# Equity vs. Non-equity revisited



## smbrannan (Jun 9, 2007)

This quote is from the "Fantastic Resource" thread, but I started a new one as it has nothing to do with online DC resources any more.



Elsway said:


> If destination clubs did not require an upfront deposit it would have to make a significant equity investment to purchase the properties and it would have to compensate for its carrying costs by charging much higher dues.
> 
> Today, you can join Belle Havens with a $200,000 deposit and annual dues of $17,500 for 30 days. Belle Havens is debt free, so your annual dues do not include a financing component. If Belle Havens wanted to change their business model to eliminate membership deposits, they could borrow against the homes in their portfolio and return all of the deposits to members. BH would then raise their annual dues to cover the financing (interest) cost on the debt and to provide an adequate return to equity holders.
> 
> ...



Not sure where you are going with this analysis.  I wasn't suggesting that an equity club, like BH, should take on leverage to reduce their member's upfront costs.   Each BH member can decide whether and how much to leverage their upfront payment to BH, which pretty much leads to the same outcome you describe.  (not sure about the tax implications though)

But, the point I was trying to make is this: if a non-equity club is levered, as they all seem to be, then the DC investors, rather than the members, should provide the equity.  After all it is the investors who  expect to reap the reward of appreciation of the properties, and any excess cash flow that they can skim from the MFs.  So it seems very logical, to me, that they should be willing to provide the equity needed to achieve this result, and they shouldn't need an interest free loan, a.k.a. refundable portion of member's deposit, to make their business work.

The reality is that the interest free loan that members provide is probably very risky.  Instead of paying a cash interest rate the matches the risk, the DC offers to provide the benefit of lower daily rental fees on their properties.  But most people have no idea whether the discount on daily rental rates that they receive is appropriate compensation for the very risky interest free loan that they have provided.

I'm suggesting that an alternative DC model could simply be based on a commitment by members to provide an annuity cash stream to the DC for use of the DC's properties.  In essence, the DC members enter into a take-or-pay contract with the DC.  This gives the DC certainty as to their cash flows, which means that they should be able to offer their properties at a lower daily cost than other providers (like VRBO, HomeAway, etc.) who have to charge a higher rate to cover the risk that the property will not be rented to its full capacity.

The members don't participate in the underlying real estate, which is exactly what happens in every DC out there today (except BH).  But they do receive the right to use luxury properties and haven't been induced to providing free financing to the DC.  And the DC investors, who do stand to gain if the properties appreciate, have put their own money at risk.  What could be more fair?


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## PerryM (Jun 9, 2007)

*WorldMark is the answer...again*

This is another attempt of mine to show how easy debt free and deed backed ownership models can be implemented in the DC industry....

Besides BelleHavens there are at least 2 other 100% debt free and 100% of the units owned by the club members organizations  – they are WorldMark and Club Intrawest.  I know WM inside and out but not sure on Club Intrawest.

If WM did not call themselves a timeshare but a DC then they could instantly form a new division WM the DC.  As far as I can imagine a simple global replace of “Timeshare” with “Destination Club” would to it.

The average WM condo is about $200k to $250k and higher in some locations.  If they simply multiplied everything by 4 then they would have a product that offers:

1)	$1 M condos/homes

2)	100% debt free

3)	 A prime week would cost 4 times the current price per credit (Point) of $1.85 = $7.40 or $74,000 per week

4)	MF of 4 times the 4¢ = 16¢ or a week’s MF is $1,600


If you wanted 2 prime weeks that’s $148,000 and MF of $3,200, 3 prime weeks is $222,000 and MF of $4,800.  Off season weeks cost less credits (Points).

These prices reflect the traditional timeshare fat of free gifts and all kinds of marketing efforts.  This shows that at least one timeshare developer already has the mechanism to take the exact timeshare sales structure and start to sell $1 M condos in a DC.  However they would be free of ALL timeshare laws.

Since the condos are not titled as a timeshare they can be sold at any time as whole-ownership.  WM could offer 60% of the CURRENT real estate value or 80% of the original membership fee and buy back the memberships on a 3 in/1 out basis.  Or, they could allow members to sell their memberships in a free market and not get involved with resales, or do both like Marriott.

So if WM, a timeshare developer, can offer 100% debt free and 100% ownership of deeds to their members with NO structural changes from their timeshare division why can't other DCs?  This should have the current DC market hustling a little faster in addressing these matters.


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## puffpuff (Jun 9, 2007)

Very Interesting .

Based on the above model, for two weeks, MF 3500, would you spend it on deeded WM for $148000 or a HCC Associate membership for $30000? 

I have a feeling a lot more people is going for the HCC simply because of price point .  I could be wrong.


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## BocaBum99 (Jun 10, 2007)

smbrannan said:


> This quote is from the "Fantastic Resource" thread, but I started a new one as it has nothing to do with online DC resources any more.
> 
> 
> 
> ...



I completely agree with your underlying thesis.  The upfront deposit is definitely a free financing mechanism for the DC.  The DC industry doesn't want its members to view it as such.  They just want them to view it as an alternative to the pass book where they would normally park their cash receiving 2-4% APR.   It isn't, unless of course the FDIC is now insuring such deposits.  So, assuming a risk adjusted cost of 5% or less is really a non-financially sound business assumption.  I'd say that 10% or more is probably more appropriate given the payment priority of members vs. creditors should the DC go belly up.  I could be wrong, but members are probably last in priority for liquidation of a DC.  If you are the first mortgage holder on any of the properties, you are first in line to be paid back upon liquidation and you get 7% or more for non-owner occupied financing.  I would probably use a percentage or two above a bond yield for a comparable company.  Certainly more than 10%.

Once you determine that risk adjusted cost of capital, then you need to add in the annual dues, any expected inflation and the probability that you won't use all of your use time.   Then, you can calculate your expected average cost of accommodations per night of usage.  

If you really want to capture a true expected cost, you should create a conservative estimate of how long you will keep the DC and the capital that will likely be returned.  If you are bullish on the DC, you will yield more cash back later.  Then, discount all the cash flows back down to an average cost per night of stay.

For me, if I had the spare cash lying around and the cost were 1/2 of what I could rent equivalent accommations for, then I would do it.  Otherwise, I wouldn't.


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## Elsway (Jun 10, 2007)

> Not sure where you are going with this analysis.



I was merely addressing your question related to whether a DC could eliminate membership deposit risks by financing the properties on their own and eliminating the upfront deposit.



> But why does there have to be a member deposit at all? If this is an alternative to VRBO, Orbitz etc. why not jut have a 10 or 20 year agreement to pay annual dues in exchange for access rights to the DC's properties. How the DC finances the properties is their business.



I used Belle Havens as an example and assumed that this DC returned all membership deposits and adopted a pure rental model.


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## smbrannan (Jun 10, 2007)

BocaBum99 said:


> If you really want to capture a true expected cost, you should create a conservative estimate of how long you will keep the DC and the capital that will likely be returned.  If you are bullish on the DC, you will yield more cash back later.  Then, discount all the cash flows back down to an average cost per night of stay.



Question for folks here who took the plunge and bought into a DC.

Did you discuss this with your financial advisor and if so did they give you any meaninful insights?

I've never used an advisor, preferring to do things myself, even if  that means being uninformed about the latest and greatest financial products on the market.

Because it is a large purchase, and there are certainly finanical risks involved, this would seem to be a litmus test for any financial advisor.


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## puffpuff (Jun 10, 2007)

BocaBum99 said:


> I completely agree with your underlying thesis.  The upfront deposit is definitely a free financing mechanism for the DC.  The DC industry doesn't want its members to view it as such.  They just want them to view it as an alternative to the pass book where they would normally park their cash receiving 2-4% APR.   It isn't, unless of course the FDIC is now insuring such deposits.  So, assuming a risk adjusted cost of 5% or less is really a non-financially sound business assumption.  I'd say that 10% or more is probably more appropriate given the payment priority of members vs. creditors should the DC go belly up.  I could be wrong, but members are probably last in priority for liquidation of a DC.  If you are the first mortgage holder on any of the properties, you are first in line to be paid back upon liquidation and you get 7% or more for non-owner occupied financing.  I would probably use a percentage or two above a bond yield for a comparable company.  Certainly more than 10%.
> 
> Once you determine that risk adjusted cost of capital, then you need to add in the annual dues, any expected inflation and the probability that you won't use all of your use time.   Then, you can calculate your expected average cost of accommodations per night of usage.
> 
> ...


Equivalent properties at VBRO are renting at twice the equivalent cost per night factoring in all the opportunity cost etc per Sherpareport.com spreadsheet. 

In other words, DC is about half the price of just renting, but you hvae to front the intial fee. 

There is an addiiton benefit of DC is the lock-in  of MF to CPI while rental can go up a lot more based on market price. 

Would you join DC?


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## BocaBum99 (Jun 10, 2007)

puffpuff said:


> Equivalent properties at VBRO are renting at twice the equivalent cost per night factoring in all the opportunity cost etc per Sherpareport.com spreadsheet.
> 
> In other words, DC is about half the price of just renting, but you hvae to front the intial fee.
> 
> ...



I'd have to do my own analysis and then further dive into due diligence.  At this point in time, my needs are more than met by timesharing.

6-12 months ago, DCs were an absolute no.  Now, they are a definite maybe.

I'd probably do it if I could find an investment angle.  However, it's my perception that DCs are really set up for use, not for profit.


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## PerryM (Jun 10, 2007)

BocaBum99 said:


> I completely agree with your underlying thesis.  The upfront deposit is definitely a *free financing mechanism for the DC*.  The DC industry doesn't want its members to view it as such.  They just want them to view it as an alternative to the pass book where they would normally park their cash receiving 2-4% APR.   It isn't, unless of course the FDIC is now insuring such deposits.  So, assuming a risk adjusted cost of 5% or less is really a non-financially sound business assumption.  I'd say that 10% or more is probably more appropriate given the payment priority of members vs. creditors should the DC go belly up.  I could be wrong, but members are probably last in priority for liquidation of a DC.  If you are the first mortgage holder on any of the properties, you are first in line to be paid back upon liquidation and you get 7% or more for non-owner occupied financing.  I would probably use a percentage or two above a bond yield for a comparable company.  Certainly more than 10%.
> 
> Once you determine that risk adjusted cost of capital, then you need to add in the annual dues, any expected inflation and the probability that you won't use all of your use time.   Then, you can calculate your expected average cost of accommodations per night of usage.
> 
> ...



*Unsecured* is the key missing phrase which the DC industry seems to have decided that they want and folks buying a membership agree to provide.


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## PerryM (Jun 10, 2007)

puffpuff said:


> Equivalent properties at VBRO are renting at twice the equivalent cost per night factoring in all the opportunity cost etc per Sherpareport.com spreadsheet.
> 
> In other words, DC is about half the price of just renting, but you hvae to *front the intial fee*.
> 
> ...



The money used to generate the rental price for VRBO can come form 100% guaranteed sources like funds in a FDIC account.  Or, the funds backed with $25+ M in insurance from stock accounts.

I personally just don't know how to relate $200k in an unsecured membership fee in a DC to $200k in my stock portfolio which I average 13% per year and backed with all kinds of insurance.

That $200k in my stock account can be tapped for 5% each year and allow room for taxes and inflation to adjust the account.  That $10,000 + the year MF from a DC go a long way to get VRBO rentals.  Plus I can sleep at night.


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## Bourne (Jun 10, 2007)

smbrannan said:


> Question for folks here who took the plunge and bought into a DC.
> 
> Did you discuss this with your financial advisor and if so did they give you any meaninful insights?
> 
> ...



I can answer this question as I did discuss it with my financial advisor.

His advice on the membership was that it is not an investment that would generate returns. The money would have to come out of vacation expenses bucket. 

I am assuming that the reason that he was in favor of the membership because we had discussed my timeshare ownership in details in the previous meetings and the fact that the DC membership was being paid from the proceeds of the sale of timeshares. 80% return on original assets was acceptable to him.  

Then again, we have a clear demarkation of responsibilities. The wife and I make the money. He has full control on managing the investable assets based on our risk levels. i.e. he does not have to confirm buys/sells before executing them. He advises us on money going towards non investable assets(e.g. investment property, commercial RE) but we have the final say.


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## Elsway (Jun 10, 2007)

PerryM said:


> The money used to generate the rental price for VRBO can come form 100% guaranteed sources like funds in a FDIC account.  Or, the funds backed with $25+ M in insurance from stock accounts.
> 
> *I personally just don't know how to relate $200k in an unsecured membership fee in a DC to $200k in my stock portfolio which I average 13% per year and backed with all kinds of insurance.*
> 
> That $200k in my stock account can be tapped for 5% each year and allow room for taxes and inflation to adjust the account.  That $10,000 + the year MF from a DC go a long way to get VRBO rentals.  Plus I can sleep at night.



13% _insured_ - show me where???


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## smbrannan (Jun 10, 2007)

puffpuff said:


> Equivalent properties at VBRO are renting at twice the equivalent cost per night factoring in all the opportunity cost etc per Sherpareport.com spreadsheet.
> 
> In other words, DC is about half the price of just renting, but you hvae to front the intial fee.
> 
> ...




Sherpa and Helium seem to perpetuate the notion that something in the order of 5% is a reasonable assumption.

If you change the cost of capital assumption in the Sherpa spreadsheet to something that better reflects the risk of a subordinate loan (I used 11%) then the cost per night goes up by materially.  Probably still cheaper than renting, but not such a screaming bargain.

Re: locking in MF - remember rental rates could also go down, as they did after 9-11.


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## Elsway (Jun 10, 2007)

*Equity versus Hybrid versus Standard*

Let's be clear about the distinction between the standard destination club (Exclusive Resorts) and a hybrid club (BelleHavens):

1)  Neither are equity clubs.  Crescendo is an equity club.  Equity clubs can only market to accredited investors (same restrictions as hedge funds).  Accredited investors must have $1mm in liquid net worth or have earned at least $200,000 in two of the last three years.

2) The hybrid club (BH) refunds membership fees based on the current' years membership.  So, if you join BH this year and pay $200,000 and you decide to resign in five years when the membership fee is $400,000, you will receive 90% of $400,000 when you resign (i.e. $360,000).  This amounts to a profit of $160,000.

There are no guarantees that membership fees will rise and there are no guarantees that the club will be in a position to make good on their refund promise.  But, as with all investments, there are risks associated with the possibility of upside.

Yes, I used the term "investment".  We can adopt many different views as to the quality of the investment.  Some of us will buy 1967 Mustangs and regard them as investments - others will regard them as play toys.  But, given the potential for gain, I view '67 Mustangs and Hybrid Destination Club memberships as (speculative) investments.  The same does not apply to standard destination clubs such as Exclusive Resorts.


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## PerryM (Jun 10, 2007)

Elsway said:


> 13% _insured_ - show me where???




In my dreams.

What I meant to say is that the DOW averages 13.3% since 1933 and all my stock investment is in one stock - DIA.  This is an insured stock account backed with $25+ M insurance against hanky panky by the exchange, the company that does the actual trades, the company with the name I have the account with, and the actual electronic certificates that prove that I own the stock.  That's what I meant to say.


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## PerryM (Jun 10, 2007)

Elsway said:


> Let's be clear about the distinction between the standard destination club (Exclusive Resorts) and a hybrid club (BelleHavens):
> 
> 1)  Neither are equity clubs.  Crescendo is an equity club.  Equity clubs can only market to accredited investors (same restrictions as hedge funds).  Accredited investors must have $1mm in liquid net worth or have earned at least $200,000 in two of the last three years.
> 
> ...



It's my understanding by reading the BH literature and asking questions of their management that a BH member is a stock holder in BH which holds the deeds to the properties.  Is this everyone's understanding?


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## BocaBum99 (Jun 10, 2007)

PerryM said:


> *Unsecured* is the key missing phrase which the DC industry seems to have decided that they want and folks buying a membership agree to provide.



It's probably far worse than an unsecured loan or security.  I doubt it's even considered credit or debt.  I wonder how it shows up on the balance sheet of the DC.  I'll bet it's just labelled as "member deposits" and classified as a contingent liability.  It the DC goes bankrupt, then the contingency can never be met (2 in, 1 out or something like that).  So, it can be then wiped off the balance sheet and the member gets back nada.

If it were considered debt, then this debt would be paid prior to stockholders.  I'll bet member deposits are paid after all secured loans, all mechanics liens, all vendors and all stockholders / partners of the DC.  In other words, last in line to be paid back.  Does anyone know the priority of DC payback of the member deposits?


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## BocaBum99 (Jun 10, 2007)

Bourne said:


> I can answer this question as I did discuss it with my financial advisor.
> 
> His advice on the membership was that it is not an investment that would generate returns. The money would have to come out of vacation expenses bucket.
> 
> ...



Sure, your financial advisor views this as a luxury expense item akin to a country club membership with a big upfront deposit or a new Bentley.  There is no assessment that he needs to give you.  You have a personal annual budget for travel and/or luxury items and this came out of it.  The only decision is "do you want it?"  and "can you afford it?"  If the answer is "yes" to both, then that's all your advisor needs to validate.

That the asset at any given time has a market value means whenever you calculate your net worth, you simply estimate the current market value of that asset and you include it on your personal balance sheet.  This is a fine method of accounting for your timeshares or DCs or country club memberships or exotic cars.

What always concerns me is when people use fuzzy logic to justify a purchase without regards for the risks incurred.  As I said, if I were in the market for luxury accommodations and I had a spare couple hundred thousand burning a hole in a tax free money market account, I would do a more rigorous assessment of DCs and determine if becoming a member would be a better financial decision than simply renting.  My risk adjusted expected savings would have to be at least 50% of planned expenses.  If it is, then it would be worth using spare cash to reduce expenses longer term.  So, I am viewing the member deposit as an investment.  An investment in reducing my planned travel costs.  On the other hand, if I just wanted the DC as a trophy property, I would buy it simply because I wanted it.  The practical side of me won't let myself do that, however.  I personally can't justify a $200k cash outlay for a luxury purchase. 

I view all purchases of more than $5000 as either investments or luxury items.  And, I always evaluate a purchase decision based on the alternatives of buying, renting, likely usage, etc.  I have a different criteria for evaluating investments vs.  luxury purchases.  If I see a $10000 flat screen TV that I want.  I just buy it because I want it.  I acknowledge that to myself.  I don't try to come up with false justification criteria such as the amount of savings that I will receive by not going to the movies and being able to use my own home theatre instead.  I think lots of people do this type of analysis and competely delude themselves.

When evaluating investments, I turn everything into a risk adjusted return on invested capital computation.   And, I map my investment portfolio against my short and long term needs for capital.  In that evaluation process, I am brutal in attacking bad assumptions because real money is at stake.  

Why did I write this?  I guess because I hope that timesharers and potential DC owners would use some sound financial principles in evaluating such purchases.  Know why you are going into it and learn how to do the financial assessment of whether or not a purchase oppotunity meets your needs.  You are either spending the money for a luxury item, a cost replacement item or a financial investment.   If we all did that, there would be far fewer disappointed purchasers.


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## hipslo (Jun 10, 2007)

PerryM said:


> It's my understanding by reading the BH literature and asking questions of their management that a BH member is a stock holder in BH which holds the deeds to the properties.  Is this everyone's understanding?



This is in fact how Crescendo is set up (cant give any details due to Non Disclosure Agreement), not sure about BH, though it seems unlikely or they'd be subject to the same securities law restrictions that Crescendo is.  What is more likely is simply that that BH members have a contract right to be cashed out based on then prevaling membership fee, rather than an actual equity interest in anything.  If anyone has further info on the BH legal structure, I would be interested in hearing about it, as I have no first hand knowledge.


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## Elsway (Jun 10, 2007)

PerryM said:


> It's my understanding by reading the BH literature and asking questions of their management that a BH member is a stock holder in BH which holds the deeds to the properties.  Is this everyone's understanding?



As a member of BH, you can profit to the extent that BH raises its membership deposits - this (membership dues increase) can occur independent of the appreciation in the underlying real estate portfolio (i.e. dues can rise faster or slower than real estate values).  Also, your share of the club is not represented by registered securities.

True equity destination clubs allow you to participate as a registered shareholder - and the value of your investment (deposit) is equal to the fair market value of the underlying real estate portfolio (i.e. the future membership deposit level does not affect the value of your investment.)  These clubs can also have pre-specified dates at which the club will liquidate (I think Crescendo will liquidate after ten years) at which time your equity is converted to cash.

If BH was a true equity destination club, it would have to comply with securities laws which limit participation to accredited investors.

When you ask for information from Crescendo, the first thing they do is e-mail you a form which you must complete to attest to your accredited investor status.  Only then can you see the prospectus.

Some of the distinctions between BelleHavens and a true equity destination club are minor.  The differences between BelleHavens and the standard clubs which offer no asset backing for deposits are much more significant.


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## hipslo (Jun 10, 2007)

Elsway said:


> Some of the distinctions between BelleHavens and a true equity destination club are minor.



With "true" equity DCs, like Crescendo, you actually own an interest in the entity that owns the homes.  In a liquidation scenario, after any debts and other third party creditors are paid off, the members and the club sponsors would share in any remaining proceeds when the properties are sold.  With BH, that isnt the case, I dont think.  Isnt the right to receive 80% of current membership fees simply an unsecured promise of the club?  If the DC market changed and there were no longer any members willing to sign up, or if the membership fees actually went down due to changes in the marketplace (which could presumably happen even if the underlying properties either went up in value or the value stayed constant), the members who wanted to be cashed out based on the underlying value of the real estate portfolio would be "up the creek", so to speak.  That seems like somewhat more than a "minor" distinction, to me. 

If and when a "true" equity DC in the Crescendo model comes along, with a lower price entry point than Crescendo (maybe in the 75k to 150k range), that carries with it a rental program managed by the club that the members can participate in for time they are entitled to but can't use, and that carries a debt level on the prtfolio of no more than maybe 10 - 25% (no debt, ideally, though in the start up phase that could be unrealistic), I will likely sign up.  That would be a REAL investment, with the ability to use the properties nothing more than a nice fringe benefit, just like a whole ownership second home purchase, just with more diversification and more variety of destinations available for use.  Until then, I am happy to sit on the sidelines and absorb all of the wisdom (and sometimes the lack thereof) that is presented on this forum.

Of course its possible that the above model may never materialize.  But, like PerryM, I cant see why it shouldnt, eventually.  And I am in no rush to shell out the 75 - 150k in the meantime, as my time horizon for the sort of usage pattern that the DCs provide is still many years down the road.  

This industry is still in its infancy.  Those of you who have taken the plunge early will either be amply rewarded for being early adopters, or not, as the industry matures, and taking on that risk, especially at the HCC price point, seems very reasonable, so long as you go in with eyes open,as it seems like you all have, as a general matter.  However it shakes out, these are very interesting times as a whole new industry is in the process of forming.


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## Elsway (Jun 10, 2007)

> Originally Posted by Elsway
> Some of the distinctions between BelleHavens and a true equity destination club are minor.



Notice that I said "some" of the distinctions are minor (not "all").

The fact is that BelleHavens' members own all of the the club's assets debt free.  And they are likely to benefit from any material appreciation in the underlying real estate portfolio.  They do not, however, own registered shares (a fairly minor distinction), and they depend on new members to provide the liquidity needed for them to cash in on their paper gains.  In contrast, Crescendo shareholders can capture paper profits so long as the company can liquidate its real estate assets at appraised values (not a slam dunk scenario in a soft real estate market - and can also depend on the value of the dollar in relation to the Euro (because some properties are in Europe)).


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## hipslo (Jun 10, 2007)

Elsway said:


> The fact is that BelleHavens' members own all of the the club's assets debt free.



I am curious to understand the details of that.  I understand that the CLUB owns the assets debt free, and that is important.  Is it the case, though, that the MEMBERS own the assets, or that the members own a real equity interest in the Club?  I didnt think that was the case.  What exactly is it that the members own?  I thought it was more along the lines of just a contract right to receipt of a payment based on current membership fees - which may or may not move in line with underlying real estate values, and which, legally, is a pretty different animal from a true ownership interest in those underlying assets.  Sort of like a phantom stock right, as opposed to a real equity interest, by way of analogy.

(By the way, I am not intending to attack BH, which seems to be doing a lot of things right, or your description of it, I am just trying to clarify in my own mind how BH is set up, legally, as compared to Crescendo  - I cant help it, I guess, since I analyze and structure real estate joint ventures, from a legal standpoint, for a living, and have seen, many times, the difference that  legal  structure can make, at the end of the day, especially when things dont go as planned.)

FWIW, Crescendo is not without its own issues, as well, based on the materials I have seen, though it seems closer to a true "equity" model than anything else out there at the moment.


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## puffpuff (Jun 10, 2007)

hipslo said:


> I am curious to understand the details of that.  I understand that the CLUB owns the assets debt free, and that is important.  Is it the case, though, that the MEMBERS own the assets, or that the members own a real equity interest in the Club?  I didnt think that was the case.  What exactly is it that the members own?  I thought it was more along the lines of just a contract right to receipt of a payment based on current membership fees - which may or may not move in line with underlying real estate values, and which, legally, is a pretty different animal from a true ownership interest in those underlying assets.  Sort of like a phantom stock right, as opposed to a real equity interest, by way of analogy.
> 
> (By the way, I am not intending to attack BH, which seems to be doing a lot of things right, or your description of it, I am just trying to clarify in my own mind how BH is set up, legally, as compared to Crescendo  - I cant help it, I guess, since I analyze and structure real estate joint ventures, from a legal standpoint, for a living, and have seen, many times, the difference that  legal  structure can make, at the end of the day, especially when things dont go as planned.)
> 
> FWIW, Crescendo is not without its own issues, as well, based on the materials I have seen, though it seems closer to a true "equity" model than anything else out there at the moment.


With Cresendo, members, being true owners and get a K1 at the end of year year, may be stuck with paying capital gains tax even as the club sell and change properties , even where there is no capital distribution to the members from gain on sale. 

True investments does have its privileges and downside as well.


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## vineyarder (Jun 10, 2007)

> If it were considered debt, then this debt would be paid prior to stockholders. I'll bet member deposits are paid after all secured loans, all mechanics liens, all vendors and all stockholders / partners of the DC. In other words, last in line to be paid back. Does anyone know the priority of DC payback of the member deposits?



I don't know about others, but with PE and UR the priority is as follows:

1)  Mortgage or secured debt holder
2)  Members
3)  Other unsecured creditors
4)  Clubs investors / equity holders

BTW, here's an interesting powerpoint on Equity vs. non-Equity DC's, Timeshares, and industry regulation:

http://www.starresortgroup.com/presentations/03_JimTousignant.ppt


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## Elsway (Jun 10, 2007)

hipslo said:


> I am curious to understand the details of that.  I understand that the CLUB owns the assets debt free, and that is important.  Is it the case, though, that the MEMBERS own the assets, or that the members own a real equity interest in the Club?  I didnt think that was the case.  What exactly is it that the members own?  I thought it was more along the lines of just a contract right to receipt of a payment based on current membership fees - which may or may not move in line with underlying real estate values, and which, legally, is a pretty different animal from a true ownership interest in those underlying assets.  Sort of like a phantom stock right, as opposed to a real equity interest, by way of analogy.
> 
> (By the way, I am not intending to attack BH, which seems to be doing a lot of things right, or your description of it, I am just trying to clarify in my own mind how BH is set up, legally, as compared to Crescendo  - I cant help it, I guess, since I analyze and structure real estate joint ventures, from a legal standpoint, for a living, and have seen, many times, the difference that  legal  structure can make, at the end of the day, especially when things dont go as planned.)
> 
> FWIW, Crescendo is not without its own issues, as well, based on the materials I have seen, though it seems closer to a true "equity" model than anything else out there at the moment.



BelleHavens members own 100% of the equity of the entity which owns the real estate.  The real estate is owned by BelleHavens, not the members.  But, given that their is no debt at BelleHavens, the members have a priority interest in the real estate.

To preserve the membership's priority status, BelleHavens should covenant to not incur any indebtedness (including operating leases) or to involve BelleHavens in a merger or acquisition which violates the intent of this covenant.  I am not sure how they handle this issue.  I am going to speak to management this week, so I will have more answers to detailed questions - and I will correct any of my assumptions which turn out to be faulty.

Banyan partners has a contractual relationship with BelleHavens.  They manage the club and benefit in two ways:  1)  They receive a share of the annual membership dues via a management fee, and 2) They, apparently, apply a markup to the cost of the the properties which they acquire for BelleHavens.  This markup is not something that is revealed in any of the public documents, but others on this board have testified as to its existence.  I will investigate further...


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## Elsway (Jun 10, 2007)

vineyarder said:


> I don't know about others, but with PE and UR the priority is as follows:
> 
> 1)  Mortgage or secured debt holder
> 2)  Members
> ...



It is important to consider whether UR has legally committed to not distributing (dividending) assets to shareholders (via restricted payment covenant).  In a downside scenario, UR could sell assets, pay off mortgage debt and distribute the excess proceeds to shareholders.  Members (and any other unsecured creditors) are left holding the bag.


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## PerryM (Jun 10, 2007)

*BelleHavens wind down provisions*

This is one of the questions answered by the sales manager at BelleHavens:

8) If the Club should go belly up, who get's what in what order?

A) Because BelleHavens owns all of the real estate free of the debt, the members are the first and only people in line to receive the proceeds.


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## Steamboat Bill (Jun 10, 2007)

One of the factors in deciding risk vs reward of joining a DC is your entry costs. Because HCC has the lowest entry costs of any DC, it makes sense that they will appeal to the mass market and compete with timeshares. There can be lots of debate on ideal business models of each DC, and this is the reason there are several to choose from. 

I for one am bullish on the DC industry and wish I could join several of them. After evaluating them, it came down to which one gave me the best bang of the buck and had the lowest costs associated with them. For me, the answer was HCC.

I alos like PE, Bellehavens, ER, UR and Quintess. 

If you stick with the top 5 or so DCs you should be safer with numbers. I am sure there will be future consoladiation in this market but I hope that there will be no more failures.


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## BocaBum99 (Jun 10, 2007)

vineyarder said:


> I don't know about others, but with PE and UR the priority is as follows:
> 
> 1)  Mortgage or secured debt holder
> 2)  Members
> ...



This is good.  It reduces the risk significantly.  Before you buy a DC, you should know this factoid about it.

I don't like the 2 in, 1 out rule either.  That can make your membership non-marketable like stock in a private company.  There is usually a significant discount that an investor in a private company gets for buying stock in a private company.  I guess that could be considered the ground floor pricing with significant expectation for increases over time.


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## hipslo (Jun 10, 2007)

Elsway said:


> BelleHavens members own 100% of the equity of the entity which owns the real estate.



Are you sure that is the case?  If it is, then the issuance of interests in that entity to the members constitutes the issuance of a security, and the same securities laws that apply to Cresecendo would apply equally to BH.  Thus, unless the issuance of securities is being conducted pursuant to a securities filing with the SEC, which I dont think is the case (someone correct me if BH has filed offering documents with the SEC - they would then be available to anyone who wanted to see them), the offering would also have to be limited to accredited investors, like Crescendo's offering, or some other exemption would have to apply.  I dont think that the BH offering is being conducted that way.  I therefore think it is unlikely that the BH members own the equity interests in the entity that owns the real estate.  If they did, it seems like BH and Crescendo would be essentially identical in structure, and I didnt think that was the case.  Is there something definitive you can refer me to that indicates that the BH members own the equity interests in the entity that owns the real estate, as I would really like to understand the BH structure.


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## hipslo (Jun 10, 2007)

PerryM said:


> This is one of the questions answered by the sales manager at BelleHavens:
> 
> 8) If the Club should go belly up, who get's what in what order?
> 
> A) Because BelleHavens owns all of the real estate free of the debt, the members are the first and only people in line to receive the proceeds.



But do the members own the equity in BH?  That ought to be the key question.  If they don't, all they have is a contractual, unsecured promise to refund 80% of the current membership fee.  If BH goes belly up, isnt the current membership fee zero?


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## hipslo (Jun 10, 2007)

Elsway said:


> It is important to consider whether UR has legally committed to not distributing (dividending) assets to shareholders (via restricted payment covenant).  In a downside scenario, UR could sell assets, pay off mortgage debt and distribute the excess proceeds to shareholders.  Members (and any other unsecured creditors) are left holding the bag.



Unless the members of BH own the equity in the entity that owns the real estate, that would also be the case for BH, notwithstanding the contract right to receive 80% of the current membership fee on exit.  If BH is structured so that the members own the interests in the entity that owns the property, does anyone know why it isnt subject to the same securities law restrictions on its marketing as is Crescendo?


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## NeilGoBlue (Jun 10, 2007)

hipslo said:


> But do the members own the equity in BH?  That ought to be the key question.  If they don't, all they have is a contractual, unsecured promise to refund 80% of the current membership fee.  If BH goes belly up, isnt the current membership fee zero?



Sure,

But BH is not allowed to acquire debt, so therefore it would for all intensive purposes impossible for members to lose everything (assuming there isn't fraud).


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## hipslo (Jun 10, 2007)

I just took a quick look at the BH website.  Their marketing materials there say that membership interests are not "securities" and that the club is a  nonprofit entity that owns the properties.  This would lead me to ask some very serious questions, since the "members" of a nonprofit entity do not "own" the entity, the assets must be dedicated to charitable purposes and are essentially owned by the public, not by any private party. Also, to the extent that they make any claims about the right to participate in future appreciation, interests could very well be securities and the club could have to answer to the SEC if the SEC ever determines that the interests are securities.  If I were seriously investigating BH (I am not at this time), I'd be asking for a written opinion of reputable legal counsel that the interests are not securities, and that the nonprofit characterization of the entity would not have any adverse effect on the claimed asset protection that club ownership of the properties is supposed to provide.


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## hipslo (Jun 10, 2007)

puffpuff said:


> With Cresendo, members, being true owners and get a K1 at the end of year year, may be stuck with paying capital gains tax even as the club sell and change properties , even where there is no capital distribution to the members from gain on sale.
> 
> True investments does have its privileges and downside as well.



Absolutely true (as is the case for any investment in a real estate entity (other than a REIT)).  Typically (though not always) the agreements would provide for tax distributions to be made in that case so as to avoid that sort of "phantom" income.  I dont recall  whether or not that is the case for Crescendo.


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## PerryM (Jun 10, 2007)

hipslo said:


> I just took a quick look at the BH website.  Their marketing materials there say that membership interests are not "securities" and that the club is a  nonprofit entity that owns the properties.  This would lead me to ask some very serious questions, since the "members" of a nonprofit entity do not "own" the entity, the assets must be dedicated to charitable purposes and are essentially owned by the public, not by any private party. Also, to the extent that they make any claims about the right to participate in future appreciation, interests could very well be securities and the club could have to answer to the SEC if the SEC ever determines that the interests are securities.  If I were seriously investigating BH (I am not at this time), I'd be asking for a written opinion of reputable legal counsel that the interests are not securities, and that the nonprofit characterization of the entity would not have any adverse effect on the claimed asset protection that club ownership of the properties is supposed to provide.



This is great!

So why doesn't someone like the Helium Report ask these tough questions of the DC industry?

I know.


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## hipslo (Jun 10, 2007)

PerryM said:


> This is great!
> 
> So why doesn't someone like the Helium Report ask these tough questions of the DC industry?
> 
> I know.



Again, I am not attacking BH and my posts shouldn't be taken as if I am.  There could very well be perfectly acceptable answers to these questions, I just dont yet know what they are, as I am not formally looking into acquiring a BH membership at this time, rather I am just trying to learn as much as I can about the industry, generally, as it continues to evolve.

Perry, nice to see you posting again.


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## Elsway (Jun 11, 2007)

hipslo said:


> I just took a quick look at the BH website.  Their marketing materials there say that membership interests are not "securities" and that the club is a  nonprofit entity that owns the properties.  This would lead me to ask some very serious questions, since the "members" of a nonprofit entity do not "own" the entity, the assets must be dedicated to charitable purposes and are essentially owned by the public, not by any private party. Also, to the extent that they make any claims about the right to participate in future appreciation, interests could very well be securities and the club could have to answer to the SEC if the SEC ever determines that the interests are securities.  If I were seriously investigating BH (I am not at this time), I'd be asking for a written opinion of reputable legal counsel that the interests are not securities, and that the nonprofit characterization of the entity would not have any adverse effect on the claimed asset protection that club ownership of the properties is supposed to provide.



BH does not claim that members participate in the appreciation of the real estate.  They merely promise that the refundable portion of a members deposit will be based on the future level of membership deposits.

In a downside scenario, BH members have all of the rights of ownership.

I haven't seen the membership documents yet.  When I do, I will compare to what I read on the website.  http://www.bellehavens.com/me_protection.php

The BH website makes it clear that the members own the "non-profit organization that carries no liabilities".


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## hipslo (Jun 11, 2007)

Elsway said:


> The BH website makes it clear that the members own the "non-profit organization that carries no liabilities".



That's what I am questioning - I dont see how the members can actually "own" a nonprofit entity - in any event, there is a prohibition on any party receiving any "private inurement" from a nonprofit entity.  It is possible that they are using the term "nonprofit" in a different, non-technical manner, in that it is not a true non-profit, but that it is going to be run so as not to generate any profits.  Anyway, if it were me, these would be some of the questions I'd ask about their legal structure.

Also, the promise that members share in increases in membership fees, which themselves are supposed to rise with increasing value of the real estate, seems like a pretty fine distinction to me, from a legal standpoint - if I were with the SEC's enforcement division that might be something I'd find worth looking into further - in any event, it appears a little bit "close to the line", even if its technically ok from a securities law standpoint.


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## Elsway (Jun 11, 2007)

hipslo said:


> That's what I am questioning - I dont see how the members can actually "own" a nonprofit entity - in any event, there is a prohibition on any party receiving any "private inurement" from a nonprofit entity.  It is possible that they are using the term "nonprofit" in a different, non-technical manner, in that it is not a true non-profit, but that it is going to be run so as not to generate any profits.  Anyway, if it were me, these would be some of the questions I'd ask about their legal structure.
> 
> Also, the promise that members share in increases in membership fees, which themselves are supposed to rise with increasing value of the real estate, seems like a pretty fine distinction to me, from a legal standpoint - if I were with the SEC's enforcement division that might be something I'd find worth looking into further - in any event, it appears a little bit "close to the line", even if its technically ok from a securities law standpoint.



They are probably using the terms "ownership" and "nonprofit" metaphorically.  The club is structured in way which simulates ownership by the members?  And the club is not a "nonprofit" entity in a legal sense, but operates without a profit objective (its objective is to provide an attractive product/service to members, who in turn create revenues for the management company via management fees and property development markups.

I don't think they claim that there is a one-to-one relationship between real estate values and membership deposits.  In fact, if you examine their website they are scheduled to announce two price increases in the coming months - and neither of these price increases are predicated on real estate price appreciation (they depend on membership growth).


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## hipslo (Jun 11, 2007)

Elsway said:


> They are probably using the terms "ownership" and "nonprofit" metaphorically.  The club is structured in way which simulates ownership by the members?  And the club is not a "nonprofit" entity in a legal sense, but operates without a profit objective (its objective is to provide an attractive product/service to members, who in turn create revenues for the management company via management fees and property development markups.



I suspect you are correct about both of those points, though it would be interesting to know the actual details.

 Personally, I dont think I'd take the plunge on a DC unless I was convinced that the ownership was real, not metaphorical, but my goals for doing so dont seem to be the same as most of the posters on this forum.  I am not prepared to just write off the expense as a lifestyle decision, I'd like to truly own a share of a diversified portfolio of resort properties that I could also use, in lieu of receiving cash dividends, like a typical REIT would pay.  I dont think such a thing really exists yet (though Crescendo is pretty close - albeit at a price point that is much higher than I am interested in).  In time, hopefully it will.  

I purchased a vacation home 7 years ago, and it has roughly tripled in value since then.  My family and I use it all the time - what's the cost per night, using Bill's anlysis, in that case?  Its actually a large negative number.  Why cant this simple concept be grafted onto the DC model, as well?  I'd be perfectly willing to take the downside risk, since, with great properties in great locations, over the long term, I believe that risk to be slim to none.


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## Elsway (Jun 11, 2007)

hipslo said:


> I suspect you are correct about both of those points, though it would be interesting to know the actual details.
> 
> Personally, I dont think I'd take the plunge on a DC unless I was convinced that the ownership was real, not metaphorical, but my goals for doing so dont seem to be the same as most of the posters on this forum.  I am not prepared to just write off the expense as a lifestyle decision, I'd like to truly own a share of a diversified portfolio of resort properties that I could also use, in lieu of receiving cash dividends, like a typical REIT would pay.  I dont think such a thing really exists yet (though Crescendo is pretty close - albeit at a price point that is much higher than I am interested in).  In time, hopefully it will.
> 
> I purchased a vacation home 7 years ago, and it has roughly tripled in value since then.  My family and I use it all the time - what's the cost per night, using Bill's anlysis, in that case?  Its actually a large negative number.  Why cant this simple concept be grafted onto the DC model, as well?  I'd be perfectly willing to take the downside risk, since, with great properties in great locations, over the long term, I believe that risk to be slim to none.



I would join a DC if I was convinced that the club offered me convenient access to a variety of quality homes in quality destinations at an all-in cost that compares favorably with renting luxury homes or hotel suites.

If I owned a second home, I would not be able to use it for more than 3 weeks per year (until I retire).  And I would probably feel compelled to vacation in a single destination (not enough variety for me).  The cost per night, for me, would be high (unless I built in high expectations for property appreciation - which I am unwilling to do.)

I have passed on a few DCs, condo-hotels, and fractionals.  BelleHavens and Exclusive Resorts are my favorites among my remaining options (for different reasons).  I believe ER is financially viable, but offers insufficient value in relation to cost.  BH is in my sights currently, hoping to speak with them and get some answers soon.


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## hipslo (Jun 11, 2007)

Elsway said:


> I would join a DC if I was convinced that the club offered me convenient access to a variety of quality homes in quality destinations at an all-in cost that compares favorably with renting luxury homes or hotel suites.
> 
> If I owned a second home, I would not be able to use it for more than 3 weeks per year (until I retire).  And I would probably feel compelled to vacation in a single destination (not enough variety for me).  The cost per night, for me, would be high (unless I built in high expectations for property appreciation - which I am unwilling to do.)
> 
> I have passed on a few DCs, condo-hotels, and fractionals.  BelleHavens and Exclusive Resorts are my favorites among my remaining options (for different reasons).  I believe ER is financially viable, but offers insufficient value in relation to cost.  BH is in my sights currently, hoping to speak with them and get some answers soon.



This approach is entirely reasonable, I am not intending to suggest otherwise.  As I said, my goals are a little different than that, which is why I havent yet taken the DC plunge, and probably wont for some time.  Best of luck to you, and let us know what you do find out about BH.


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## Steamboat Bill (Jun 12, 2007)

hipslo said:


> I purchased a vacation home 7 years ago, and it has roughly tripled in value since then.  My family and I use it all the time - what's the cost per night, using Bill's anlysis, in that case?  Its actually a large negative number.  Why cant this simple concept be grafted onto the DC model, as well?  I'd be perfectly willing to take the downside risk, since, with great properties in great locations, over the long term, I believe that risk to be slim to none.



I agree that a purchase of a second home has the highest UPSIDE potential of any TS, DC, fractional, PRC, condo-hotel, etc. But that is not necessarily the point as investing in Google in 2004 whould have 5x your money by now. Joining a DC is about ease and quality of travel with less hassle.

I feel like I am stuck in the Matrix where the choice is being debated about taking the Red or Blue pilll. I am typing this while in Turks and Caicos in my HCC property and am very happy I decided to join a DC....nothing else matters now.


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## PerryM (Jun 12, 2007)

*Take the Red pill!!!*

I know that everyone who has joined a DC has set a price point that reflects a risk/reward ratio and is enjoying their DC.  Even the DC members who went thru bankruptcy are probably enjoying their purchase.  I, personally, wish them all the best.


It’s the DC industry that has wondered into the Matrix that Bill speaks about.  Only one, BelleHavens, apparently took the Red pill and is facing reality.  The rest of the DC industry took the Blue pill and is living in a world that isn’t quit what it seems to the outside person.

The DC industry will keep taking that Blue pill until a large corporation takes a whole bottle of Red pills and takes over the entire industry one weekend. 

Then the Blue pill could be a very bitter pill for the besieged DC industry to swallow again and again.


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## travelguy (Jun 12, 2007)

*I'll take the BLUE pill and $200K.*



PerryM said:


> I know that everyone who has joined a DC has set a price point that reflects a risk/reward ratio and is enjoying their DC.  Even the DC members who went thru bankruptcy are probably enjoying their purchase.  I, personally, wish them all the best.
> 
> 
> It’s the DC industry that has wondered into the Matrix that Bill speaks about.  Only one, BelleHavens, apparently took the Red pill and is facing reality.  The rest of the DC industry took the Blue pill and is living in a world that isn’t quit what it seems to the outside person.
> ...



Like may others who have joined High Country Club, I've taken my Blue pill and it was SWEEEET!  Great properties, service, amenities, etc. which is why I became a HCC member to begin with.  In addition (to get back on topic), I saved approximately $200K by NOT purchasing an "equity" DC.  I have now invested that $200K myself and my returns over the last year have been more than the "equity" DC could ever hope to return.


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## Steamboat Bill (Jun 12, 2007)

travelguy said:


> Like may others who have joined High Country Club, I've taken my Blue pill and it was SWEEEET!  Great properties, service, amenities, etc. which is why I became a HCC member to begin with.  In addition (to get back on topic), I saved approximately $200K by NOT purchasing an "equity" DC.  I have now invested that $200K myself and my returns over the last year have been more than the "equity" DC could ever hope to return.



This quote best summarizes my situation too. I really like all the top 6-8 DCs out there and would probably be happy with any one of them. I however, decided to join the one that most closely parallels the timeshare industry (and had the lowest cost) and that was HCC. I also really like PE and can actually see joining two DCs.

Althought the BH plan seems to be the safest of all the DCs, it is still costs significantly MORE than HCC and I can always invest the difference and get a guaranteed 5% ROI.


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## hipslo (Jun 12, 2007)

Steamboat Bill said:


> I agree that a purchase of a second home has the highest UPSIDE potential of any TS, DC, fractional, PRC, condo-hotel, etc. But that is not necessarily the point as investing in Google in 2004 whould have 5x your money by now. Joining a DC is about ease and quality of travel with less hassle.
> 
> I feel like I am stuck in the Matrix where the choice is being debated about taking the Red or Blue pilll. I am typing this while in Turks and Caicos in my HCC property and am very happy I decided to join a DC....nothing else matters now.



Its simple - you and I have different goals with respect to a DC.  I'd like to invest in a portfolio of second homes and get to use them as a fringe benefit.  You are interested primarily in paying a reasonable amount in order to achieve what I deem to be the fringe benefit.  Your approach is right for you, but it wouldnt be right for me.  I'll wait until a vehicle comes along that allows me to achieve my goals with respect to a DC.  If that never happens, that's ok, too, but I suspect it will, eventually.  (By the way, I am not really "debating" anything - what works for some doesnt work for others, and vice versa - what's wrong with that?)


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## Bourne (Jun 12, 2007)

Steamboat Bill said:


> Althought the BH plan seems to be the safest of all the DCs, it is still costs significantly MORE than HCC and I can always invest the difference and get a guaranteed 5% ROI.




There are not many times I disagree with you. However, one this one I believe that BH is not one of the safest ones. I would put it in the bottom half.


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## Steamboat Bill (Jun 13, 2007)

Bourne said:


> There are not many times I disagree with you. However, one this one I believe that BH is not one of the safest ones. I would put it in the bottom half.



I really meant that BH is the least levereged and I would rather join HCC and invest the difference (about $150k) in a 5% CD and pocket a $7,500 per year in income. After 7 years, the money would double and I doubt BH will produce a $150k PROFIT...even thought they apparently have zero debit.


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## PerryM (Jun 13, 2007)

Steamboat Bill said:


> I really meant that BH is the least levereged and I would rather join HCC and invest the difference (about $150k) in a 5% CD and pocket a $7,500 per year in income. After 7 years, the money would double and I doubt BH will produce a $150k PROFIT...even thought they apparently have zero debit.



This was my initial reaction to HCC versus the rest of the DC industry.

However by the time I got my butt in gear the membership fee was beyond my price point for the risk/reward I perceived.   (Having a boat load of timeshares already lowered that price point in my case)


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