# Tanner and Haley Bankruptcy - Lessons



## Elsway (Jun 2, 2007)

For those considering joining a destination club, I think it is helpful to be aware of the circumstances surrounding the 2006 bankruptcy of Tanner and Haley - the first and only destination club to fail.

I will summarize the causes of the bankruptcy by quoting from a letter which T&H sent to its members: 

"its financial difficulties were largely attributable to a business model that proved to be unsustainable, with revenues unable to keep pace with the costs associated with its "members-first" approach. Among other things, the company in the past rarely refused a Member's travel request, and if a desired property in the company's portfolio was unavailable when requested, the company would commonly enter into a costly short-term lease with a third party. In addition, many destination club members received their memberships at a deep discount and/or locked in extremely low annual dues and daily usage fees. The company also pursued various business and real-estate ventures that it believed to be synergistic but that ultimately proved unsuccessful. Such factors, coupled with increasingly stiff competition in its industry, made it difficult for the company to pay its bills, make planned improvements on existing properties and invest in new properties. Accordingly, the company intends to use the Chapter 11 process to stabilize its finances and develop a more viable business model. "

Here are some links for additional perspective:

A Wall Street Journal article:  http://www.tannerandhaleyblog.com/wsj1.pdf

A bankruptcy court filing:  http://www.donlinrecano.com/dr201/cr/06-50245/dk000012-0000.pdf

A reaction from industry insiders:  http://www.arda.org/AM/Template.cfm...emplate=/CM/ContentDisplay.cfm&ContentID=5884


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## timeos2 (Jun 2, 2007)

*Buy now for more or later for less. Your choice.*

A very interesting case study that can apply to timeshares as well. There is no such thing as "guaranteed" accommodations or fixed fees - those things simply cannot be planned out with any degree of certainty.  

Also remember that the upfront costs for destination clubs or timeshares are mostly pay back to the developer. Little if any goes to the ongoing operation of the system.   It is the annual fees that actually support the day to day functions. So the value to being the first buyer and paying the full developer cost is in things like getting a specific use date or unit and will not represent any savings or guarantees on future costs. The advantage of being the second or later buyer is inheriting the same ownership rights and ongoing fees but avoiding the original depreciation that paid off the developer. Again clubs and timeshares are more like cars than real estate when it comes to pricing and ownership costs.


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## travelguy (Jun 2, 2007)

timeos2 said:


> A very interesting case study that can apply to timeshares as well. There is no such thing as "guaranteed" accommodations or fixed fees - those things simply cannot be planned out with any degree of certainty.
> 
> Also remember that the upfront costs for destination clubs or timeshares are mostly pay back to the developer. Little if any goes to the ongoing operation of the system.   It is the annual fees that actually support the day to day functions. So the value to being the first buyer and paying the full developer cost is in things like getting a specific use date or unit and will not represent any savings or guarantees on future costs. The advantage of being the second or later buyer is inheriting the same ownership rights and ongoing fees but avoiding the original depreciation that paid off the developer. Again clubs and timeshares are more like cars than real estate when it comes to pricing and ownership costs.




I can only speak for the High Country Club business plan as it's the only club that I've signed NDAs and viewed the plan, financials, projections, property purchase info, etc.  Having said that ... your statement is incorrect.

Destination Clubs (High Country Club) operates on the inverse of the timeshare business plan that you outline.  The end result is that the early buyer gets best price, lower fees and somewhat of a "guarantee" that the fees will stayed fixed with the c.p.i.

Contact HCC or your DC of choice, sign the NDA, and get the entire story on their biz plan.  You'll be pleasantly surprised how forthcoming and transparent they are with their info.


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## timeos2 (Jun 2, 2007)

*Nothing is guaranteed.*



travelguy said:


> I can only speak for the High Country Club business plan as it's the only club that I've signed NDAs and viewed the plan, financials, projections, property purchase info, etc.  Having said that ... your statement is incorrect.
> 
> Destination Clubs (High Country Club) operates on the inverse of the timeshare business plan that you outline.  The end result is that the early buyer gets best price, lower fees and somewhat of a "guarantee" that the fees will stayed fixed with the c.p.i.



As for paragraph one who or what is able to tell you, them or anyone what the properties will cost to operate in 10 years? How about utility costs? Taxes? Someone is buying the futures and then covering the costs if they go up or pocketing the difference if things go down? I doubt that. There are no guarantees. 

As for paragraph two that is a classic pyramid type scheme. The new comers pay more so the original investors get paid back or collect the "guarantees" but there are only so many newbies willing/able to buy in as the costs rise. Great to be on the top of the pyramid but the ride doesn't usually last long. Again if the CPI or whatever the base may be isn't enough to maintain and improve the resorts then they either deteriorate, fees rise above the "guarantee" or the whole system fails.  

If there are any guaranteed costs that work then either the current fees are too high to allow for future increases or the creator needs to get into prognostication for profit in a big way as plenty of people and companies would pay for that type of knowledge. 

A couple real life examples. I once purchased an antenna with great reception that brought in channels clearly from three different cities if you pointed it correctly. It included a lifetime guarantee. 11 years later it wasn't working so well anymore so I called the company that offered the guarantee. Amazingly they still were in business (although a year later they weren't) and they listened to my complaint and request to honor the lifetime warranty. "How old is it?"  11 years. "Yup, thats it's lifetime - 10 years".  

Or how about the two or three lifetime warranties I have on some major appliances? You guessed it  - the companies are long gone. So much for guarantees. 

At most you can hope they will honor whatever it is you are promised as best they can but blindly assuming that because you paid the full fare and got promises things will actually play out is a big and unlikely leap of faith. And it's your worry as whoever made those promises plan to be long gone and they have the upfront money spent. The buyers hold a piece of paper - not much leverage.


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## PerryM (Jun 2, 2007)

*An entire industry built on a foundation of cards*

To me the Tanner and Haley Bankruptcy exposed many things about the DC industry:

1)	Why all the secrecy?  Does one DC really think the other DCs can’t figure out what’s going on or is it to keep the info out of the public spot light of scrutiny? 

2)	Management cooked up a business plan that anyone of us could see was insane, why did their members agree to the insanity?  (Greed on their part is my guess)

3)	There are NO protections for the consumer at all – not one law, not one hurtle of stability, no special reporting, where was the CPA firm’s screaming reports?

4)	Another DC absorbed this bankrupt one – that seems impossible to me

5)	Were did the investors go?  Did they make out like bandits?

6)	The fundamental business plan for all DC’s is just nuts: members buy a condo for some guy and then pay him rent to use his condo that they paid for!  (BelleHavens excluded)

7)	The entire DC industry is sitting on a powder keg where a few bad stories by the Drive-By Media can cause a cascading failure for the entire industry – it’s way too leveraged for me, but I’m no expert on DC, just a gut feeling

8)	The whole industry is about 5 years old and about 90% of businesses go out of business within 10 years.


What the DC industry can do to address it’s shortcomings:

1)	100% transparency of operations – there is no Maxwell Smart going to steal secrets and create another DC

2)	CPA auditors report annually - no make that 6 months with follow up audits in 3 months

3)	No more than 15% or so leveraging – just enough to arrange for new properties entering the DC

4)	1 in/1 out way of getting your money out

5)	The 80% or so of the membership fee returned needs to be guaranteed somehow.  If the DCs paid cash and owned the units this would be very easy to write the protection for the members

It isn’t that hard to do the above if the guys who cook up these DCs didn’t want to be so greedy.  That to me is the fundamental flaw of DCs – too much greed on the founders part.  (BelleHavens is an exception)  This was ok when there were a few of these things but as bigger corporations get going on the DC idea (Which I really love as a concept) the greed will kill their companies.  The DC industry is ready to have a bloody period of consolidation which will start as a major player enters the field.

These are just my observations; I don't claim to have the credentials to render an actual verdict.


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## Elsway (Jun 3, 2007)

travelguy said:


> Destination Clubs (High Country Club) operates on the inverse of the timeshare business plan that you outline.  The end result is that the early buyer gets best price, lower fees and somewhat of a "guarantee" that the fees will stayed fixed with the c.p.i.
> 
> Contact HCC or your DC of choice, sign the NDA, and get the entire story on their biz plan.  You'll be pleasantly surprised how forthcoming and transparent they are with their info.



Belle Havens guarantees that fees will not grow at a rate that is greater than the urban CPI plus 5%.  The "plus 5%" component can really add up over time.  In fact, in real (inflation adjusted terms), your annual fees can double in roughly 15 years.  That is hardly comforting.

I am concerned that not all destination clubs allocate a portion of annual dues to a capital reserve account.  The capital reserve account is used to cover home improvements and large maintenance expenses (i.e. replacing a roof, etc...).  Without a capital reserve, members may be subjected to occasional special assessments.

Belle Havens annual dues are discussed in this document:  http://www.bellehavens.com/documents/AnnualDuesDemystified.pdf


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## Elsway (Jun 3, 2007)

PerryM said:


> To me the Tanner and Haley Bankruptcy exposed many things about the DC industry:






> 2)	Management cooked up a business plan that anyone of us could see was insane, why did their members agree to the insanity?  (Greed on their part is my guess)



Most of us probably make purchase decisions based on the following criteria:  "Is this product/service worth paying the cost?"  When buying a DC, we need to turn this question on its side:  "Is this product/service worth more than the cost?  And, if so, how can the service provider make good on its promises over the long run?"  From what I have observed on this board, HCC seems to be the club which is over-promising (i.e. headed down the same path as T&H.)



> 3)	There are NO protections for the consumer at all – not one law, not one hurtle of stability, no special reporting, where was the CPA firm’s screaming reports?



There will be laws to protect consumers.  The industry is trying to proactively craft those laws because they don't want to be covered by the same stringent regulations which govern time shares.




> 4)	Another DC absorbed this bankrupt one – that seems impossible to me
> 5)	Were did the investors go?  Did they make out like bandits?



The equity investors got wiped out.  The creditors got a partial recovery on their loans.  The members were invited to join Ultimate Resorts low end plan, with tight restrictions which relate to their ability to get a refund on their membership dues.  Most of the T&H members joined UR, and some of them paid a fee to upgrade their membership.  The properties and some of the leases were absorbed by Ultimate Resorts - thus forming the basis for UR to establish an Elite membership plan.




> 6)	The fundamental business plan for all DC’s is just nuts: members buy a condo for some guy and then pay him rent to use his condo that they paid for!  (BelleHavens excluded)



You are correct to exclude Belle Havens.  They are distinctive in their approach.

I was disturbed when I learned that Exclusive Resorts had sold all of their New York City appartments and are now leasing the properties.



> 7)	The entire DC industry is sitting on a powder keg where a few bad stories by the Drive-By Media can cause a cascading failure for the entire industry – it’s way too leveraged for me, but I’m no expert on DC, just a gut feeling



The gate function (3 in 1 out for membership resignations) provides a level of protection.  The winddown protection is a double edged sword.  The T&H bankruptcy provides a good lesson on what not to do.  And laws/regulations are coming (probably soon).




> 8)	The whole industry is about 5 years old and about 90% of businesses go out of business within 10 years.



I believe the industry will survive and prosper - mainly because the value proposition is so attractive compared to the purchase of a second home or a portfolio of timeshares.  Consolidation is likely.  And major hospitality companies will probably enter the business, eventually.


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## PerryM (Jun 3, 2007)

*WorldMark is the answer...*

The perfect DC to me already exists – it’s WorldMark (I already posted my views on this somewhere here, but I’ll recap):

The WorldMark DC would be 100% transparent, 100% Point oriented, 100% backed by ownership, and could allow members to participate 100% in real estate appreciation (ok, a handling fee would shrink that).

WM, the timeshare group, has screwed up their own fine plan by allowing the transient developer TrendWest/Cendant/Wyndham/Bozo the Clown to operate and screw up a fine club.

Just take the WM system and buy individual condos/homes and allow the club to easily sell these things if need be and the condo/home won’t morph into a timeshare.

Basically a WM owner can spend $22k (developer prices) and spend every Christmas in Maui for the rest of their natural lives. (MF is $500) Because they subsidize Maui with Illinois timeshares lets say that it really costs $30k for a 2BR week in Maui.  That WM condo is probably worth $750k.

Imagine multiplying that to $2 M and the cost would be $80k- developer pricing.  The MF would be close to the $1,500.

Now they buy a 2BR $2 M condo in Whistler, then NYC, then ….

It’s points oriented and off season would allow for more usage.  Need just the week end at 90 days out – no problem if its available.

This should be the trend of the DC industry – Points and not the old dinosaur Week system.


Imagine WM - the DC, buying a $2 M penthouse in a great location and selling enough points to stay a high demand week and it only costs you $80k.  This could be a holiday week every year too.  Need 3 weeks a year - $240k and a MF of $6k.  Isn't this what DC's are marketing now and with the exception of BelleHavens you have no protection and no real estate appreciation.

Don't think they couldn't morph their current system into this over a week-end?  It'd have another name and much more upscale but their Point system would allow all kinds of flexibility.  $1 M condos could be bought, $5 M condos could be bought.  It all works in a Point system.

P.S.
Just realize that a timeshare organization, who must follow strict real estate laws governing advertising, could just dump all those laws by calling this thing a DC.  It's that simple for a timeshare developer to quickly take over the DC industry by doing a simple replace "Timeshare" with "Destination Club" in their documents and ransack then entire DC industry in the blink of an eye.

Now just try to get out with the 3 in/1 out clause.

P.P.S.
WM now owns 5,000 condos and has 260,000 owners - a DC club could easily match this.  Many/most of WM's condos are individual condos bought within an existing condo complex - they did not build them.  The exact same purchases would be made for a DC but on a much higher quality.  WM owns every one of those 5,000 deeds and has NO loans outstanding - not one penny.  Totally debt free and unencumbered - what beautiful words to an investor.  If they can do it so can someone else with exactly the same system.

Since WM - the DC would not have to worry about all the restrictions of real estate laws they could start infomercials and heck have their own WM the DC network - "all Destination Clubs all the time".


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