cjw

We are new to this topic and are working to learn more about Destination Clubs. The primary question we have is how do DCs earn money? Recognizing that most clubs will use annual dues to cover operating expenses, at some point, don't these clubs need to sell their real estate holdings to realize the appreciation of these residences? At that point, what happens to the members? Another alternative is that these Clubs are sold, but then what happens to their members? Finally, any opinion with regard to Equity Estates, the Atlanta-based company, that plans to sell all properties in 15 years and share the capital appreciation with stakeholders?

NeilGoBlue

There are several answers to you question.

Here is one asnwer..

Clubs are like the local landlord in your area that owns 20 rental properties. Some landlords never sell...they pay down debt and live off the cash flow. You don't have to sell to realize your gains. You could refinance etc...

Also think commercial real estate... Companies owne shopping malls, strip malls, etc.. they make a cash flow stream, but might never sell..

As the dues and deposits increase (as membership increases, there will be more cashflow..)

Kagehitokiri

welcome to the forum cjw

REIT style clubs have a maturity date.

perpetual clubs will obviously have to buy/sell properties as time goes on, but also do so based on member demand. when you get to ER's size/buying power, if they ever needed cash, they could flip a handful of properties for a fairly nice profit.

the majority of the experiential travel offered so far seems mostly profit oriented, rather than truly offering value. it will be interesting to see what A&K offers.

clubs can consider operating expenses of properties in the selection process, going with homes of the same value, but lower expenses. (so that lowers the average annual operating expense per property)

TravelGuy

These are good responses.

An even more simplistic answer is that Destination Clubs (in general) make profits in two ways:

1. Real Estate Investment - They make future profits as the properties appreciate in value.

2. Property Management - They make current profits from the management fees to run the DC (like Hilton manages hotels).

cjw

It seems, however, that most of the clubs are running on very little profit. And, believe me, I understand the concept of using OPM (other people's money), on an interest-free basis, to purchase either leveraged or not leveraged real estate. When there is no maturity date, however, like for ER, I can't seem to reconcile the exit strategy. I think either the club needs to continue to expand so they can charge higher dues to deal with the inflation of property management and supplemental real estate purchasing or they eventually need to sell the real esate (or their firm) to capture the true value of the real estate appreciation.

Any further thoughts experts?!

DC4MS

I too have asked myself the same question.

Every club has a slightly different business model that will yield either more or less profit for the club.

In no particular order, here are a few way I have observed:

1. Membership fee - some clubs will allocate a certain percentage of the membership fee to buying assets (i.e properties and furnishings) and then use a certain percentage for running the business (i.e. salaries, advertising, rent).

2. Annual dues - most clubs use the majority of the annual dues to pay for the daily, weekly, monthly, yearly expenses of maintaining their property portfolio.

3. Refundable fees - most clubs will refund a portion of a membership fee and some clubs will refund 100% or more. Obviously, the lower the refundable portion of the membership fee, the higher the profit will be for the club.

4. Increased appreciation of the real estate portfolio - the majority of the clubs own the properties and will own the capital appreciation if and when they sell the properties. If real estate prices continue along a historical average () then the clubs can expect to double their investment in 10 years or so.

Destination Clubs is definitely a get rich SLOW business.

TarheelTraveler

Like others have said, the models vary pretty dramatically.

With the equity clubs like Equity Estates, the model is to make some money on the sale of memberships but with so much of the fee going into the real estate, it is primarily to make money when the real estate is liquidated in X number of years, with a split between the members and management.

With the other equity clubs, the model is to make money with the sale of (and potential resale of some) memberships, with some minimal money coming in from management fees of the properties.

With non-equity clubs, the model is to make money from the sale of (and resale of some) memberships, management fees, and eventually appreciation of the real estate.

I think each of these models has its pros and cons. With an Equity Estate-like model, you hopefully will make some money at the end of the day if historical trends playout, with enjoyment of the properties along the way, but you'll have some portfolio disruption in X number of years and you might be looking at a new club at that point in time. With the A&K flavor of equity club, the members own the club real estate, so there is no incentive to sell real estate that has appreciated significantly to capture some gains. You keep the houses that the members (and probably prospective members) like regardless of value and built-in appreciation. With the non-equity clubs, the management is building a real estate portfolio with "some debt" owed to members in the form of the refundable portion of the deposit. The way they realize this profit is by selling the real estate and buying less expensive real estate that fits the model, or by earlier members leaving and getting the non-refundable portion of the deposit. While there is an offsetting incentive to keep those great houses from a sales perspective, the whole idea is that they eventually want to recognize some of their gains (perhaps in some cases when they reach their max. members quota). Alternatively, they sell the DC for a profit to someone else. To me, the advantage in that approach is that because the DC management gets additional profit at the end of the day, they are perhaps willing to subsidize the club along the way to build the portfolio.

In any event, I don't think any of these models are quick money makers for the DCs.

TravelGuy

Once again I'll attempt to add a very general and simplistic view of what other posters have accurately posted:

A DCs future profits from the appreciation of real estate does not mean that the DC must sell the property. A DC can simply refinance the property for additional value based on the increase in property value and continued improvement in the DC's balance sheet as the DC grows.

This allows the DC investors to receive cash flow while the members continue to use the property. No increase in property value means no cash to investors but DC members continue to received use of the property.

Win/Win!

TarheelTraveler

What am I missing? Yes, you can refinance and pull money out of the property, but doesn't that increase the debt and, therefore, the cash flow required to service the debt? Wouldn't the properties have increasing amounts of leverage? You presumably have more members to support this, but seems like it would be a negative trend? To me, it's not like a shopping center where you have ever increasing rents coming in. Again, not sure what I am missing.

I can see a valid argument for each of the models, but not sure that most people fully understand the differences (I know I didn't when I was looking at DCs).

TravelGuy

I'm trying not to get into a 20 page thesis on the biz model for DC financing so please forgive me if I'm really generalizing.

You're not missing anything except that a portion of the cash generated by the refinance is the principal pay-down from member initial and annual payments. Additionally, as more members come into the club, the cash flow from each of those members is higher due to increased membership deposits and annual dues. This higher cost of membership fee is supported by club properties that have increased in value and, of course, the additional property selection created by property purchases from new member deposits.

To be extremely simplistic, the DC biz plan is more a real estate investment model that a traditional consumer commerce model in that cash flow is key.

TarheelTraveler

You would need to have ever increasing membership deposits and dues, and essentially new members willing to pay high enough deposits and dues to support the newer houses at then higher prices plus the older homes that have had cash taken out. It seems like this is a great shorter term strategy as management is willing to subsidize the portfolio in order to hopefully become a leader in the industry, but it also seems like it could be pretty painful long term, particularly if there are no or few limitations on management when they want to "cash out".

Again, they are just different models, but people need to fully understand them. For me personally, I liked the Crescendo - Equity Estates type of model the best, but the marketing limitations of that model are pretty onerous.

TravelGuy

The long-term projections (10 year) that I've seen are based on a reasonable expectation of new members, moderately increasing deposits and dues, and moderate increase in property values. Several years into those projections and the numbers are working above expectations, even with the stagnation and decline in the value of real estate in some resort markets.

There are many limitations to the "cash out" process placed on management by membership contracts and the DC's outside investors. This creates a Capitalistic style checks-n-balances system by the consumer and stockholder, provided anyone is doing continued due diligence (which we appear to be doing by discussing and investigating on this forum). As DC members, we are also somewhat assured of the DC's continuing solvency by the yearly audited Net Asset Test.

Another thought - If you consider the negative cash flow from the purchase of a $1-3 million vacation home, a DC membership deposit pays for itself within several years (not to mention the opportunity cost of capital and recent declining property values). After that, you are receiving the use of the DC properties for only the cost of the annual dues. An example of this is that High Country Club members who bought in several years ago are probably way ahead on a cash basis even if they never receive their membership deposit back. (No, I'm not going to do the math to prove this. It's too early on a lazy morning in Hilton Head )

LTTravel

Before joining a DC I was one of those thinking about purchasing a second home in the $1- $2 million range. I am sure that the one that I would have picked would have depreciated 15-20%, or nearly the entire membership price of an upper level DC. With their ability to purchase at better prices, spread out their investments over multiple locations, thereby decreasing the downside potential, I am sure that they have faired much better. So now I don't have any of the headaches of second home ownership and can vacation in multiple destinations. Even if the DC goes belly up 100%(which I doubt), I would be at worst even, financially, in my decision as opposed to my alternative.