is key.

 

[Elsway]

This suggests that one ought to be looking for opportunities to invest in DC's rather than buying memberships.

True. Perhaps one of the existing DCs will grow large enough to contemplate an IPO.

Barriers to entry have been low, but are bound to go up. Quintess is the latest club to announce a rapid growth initiative. Once some of these clubs gain critical mass, we will probably see some consolidation given that the smaller clubs will have difficulty competing.

Ultimately, I would not be surprised to see some of the major hospitality companies (Marriott, Starwood, Hilton, etc...) get in the game.

For anyone who is contemplating a vacation home for occasional useage, the economics of a DC are very compelling. (Unless you make aggressive assumptions about the price appreciation potential of vacation homes).