ChicagoMark

What in the opinion of this board is adequate DC due diligence prior to joining?

My Rx would be as follows and in no particular order:

1.) Viewing financial statements in person & signing an NDA to do so-this presupposes that one knows how to read financial statements.
2.) Viewing multiple DC properties in person.
3.) Speaking with multiple members (at least 6) of some tenure in the clubs-no newbies!
4.) Making a thorough assessment of ones own vacation needs-ala Quintess Michael's questions on another post.
5.) Comparing & contrasting multiple clubs to make an informed decision.
6.) Preview Membership to kick their tires and sample their ability to deliver travel & service
7.) Website tours & temporary password to get a feel of the ease of use.
8.) Lexis/Nexis search on litigation on the club, and the principal executives. Pull copies of all litigation & read.
9.) Figure out what your real budget is-If you can't afford to write a check, (you should not borrow to do this,) or if you'll lose sleep over the money being at risk-this isn't for you.
10.) Get your spouse on board-even if you're writing the check, he/she needs to be on board. Consequences of them not embracing the concept are just too high.

Thoughts?

Bourne

Good points.. In addition...
11. Reviewing documentation on Mid/Short Term past performance of membership and destination/property growth. Also reviewing projected growth/future plans
12. Historical Membership resignation information and current resignation list with timeline of repayment of deposit.

pwrshift

Deciding what club and whether to join is a very confusing process in the DC field as I found that each club's rules intentionally differ to confuse you. Such as ER's farce with their new 100% refund after creating a non-refundable 'initiation fee' that really is the same as 25% non-refundable of the previous plan. Smoke and mirrors IMO. Also very misleading and beneath them.

I also found that signing a NDA doesn't mean you'll get the same answers as you get from reading a public company's annual report ... such as the incomes and bonus payments to senior executives, and full explanations on where the revenues and expenses come from based on historic results.

There is a severe lack of permitting prospective members to 'kick the tires' and stay at their locations for 3 nights or so, as you can easily do with timeshares. You gotta part with money first it seems. And by the time you've taken to inspect 6 properties, and the DC head office, the membership price will have doubled. If the DC gives you member names to call, they are usually so committed that all you hear is good, no bad...and the DC knows that. Even on this BBS you find members who will not critique a club for not providing enough dishes, etc., but would be the first people to raise a fuss with a timeshare for similar things...they are certainly a committed bunch here so you have to read between the lines in many cases.

Certainly, one has to look at their past, current and future vacation needs. Just because your 5 kids will enjoy a 5 bedroom DC now doesn't mean you'll even be able to get them to go once they've left the nest ... so you and spouse could have way more space than you comfortably need .... but you're still paying for it in your annual dues even if you only have 2 people going or 14!

TarheelTraveler

All good questions and thoughts. Here are my additions:

1. Do the math to make sure the DC model you're looking at can work and don't rely/count on future cash flow/member growth forecasts that are often offered. For example, if you put in 400K into a DC and 85% is put into real estate (this is probably the top end in the industry), have a ratio of 6 homes per member (which is probably about average), that's about $2M to buy a house. If you're buying $4M houses, that leaves debt financing at $2M. If they're fortunate, they can borrow at 8% for an interest cost alone of $160,000 or about $27,000 in interest costs alone per member, before you even touch principal paydown, taxes, insurance, furnishings, concierge hosts, home office employees, etc. which easily can add $20-30,000 per member. Obviously, if you decrease the ratio, don't put in 85%, buy more expensive properties, have higher business debt costs, have a lot of earlier members who put in even less money or are paying less in dues, you have an even harder time making the numbers work. I would make sure that whatever club you join can explain and you're comfortable with how the economics are supposed to work, who is funding a shortfall, if any, how they are planning on reversing any shortfall, what if the funding sources change their mind about funding any shortfall, etc. Some clubs require constant growth to pay for "past sins" of unrealistically low deposits and dues structures that they're locked into. Other clubs have investor deep pockets that will fund the shortfalls with the idea of receiving a return on this down the road if they can do an IPO, be sold to a Ritz, FS or other DC or be the Google of the DC world. Some are counting on the back end real estate appreciation. An early member can end up with a great early "windfall" membership contract, in effect subsidized by the investors or later members, but just make sure you are comfortable with the risk that goes with it as well. The bottom line is just understand and be comfortable with the way your DC's economics operate.

2. What percentage of new membership deposits are used for cash flow purposes (i.e., what goes into the real estate being bought for the club and what is being used for other purposes)? Does management have any limitations on the expenditure of new membership deposits?

3. I would see what flexibility the DC has to leverage the properties (i.e., can they put the money into real estate, but then take the money out by increasing the leverage on the properties when cash flow runs short). If a significant part of the DC's compensation is derived from appreciation, do they plan to (or more importantly, do they have any limitations on the ability to) sell properties that have significant built-in gains or do they receive their return by increasing the debt on properties over time as the properties appreciate and are there any limits on that? Does this result in high dues increases for future members to pay for the higher debt costs and hurt future member growth? In other words, does the strategy ratchet current member growth at the expense of long-term member growth?

4. Are the properties asset protected for the members from what's going on with the sales and management entity (important given the issues discussed above)?

5. What is the total/average membership contribution to date and what is the average dues structure locked in (or alternatively, dues coming in versus expenditures), so you don't end up with an underfunded DC?

6. Once you've narrowed your choices down, have your attorney and accountant review your top two or three to get their thoughts.

7. Look at both current and long term costs/benefits and make sure you understand the exit economics and procedures, in the event pwrshift's example proves true and your kids/grandkids/friends no longer like you enough to want to travel with you (despite the accomodations being gratis). The economics to the resigning member are dramatically different (see the Sherpareport spreadsheets for example to get an idea of how much of a dollar difference that can make).

Even if the clubs and services can look somewhat similar on their face, the answers to these questions will vary dramatically across DCs. Just make sure you know what you're getting.

Once you've done the due diligence and made your decision, enjoy the incredible vacations and memories. Joining a DC was one of the best decisions that we've ever made.

Quintess Michael

Great Answers!
I would add one thing off the top of my head, and that is:
Who runs the club?
How many members are on the board? Who decides where the new properties are?
If it is a third party that is not primarily members, I would suggest following the money.
Where does your dep go? Who gains from the sale of future homes? etc.
Is the DC paying retail for homes that the company's development arm is building?

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

pwrshift

Michael ... I had a call from a Quintess rep just last week that said Quintess does this very thing...one wing develops an area and the DC buys some of the units ... he didn't say at what price, however. Yet, you seem critical of it.

TarheelTraveler

As you suggest, Quintess could be like A&K in that the development arm sells it to the DC at cost.

pwrshift

But, with a private company, how would you really know if they sold it at cost or at vastly inflated prices - big difference in accounting.

TarheelTraveler

What you suggest would be fraud on the part of the DC. And even if it were a public company, I don't think you get that level of detail in most financials to see those types of subsidiary transactions. In any event, in many cases, you could just check the property records to see what the development arm paid for the property, and see what the membership entity paid for the property, which would work for the properties that are bought completed and sold to the member entity after a certain number of members join. Of course, this assumes your DC operates on a transparent basis (some are good about that and some aren't).

Jack

good stuff one thing I am very interested in is availability, Like how some DCs say they have unlimited days our large amount of days, to me it just seems like a number mix. like if they 56 days available a 6-1 ratio thats 336 days soldout... not a good occupancy rate

Quintess Michael

That oversimplifying, but correct.
Different paths to what I believe is the basically the same result.

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

Quintess Michael

Good point, Pwrshift.
With new properties it's pretty easy to find cost vs appraised value, and see if what the company paid is much different.
With existing homes, just look at what was paid at sale, and what it sold to club for.

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

Quintess Michael

Not at all critical, because most clubs don't build thier own, and Quintess doesn't pay mark-up on the homes it buys/builds.
We (at this point) only develop what we are going to use, so everything in an area that we move into is approached from a "lowest cost/highest value to the members" perspective.

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

caribbeansun

No, not fraud just a transaction that doesn't pass any of the economies through to the members and may well inflate the price above FMV.

You get related party transaction notes but you are correct you won't see this level of detail in the notes to the financials.

TarheelTraveler

Nice article by Amy Gunderson that discusses some of those key due diligence questions.

Halogen Guides | The Six Most Important Questions You Should Ask A Destination Club Before Joining