I only caught the last 10-15 minutes of the 1st of the 2 webinars, so I was glad to be given access to a replay.
As impressed as I was with EE -- and both Adam and Rob -- I walked away with three questions that concern me.
I fleshed them out
here. One is obviously my long-running concern that initial deposits are going up while Net Asset Value is likely going down. My new concerns after that call involve the likely difficulty of resigning toward the end of the club's tenure and what may be a pronounced exit strategy at the other side of 2021.
Hi Desties & others contemplating EE...
I know this is late, but I have finally had time to tackle this. While I am simply a member, I have spoken with the EE team and am posting my thoughts, along with
their answers to a couple of your specific blog questions... hope this is helpful. (Sorry this is so lenghty and has taken me so long to post...)
Having gone through the Lusso failure we, along with a good number of other Lusso members, really put Equity Estates through the paces prior to investing with the fund after having lost the money in the standard Destination Club model. We carefully reviewed the financials, the offering memorandum, met one on one with management (whom we have found to be very forthcoming and always available!), participated in a number of calls, and spoke with other EE members. We determined that Equity Estates is clearly
not a Destination Club but rather a fund that is governed by a very different set of standards. Rest assured,
we did ask these same questions that Desties poses. In fact, about 30 days ago we “Upgraded” our membership and made an additional capital contribution to add another 15 nights a year, after again putting EE management through the paces.
That said, I forwarded these specific questions onto the Executive team and quickly got a response (which I will paste below)- which is consistent with what we understood to be factual. There have been modest capital contribution increases- and former Lusso, UE, and other DC members have been able to capitalize on special “refugee” only incentives to reduce their capital contribution rate. The homes being purchased really are different and better -- not bigger nor gaudier, but better located, better appointed, and likely better positioned to be of greater value in 2021 or beyond, which, given the fund's model is obviously to our benefit.
We personally love both Anguilla and Costa Rica, having traveled to both locations in the past. Obviously, so do the other EE members... that is why these were both voted highly in the fall 2009 member survey. We will likely get to both in 2011, if American Airlines will cooperate in scheduling! It’s all in the eyes of the beholder, but I’ve never thought of Costa Rica as “eclectic”. Anguilla has the #1 rated beach (Shoal Bay Beach) in the world on it according to Conde Nast. PM me if you would like to learn more about what we think and what our experiences have been like both with management, homes, concierge, etc.
The following are the
questions that Desties had posted on the blog, and
answers I received from the EE management:
Desties said:
1. If real estate prices have generally fallen over the past few years, why are the initial deposits inching higher every year?
This is important. The club claims that just 5 members have resigned, and all were cashed out at higher prices than their initial deposits (since they receive 100% of what a new member is paying at the time and that has increase over any rolling 24-month period).
See the problem? As an investment, new members should be paying based on Net Asset Value. The club has purchased 10 of the homes available (the rest are leases or exchanges) and it would be a shock if they haven't fallen in price -- on average -- from the initial outlay. If real estate prices soared, new members would expect initial deposit rates to escalate. Why haven't the initial deposit requirements dropped as real estate prices -- particularly for high-end vacation properties -- have taken a hit?
Existing members may be overjoyed, but new members are getting diluted -- making it that much harder for them to come out of this with a profit in 11 years.
Owner members in Equity Estates Fund I, LLC do not make deposits but rather capital contributions to purchase a piece of the company. They own a membership interest in return for their investment. An investment in the fund is typically a long-term investment. Supply and demand are driving pricing more than market value or NAV. NAV alone underestimates the value for the following reasons: 1) this is a unique collection of homes that is difficult to replicate, 2) with 80% going into real estate, there will always be a premium paid to enjoy such a portfolio, and 3) there is significant value received each year on the delta between the annual dues, when viewed on a nightly basis, versus market rates to rent similar properties (call is a “vacation dividend”) with concierge services and support. There are many real estate funds that you can invest in on an NAV basis. However, there is simply no peer for this type of investment where you can enjoy and personally benefit from the investment.
The management team at Equity Estates feels the membership interests are appropriately priced in today’s market based on increasing demand. The fund has grown by 50% each year since inception, and expects to beat that growth rate this year. More and more people (including over 100 UE members) are seriously considering investment in the fund, which has extremely limited supply in the sense that it’s the only luxury residence fund of its kind in the U.S. If the capital contribution rate was mispriced based on the laws of supply and demand, no one would be investing.
The peak of the luxury real estate market in most North American destinations generally occurred between 2004 and 2007- the period when most traditional Destination Clubs were building their arsenal of homes. Equity Estates Fund I only purchased one home prior to 2008 (New York City 3br) and one home in 2008 (Turks and Caicos). It purchased Telluride and Hilton Head in 2009 and expects to end this year with 6 new homes acquired. So, while two of the ten homes are down slightly (single digits) based on appraisals, the other 80% have been purchased this year or last year, arguably at or near the bottom of the market. Today, the fund is able to purchase remarkable ocean front and ski in/out, for example, residences at its same target average price point of $3M and obtain assets that in 2005 or 2006 would have been priced 30-50% higher. These unique assets should fare better, than say a 2nd or 3rd row beach home, over the holding period from both an experiential and investment perspective. There simply is not any new beachfront being created. Long-term this should bode well for those making capital contributions today, as the fund is well positioned to see annual appreciation that at least matches historical inflation rates of 3%, which over the next 11 years or so would return roughly 100% of capital contribution rates made today. Of course, if the portfolio grows at 5% or 7% per year on average (even if it’s flat or down in the short-term), this will yield greater returns for owner members over the long-term.
The few members who have redeemed early have received 92.5% of the current contribution at the time back, which in each case has yielded roughly 100% return of their investment.
Desties said:
2. Won't it get harder to get out in the future?
Right now, cashing out is pretty easy. The club has great homes, friendly management, and pose a great high-end value proposition. However, resigning won't be so easy in a few years. Let's say you want to get out in five years. Who wants to pay for a club that will liquidate in 5 years, especially if real estate prices don't recover and they are deep in the hole with their initial investment deposits?
Yes, the club isn't going to fold come 2021. It has five years to liquidate its portfolio, and members may also vote to keep the club going in a new form. That still creates uncertainty. Unless luxury vacation real estate takes off by the latter half of this decade, getting out won't be easy.
Equity Estates should be viewed as a long-term investment, with a specified liquidity date of 2021 for those who want to cash out then. That said, the fund has demonstrated significant year over year growth of 50% each year during one of the most challenging economies (recessions) in recent history. As the fund continues to grow virally (through referrals and former DC members), it is anticipated that it will be closed in the next few years with 300 full member equivalents (could be more than 400 families). At that point, all new referrals and those who have grown interested will have to join a wait list to purchase a membership interest from a redeeming member, who can set the rate. So, again supply and demand will dictate value, and a family may join with 5 years left knowing that there will likely be a successor fund created for all members not interested in redemption beginning in 2021.
Desties said:
3. How messy will the cashing out process be?
As noted earlier, the club doesn't have to sell off its owned homes come November of 2021. It can elect to delay the process if the property resale climate is unfavorable.
Further compounding matters is that many of its homes are in eclectic locations. Anguilla and Costa Rica aren't exactly booming markets. I don't know if those properties are purchased or leased, but if they are among the 10 owned homes it may make the selling process hairier.
Regarding the cashing out process, you either love or hate the idea of owning a diversified portfolio or luxury real estate. Management surveys owner members’ destination desires and analyzes other players in the market and other luxury real estate trends before making investments. Costa Rica is under contract and Anguilla is owned. Both destinations were near the top in the annual survey of members most desired new destinations. Management purchased there precisely because they aren’t in booming markets, and they were able to buy spectacular homes at value prices. Management believes in Warren Buffett’s theory on investing: “Be fearful when others are greedy and greedy when others are fearful.” There’s plenty of fear in the luxury real estate markets today, which should bode well for Equity Estates owner members long-term.
Desties said:
Now, these are just the three questions that I feel need to be answered with convincing responses. You may have some of your own, and obviously you're going to want to ask them if you are about to make a serious six-figure investment in a destination club.
Hopefully, this will be of, help to some of you... please feel free to message me if you have other questions, as I lurk here, but can certainly miss posts -- as they seem to move quickly at times!!!
