Destination Club

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Destination Clubs were "invented" in 1998, when Rob McGrath, a veteran of the luxury timeshare development business, launched Private Retreats. Since then over 20 companies have launched clubs (and more are being launched every month) targeting affluent families that want the benefits of second home ownership, but with more flexibility and choice.

Contents

[edit] Defined

These clubs tend to have the same basic structure: in exchange for a one-time upfront membership fee, and annual membership dues, a member gets access to a roster of luxury vacation homes around the world, which can be booked based on availability and reservation priorities. Here's a typical rundown:

  • Access to 3-5 bedroom homes (smaller condos in city locations), either on resort properties or near key locations (ski resort, beach etc).
  • Approximately 30 days of home usage at different homes across multiple locations.
  • The ability to book homes in advance and on a “space available” basis, as well as a system to handle the demand for holiday or peak periods.
  • High service levels including: pre-departure planning, on-location concierge services and daily home cleaning service.
  • Furnishings, appliances and audio-visual equipment that would be considered “luxury class,” such as Viking stoves and flat-panel TVs.
  • Additional membership privileges and benefits, including special club events.

[edit] Compared with Alternatives

Destination clubs are often compared to other “fractional” real estate programs like timeshares or private residence clubs. The destination club model gives the consumer more choice and less overhead, typically without deeded ownership of the underlying real estate. There are some exceptions. Below is a summary of how the destination club model compares:

Luxury Hotel - Though appealing for a couple’s getaway, lux hotels are less optimized for kids and multi-family groups. These hotels often provide exquisite service and plush amenities, but have inflexible room configurations, limited privacy and pricey services.

Luxury Rentals - With this alternative, vacationers simply rent a house. Though you may choose the house you want, where you want it, the research and cost can be significant. In Cabo San Lucas, 5-star resort Las Ventanas charges $4,000 a night for a three-bedroom residence suite. A single five-night vacation would exceed the annual dues for most destination clubs ($20,000 at Las Ventanas vs. $18,000 average annual dues).

Private Residence Clubs - These clubs combine the services of a luxury hotel chain with the partial ownership of a second home. The residences are typically smaller than destination club residences: 750 sq ft (70 m²) city apartments to 3,000 sq ft (300 m²) resort villas.

Second Home Ownership - This option provides the benefit of full asset appreciation with a home that is uniquely suited to and customized for your family. The downside is lack of destination flexibility, and the cumbersome reality of owning a home. Taxes, maintenance, utilities, neighbors can become a disproportionate burden for a four-week-per-year residence. Destination club membership can be less expensive than home ownership, even factoring in ownership appreciation.

Destination clubs are especially well-suited for families or groups who are looking for larger residences – three or more bedrooms and at least 2,000 sq ft (200 m²), and can manage their travel schedule within the availability structure of a club.

[edit] Membership Model

While there are several variations, the basic choice is between equity and non-equity clubs. This is similar to the membership model choices at country clubs.

In both models, club members provide a large up-front sum and an annual fee. In non-equity clubs, they enjoy the hospitality benefits of the club, but don’t participate in any of the real estate appreciation of the portfolio of homes. The up-front payment is a deposit, and when they resign from the club, members receive 80% (sometimes up to 100%) of that deposit back, typically with no adjustment from the initial sum. There are some exceptions.

With equity clubs, the up-front payment can be considered an investment of sorts. When exiting the club, the refund of that fee is adjusted to reflect the value of the home portfolio. Various clubs have different ways of providing this benefit. In some clubs, members own a deeded title in the portfolio or specific residences. M Private Residences is the current leader with this benefit. In other clubs, members have an option to do so for an additional fee. Quintess made this available to charter members, but has indicated that it is not fundamental to their business model.

A popular variation is the “hybrid” model, which provides an upside benefit that is tied to either the value of a club membership, or the value of the home portfolio when a member resigns.

Although the equity model has some obvious appeal, it’s not a simple choice. Members are making both a financial and a vacation lifestyle decision, and should consider each aspect in turn.

[edit] History, Hiccups and Trends

Private Retreats launched the industry in 1998, with one club, Private Retreats, under the company name Preferred Retreats. The company was later renamed Tanner and Haley, with over 900 members in 2006. Exclusive Resorts entered the business in 2003 and with the backing of AOL founder Steve Case, became the industry leader in terms of members, locations and homes. By the end of 2006, the club claimed over 2,500 members with 300 homes in 30 locations. Following the success of Exclusive Resorts, from 2003 to 2004 entrepreneurs launched competitive clubs such as Quintess, Dream Catcher, Private Escapes, and Ultimate Resort. Specialty clubs joined the mix as well, for instance The Markers Club for golf. In 2005, a Fortune 200 company, Cendant Corp. entered the market in partnership with Leading Hotels of the World and Destination Club Partners, a pioneer in fractional resort development. Together, they launched Leading Residences of the World.

In 2006 the industry grew substantially, but also suffered a high profile failure. Tanner & Haley, the first destination club and the second-largest at the time, declared bankruptcy. The move left nearly 900 member to question the security of their deposits. Some members joined just a few months before the filing, paying up to $1+ million, assuming those funds would be eventually returned. According to Halogen Guides, a site that tracks the industry, the company ran into trouble by overpromising home availability and by offering an overly generous 100% deposit refund. Combined with other cost issues, this led the company to rely on leased homes to fulfill demand. The basic business formula demands that companies own (rather than lease) the majority of their homes. The initial "buy-in" should be earmarked for leveraged home purchases. According to Halogen Guides, the use of buy-in capital for operations or leases is a sign of company weakness. Since the bankruptcy was announced, other companies have stepped forward to increase transparency and/or increase assurance of their balance sheet health.

[edit] Other trends to watch:

  • Consolidation of smaller clubs - In 2006, Quintess merged with both DreamCatcher and with Leading Residences of the World, to become the third-largest club and Parallel merged with Solstice.
  • Involvement of large hospitality corporations - Currently only Cendant is a player, with other brands conspicuously absent.
  • Development & membership rights in resort communities - Certain ownership resort communities have been unwelcoming to the purchase of units by destination clubs. These communities see destination clubs as changing their quiet residence feel to more of a weekly-turnover tourist destination. Some have organized to forbid clubs from purchasing residences. Larger destination clubs have the advantage of purchasing a substantial percent of the residences from resort developers before community bylaws are established.
  • Local zoning issues - Local communities may have restrictions depending on how a destination club-owned home is categorized.
  • Industry organization & government oversight - In light of the Tanner & Haley bankruptcy, the industry has acknowledged the need for clear guidelines and regulation. A Destination Club Association has been formed, and is working with the American Resort Development Association (a non-profit trade group for timeshare industry) to draft a "Model Act" for destination clubs.

[edit] Questions to Consider

Does the travel profile of my family match what a destination club can offer?

Consider the following factors when answering this question:

  • Number of travel days per year
  • Locations: Are a club's current or planned locations in areas that you travel to – or want to?
  • Size and quality of homes and ability to handle your family size
  • Forecasted cost per night or week of a club – they range from about $150 per night to over $3000 per night, depending on the luxury level of the club. A calculator is available here
  • Reservation terms and tools - are you comfortable planning ahead and working within club rules? If you're a last-minute traveler, you may become frustrated at the lack of availability.
  • Your own travel flexibility - If you're flexible on dates or locations, you'll find many more options available, particularly in the larger clubs.

Am I comfortable with the non-equity membership model of a club? This is the dominant membership model to date, with over 10 clubs to choose from, including the industry-leading Exclusive Resorts. There is risk to this model – you are committing capital to the club, presumably based on the expectation that you will get a portion back in 5 or even 25 years. Unlike the equity model, these clubs provide no deeded title to real estate assets in the club’s portfolio.

Factors to evaluate

  • The size of the initial membership deposit and the rules about its refund to you (80% or 100% back, for example)
  • The financial strength of the club, and your assessment of their ability to return the deposit when you want.

[edit] Deciding on a Particular Club

In selecting a club, keep in mind that this is both a lifestyle decision and a financial decision. Your lifestyle decision will be driven by personal parameters of your family’s vacation preferences. Once you’ve found a few clubs that match your vacation profile, take a look at the financial aspects. Most clubs are forthcoming on their hospitality terms; they tend to be less so in discussing financial parameters such as liquidity and redemption guarantees. This is a long-term service you’re buying into; you’ll want to evaluate it as a long-term business. Keep in mind that this is a young industry. Each club works to balance their desire to grab market-share against their need to provide a stable capital base. Each club approaches this differently, with varying levels of financial assurance and transparency. This picture is constantly changing, so make sure you're getting up-to-date answers.

[edit] Key Decision Factors

  • Management philosophy and experience – Is this a club that you think you will want to use for many years? Are you comfortable with their position on growth vs service? Do their development plans match your travel preferences? Are they attentive to member preferences and sentiment?
  • Financial structure and health – Are you confident you will be able to get your deposit back? Or perhaps that is capital you are willing to risk for the right club?
  • Availability – Will you get reasonable access to homes in both peak and off-peak periods? This does not mean you need a guarantee that you will get what you want at all times. That is an unrealistic expectation – there are more members than homes. You do need faith in the management team to manage the club to keep most of the members happy, most of the time. In particular, you should understand the system the club is using to book holiday travel.

[edit] Due Diligence Questions

[edit] Membership

  • Can family members use the homes without the primary member? Which family members and what age do they have to be?
  • Can memberships be shared?
  • Can memberships be transferred? If so, are there any restrictions on recipient?
  • What is the transfer fee, if any?
  • Can memberships be resold?
  • Is there a waiting list to join? If so, why?
  • Is there a waiting list to resign?

[edit] Fees

  • Is there a membership deposit? What percent is refundable? What happens at the end of 30 years?
  • Is there any real guarantee that the refundable portion will be returned?
  • Is there any anticipated membership deposit increase? If so, how much and when?
  • What is the average time it takes to refund a member deposit?
  • How much of the membership fees go to paying for operations and sales of the club?
  • Are members purchasing an equity stake in the homes?

[edit] Destinations

  • How many destinations does the club currently have?
  • How many destinations are planned?
  • Does the club have a geographic or location emphasis? (e.g., ski, international, urban, golf, etc.)
  • Are there multiple homes at destinations? How many homes do you plan at each destination?

[edit] Real Estate and Homes

  • What is the average size of the homes (square footage, number of bedrooms, baths)?
  • How are the homes furnished? (Style, quality, fixtures, heated pools, hot tubs, billiards, etc.)
  • What special amenities does the club provide as standard in each home (housecoats, quality of soap products, Starbucks Coffee, welcome basket, etc.)?
  • Are photos and floorplans available for all homes?
  • Please briefly explain the destination or home arrival and departure process.

[edit] Travel Services

  • Does the club have a travel concierge?
  • Does each location have a site concierge?
  • What happens if something goes wrong when a member is at a home?
  • What is the frequency of the onsite cleaning service during a guest stay?
  • Is tipping allowed or expected?

[edit] Reservations & Availability

  • Please briefly explain how the reservations system works.
  • Is the member-to-home ratio guaranteed in writing?
  • What is the total number of Full Member Equivalent members in the club? (defined as a member with full booking privileges who can stay in ONE home at a time)
  • How many days of possible occupancy are there across all the homes in the club?
  • Do you offer any location/home based guarantees, in terms of advanced booking?

[edit] Partners

  • Does the club partner with a jet service company? If so, who?
  • Does the club partner with a travel agency? If so, who?

[edit] Club Structure

  • What are the financial goals of the owners/founders? Who owns the home and realizes the appreciation of the portfolio?
  • How and when is profit taken from the club?
  • Is there an annual meeting for the members?
  • Is there a Board of Directors? Who are they?
  • What is the capacity model? At what number of members are new home brought online?

[edit] Financing

  • What type of financing is the club using to purchase its homes? What percentage of the purchase price of the home was originally financed?
  • Can the club provide audited financial statements to demonstrate that at any point in time there is enough equity in the homes and cash to retire the refundable portion of the membership deposit?
  • What other assurances can the club provide a prospective member that the refundable portion of their membership deposit will be returned?
  • Ask for copies of publicly provided financial statements; companies following their model should have no hesittation providing these documents.

[edit] Company Experience and Strengths

  • What is the background of the founding team?
  • What hospitality experience does the management team have?
  • What real estate experience does the management team have?

[edit] Major Flaw with Destination Clubs

The Destination Club (DC) industry has an Achilles Heel - the refundable portion of the membership fee has no assurances that it will ever be paid. If the club is deluged with members wanting to exit there maybe no new members wanting to join. The members are captured and can't exit the club with the industry standard of 3 in 1 out rule.

Additionally, the DC may find itself in financial trouble and not be able to repay the membership fee as it has guaranteed. The industry apparently is aware of this problem and has yet to address it.

There are no destinatin club specific real estate laws to protect DC members, although agreements are covered by all other aspects of law including contract law. Timeshares and other forms of fractional ownership have many consumer oriented laws to protect their investment.

[edit] Currently Active Clubs

  • BelleHavens
  • Choice Escapes [1]
  • Ciel
  • Crescendo
  • Destinations Private Resorts
  • Equity Estates
  • Exclusive Resorts
  • High Country Club
  • Lusso Collection
  • The Marker's Club
  • M Private Residences [2]
  • Portofino Club
  • Premier Destinations
  • Private Escapes
  • Quintess, LRW
  • Signature Destinations
  • Solstice
  • The Hideaways Club
  • The Oyster Circle
  • Ultimate Resort
  • Validus, A Destination Club
  • Vintner's Club
  • Vita Luxury
  • Yellowstone Club World
  • One Key

[edit] External links