TarheelTraveler

Michael - I'm glad you're on the forum and appreciate your input (I wish all of the DCs had a representative on here). As a sidenote, I've always been impressed with the quality of the Quintess homes and other than an initial phone call that didn't get returned for whatever reason, I have always had very favorable impressions of the Quintess sales people that I encountered.

Would you be willing to share for Quintess how much of the deposit typically goes into real estate, whether there are any specific contractual requirements or is management given the latitude, and what is the average down payment on a home as compared to the financed piece?

Quintess Michael

Thanks for the kind words, Tarheel. If you get to Tuscany, check out our new place...It's awe-inspiring.


I have a meeting with the CFO later today. I will clarify if I can release that without an NDA.
I honestly don't think it is a static number, however, and I would bet the same with other DC's.

In order for me to keep being active on this Forum, I need to walk the line between information, and TOO MUCH information

__________________
Michael Aumock
Director, Membership Development
Quintess, The Leading Residences of the World

NeilGoBlue

Dooijp,

I think Tarheels comments are dead on.

Also you keep referring to the deposit as an investment and you are trying to understand how club owners will respond to a 30% decline in prices. Well, to most of us, it's not an investment so I think you should be careful of the 'run on bank, no cashflow' scenario that you are painting. Your assumptions MIGHT be accurate if it really was an investment. Personally, I don't care about it.. it's not an investment to me. It's a purchase (and I belong to an equity club!). As long as I get my vacations and the club keeps up with my expecations, I'm happy.

Tarheel's comments about dollar cost averaging are smack on point. My club, AK, only has about 20 homes. By the end of 2009, they will have 30-40 homes. So they will benefit from the lower prices.

Also, at AK, 80% of the membership deposit goes towards the purchase of the homes, debt free.

dooijp

well, I surely agree it's not an investment unless you consider an unsecured loan that pays no interest and returns 0 to -20% over its life to be a good investment. I also agree most of us who join think of the amount paid as a writeoff; however, just because I can afford to lose 400K does not mean i WANT to lose 400K by joining. Since I don't want to lose 400K i do believe it is reasonable to believe other current members don't either and thus a run on the bank MUST be possible if very unlikely. If we use the default rate implied by similar businesses/industries, you should be assuming 10-15% chance that an established dc collapses and 20+% for a cash flow negative startup club to fail.

There is a lot of optimism on this forum on the business model that has never endured a recession. those who say 30% declines don't happen--Japan fell 90% nationwide in the 90's. So, while most people are getting bogged down on how such a decline is IMPOSSIBLE or increasing prices are a CONSTANT, i think it is very fair to ask the inconceivable--what happens if prices fall 30%? Do equity investors bail? Do members get scared (as their wealth plunges in other investments) and bail? How do clubs replace cash flow lost as new members cease joining? Does it make sense that membership deposits fund operations ? doesn't this force clubs to keep adding members at any cost? What will the clubs give away to get new members at expense of old members?

In the end, maybe the dc isn't for me and better for those who jump in the water before checking the temperature figuring if other people are in it must be ok.

dooijp

Reading that back, it sounds more hostile than i intended, sorry for that. I really love the concept of the DC's, am likely to join one and appreciate the feedback. I guess i just need to go talk to the DC's and get them to show me financials and see if i can come up with my own estimate for how much of deposits they are using to fund operations---one could actually then back that out, project how cash flow negative they are, and then predict an exact date of liquidation for the club.

NeilGoBlue

Dooijp,

First, I'm one of the few, like you, who does believe that luxury real estate could fall 30% and might even be likely. It's one of the reasons I joined an equity club. And it is an friggin excellent reason why you should be asking these questions and do your due diligience.

Your're missing my point, however, ..It's not that 400K is throwaway money, (tho, for some it might be). It's that it's not JUST an investment. So the rules of investment might not apply the way you think they do. Meaning, club members might not act the way they would in an investment because they get utility or value from the purchase. As long as people get utility from the purchase they might not care about the decline.

For example:

Large SUVs have declined in value and probably will decline. If you bought an SUV, do you sell right now, since it might decline next year even more.. probably not, because it's not really an 'investment', it's a purchase. I know it's not the best example in the world, but I think you get the point.

NeilGoBlue

Given your thought process.. you should really look at an equity club.. that way your deposit is protected by the assets, there is no debt and in theory, your only downside is the real estate market. There is no leverage, so you shouldn't lose everything (barring a fraud). You might only lose 30% due to the real estate decline minus selling costs, etc.

dooijp

thanks, i will look at an equity club as a comparison. the bummer is that A&K won't sell in NY. Also, I do think points above on cost of FS, Ritz and other hotels jumping a lot are valid. I pretty much gave up on resorts and only rent houses now but my wife wants a bit of pampering so i feel like a DC is the right middle road to go. i just like tangible concepts and this all feels very intangible.
and fair point on the idea of purchase vs investment---i understand your point and it does probably reflect how many think which goes a long way to understanding how they'll behave in bad economy.

hopefully, new members join and deposits go to progressively larger homes. Of course, if the previously purchased 3 million homes are now worth 2 million, it could be hard to get new members to join for same deposit--although a new home will be bt for 3 million which is 50% bigger/better than previous homes, that benefit accrues to all members so the new member pays for 3 million home but gets 95% of the time a 2 million home.

jyc

I think there are lots of good questions here. Here's my two cents. I don't think for-profit destination clubs long term are the ideal given the multiple conflicts. I think the optimal structure would be a member-owned not-for-profit (i.e. equity country club vs for-profit). That being said, we don't have a current option with scale and a platform like that. So I joined a DC despite my prior US housing market bearish but do remain modestly nervous. DC's generally finance using 10-year loans with original leverage of roughly 50%. I think posters here are naive if they think a 30% drop is merely an opportunity to dollar-cost-average. In practice, DC's would if down 30% probably break debt covenants, have their auditors question their ability to be a going concern, and all lenders will put a circle around the sector. My guess is this is the real reason why PE/UR merger took much longer than expected - getting their lenders to sign-off. But I think from a cash flow perspective DC's adjust their cost structure since I think prob half of their expenses relate to new business, marketing, and real estate acquisition thus if they thought they would not grow would shut down much expenses and would be slightly cash flow positive. I think DC's are fine at current house prices (now down 15%) and another 10% down but I think 30% incremental is problematic and will require equity infusion. I do not ascribe to down another 30%. To get equity interest, investors need to ascribe "platform or enterprise value" over and above the DC's underlying tangible net asset value. I think no one does this for the small clubs - they're just a pool of assets - but would do it for the Quintess, UE, ER, etc's but I'm talking about $5-$50MM of value which would not compensate ER if their homes depreciated by $200-$300MM. As an aside, if home values decrease we should not expect to pay lower deposits per se. Deposits should be priced at what the market can bear which may have no bearing on what the proportionate share in a house would cost. For example, timeshare/fractionals normally get sold at roughly 150% more (meaning build for 100 and sell for 250) than cost to build. But the market pays what it thinks the product is worth. Blackberry charges what it can not what it costs. If DC's offer a good value proposition which I think they do then current pricing is correct and increases are supportable.

NeilGoBlue

If it is an equity club with no debt..then I don't think we are naive..Both Tarhheel and I belong to an equity club with no debt.

Kagehitokiri

welcome to the forum jyc.

you have certainly raised some good points of financial/business discussion.

however, i would say that you cant lump high end timeshares/fractionals with the rest. the vast majority are a complete ripoff, sold only because of extremely aggressive/misleading sales tactics. there may be a comparison between the high end and destination clubs, but not in general.

and not directed at you, but in general, as NeilGoBlue and TarheelTraveler continue to point out, you cant make blanket statements about DCs, because there are no 2 clubs that are structured exactly the same way. (unlike all timeshares, and to a lesser extent fractionals)

TarheelTraveler

Great info and thoughts. That is however how A&K is structured.

Kagehitokiri

TarheelTraveler and NeilGoBlue, how would you respond to someone if they were questioning intrawest/fortress' financial interest/stake/etc in A&K/their new club?

NeilGoBlue

The club is owned 100% by the members of the club. The operational and developmental companies are owned by AK (and thererore intrawest and fortress).

I'll let tarheel confirm the structure of the operational and developmental companies, but the club is owned 100% by the members, debt free.

TarheelTraveler

NeilGoBlue stated that correctly. One of the main reasons the A&K club was structured that way was to avoid the potential conflicts of interest that jyc points out. To Kag's point, I guess you could have a DC that was a member owned non-profit all the way around (most equity country clubs are like that), but I think it would be impossible to compete against the established DCs. In other words, I think you need the marketing and financial wherewithall of someone like a A&K/Intrawest/Fortress to get a club going at this point. With A&K, it's all on the table as to where it will get its return.

jyc

At this point, the equity destination clubs including A&K do not in my view have scale or a platform. Hopefully that will change in the future. The question is, exactly which conflict of interest do like the best? Have a development company (i.e. Fortress, Belle Havens, etc) which buys for $100 and contributes to the club at $125 which I think is akin to the equity clubs or a for-profit club that buys for $100 but tries to make money on appreciation. I think they're differently conflicted. That being said, if A&K had the footprint of homes I liked and had 1,000 members and 150-200 homes then I'd join A&K in a heartbeat.