What matters is that if XX # of members own YY # of homes valued at $XYZ, but the XX # of members aren't fully utilizing capacity, then the club sells BBB more memberships. Doesn't the equity that the XX # of members currently have decrease? It should, assuming that the dollars paid by the latter members are "equity" memberships also. Or, does the last guy in basically own as much as the first guy in? Doesn't seem fair, does it? One rides out the tides, pays dues over the years (to travel, of course) and awaits the depreciation. The last guy in gets less, right?
The only ones that get equity are the ones that put in equity. The level of membership one buys determines the equity if there was a wind down. The price of the membership does fluctuate up and down. Currently the memberships are marked down, which one could say is a fair reflection of the market (my house is certainly not worth as much either), but nonetheless does result in a some equity dilution to the extent that new members are being added versus replacing resigning members. However, to A&K's credit (for whatever reason, they never get credit for doing anything right on these boards despite the purely ridiculous antics of other clubs), they've significantly reduced their commission, so that the equity going in is much less of a reduction. Now I'm sure they did that in anticipation of some members saying why are you reducing the price of memberships, but the way I look at it, you've got to have your head in the sand to think that your house, vacation house, timeshare, fractional, whatever is worth the same as it was two or three years ago.
The same question has come up about other equity clubs. I remember the criticism about EE was that they don't mark up or down the value of the portfolio for purposes of buying into the fund. I can maybe see that argument better in the investment context like EE, but it's not like we're dealing with mutual funds here either.
To the point about never getting credit for doing the decent thing, unlike a lot of other clubs that seem to escape criticism, A&K
doesn't have a development arm that buys houses, marks them up 20-40% and then sells them to the club. Of course, with other clubs, that (at least in the past) has not been disclosed to members. In contrast, A&K simply buys from a builder, furnishes it, and sells it at cost to the member's club. It's not a way of making money. Until the member's club has the money to buy the property, the member's club gets to use the property but accordingly does pay for the utilities, HOA fees, destination host, etc. Of course, the house could lose value in the interim or it could increase in value in the interim. Of course, the criticism from the boards will be doesn't that mean members are overpaying for houses now. Sure (although in reality it's academic, because the member's club is not buying any houses now), but members are underpaying in normal times when appreciation has ranged from 2-5%.
Non-equity clubs were designed around appreciating housing markets. The club owner's incentive to own the club was the appreciation and the tax benefits from the depreciation, and if the club thrived maybe then from the enterprise value of the club down the road. The problem with non-equity clubs is that with the housing market getting crushed, appreciation in the portfolio became less and less of a likely reality, and their other investments were also getting crushed, so the losses were of no tax benefit either (no gains to offset), so why put more money into a money losing business. Hence, the shut down or retooling of a number of non-equity DCs.
An equity club is analagous to buying a vacation property. If the value goes up, it's our portfolio that is increasing in value. Conversely, if the value goes down, it's our portfolio that is decreasing in value. The value of the portfolio nonetheless has no effect on my vacation enjoyment of the portfolio. Just like the value of a timeshare or fractional doesn't effect the vacation enjoyment of the property. However, it surely has some tangential effect on the value of my membership, again just like the value of a timeshare or fractional.
The concerns for an equity club are a good bit different than those of a non-equity club. If the equity club sponsor like RC, A&K, EE or whomever can't sell memberships, they may decide to get out of the business, so the real risk is in losing your sponsor. You still own the real estate and can continue on, but you end up needing to do something like M Private Residences did, which is hiring their own management.
