Bourne

Survive is the wrong word. Given the model, they technically cannot go bankrupt.

Today we have a exclusive brand(ER, UE, QN), premium brand(UE, HCC), boutique brand(LU) and equity brands(BH, CR) that are mainstream.

Based on growth, the one's at risk are the boutique brand(LU) and equity brands(BH, CR). At this point, Lusso has managed to gain traction and I hope it reaches it member cap. That said, it is the only one with a member cap that got this far. ( PE had it, but will not after the merger )

Compared to the mainstram DCs, the growth of Equity bases DCs have stalled. Further to my numerous posts on this topic, the primary reason is that they market the product with one hand tied to their back due to SEC regulations.

Will the BH + CR company be around three years from now?

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The Nile is a river in Egypt......

Kagehitokiri

solstice originally had cap of 42 and sold out. then it merged with parallel and uncapped.

there are other clubs with caps.

UE will be "equity".

IIRC the only 2 clubs ive seen with "investor only" status are crescendo and worldwide private residences. (latter appears dead)

TarheelTraveler

Bourne - I have to disagree with you. There are a number of DCs operating with completely unsustainable models that require significant growth to keep going. When the growth slows down, either because of competition or economic forces, they will not be able to make it. Portofino's problems are only the first ones to manifest themselves this year, but there will be others. While the whole industry will be hurt by the economic problems of certain DCs, it will shift some growth to the equity DCs.

Also, as Kag and others have pointed out, I suspect that there will be some significant developments coming in the next few weeks that will make one or more of the equity clubs significant competitors rather than just the "safer" alternative.

Will UE be equity or merely offer an appreciation component?

DJTraveler

I've been working through the marsh on this one - wish equity actually meant equity. Like cash, Jackson, Grant.... If there is no direct ownership with title to real property, there is no equity. Clubs should not misrepresent equity vs. non-equity memberships. CR is the only one which fits the build. BH has a lot to say about equity, but I found on their website that deposit return is tied to replacement deposit pricing. hmmmm, isn't that non-equity? "REDEEMING A MEMBERSHIP Should a member want to exit the Club, he/she may do so after two years of membership, on a three-in-one-out basis. The exiting member will receive 90% of the then current value of the membership."
SEC knows for sure

Non-equity clubs are offering potential upside in deposit value provided the club deposit pricing grows in value, and new members coming in at that price will replace you when you opt out. So, if a club's price does not grow or membership slows/stalls your return is tied to 80 or 100% of what you paid. It's those 100% gtd. deposit return with a year or less required refund that I'm avoiding. I like the horse that does not have a cap, as they have not worked before....growth seems to me, is good. Thoughts?

NeilGoBlue

By having the members own the 'club' that has all the debt free assets, an equity model is created. Because it's not a true security, the redemption value is based on the current membership price. The membership price is a direct reflection of the equity value of the homes and an indirect reflection of supply and demand.

This allows these types of clubs to not be forced to be classifed as a registered security.

Kagehitokiri

it will be interesting to see what the model is of the merged club which has yet to be announced.

DJTraveler

Go Blue
It's someone's equity, (ie, Hunt, Sentry, Banyan) just not the members. Litmus test - If the real estate appraised value grows beyond the offered deposit price for new joining members - very possible due to competition or economy, etc. will a resigning member receive a refund tied to the real estate value or the current price achieved through new sales? By the same token, are you backstopped to recieve a minumum of 90% of your deposit paid if the real estate portfolio value falls below member deposits?
I have never seen a private equity group, financier and a vc not leverage anything. Clearly, it looks like things are well run and deposits covered at BH, just pointing out how easy it is to misunderstand a term like equity can be - and DC's should be consistent with how things such as this are represented.

vineyarder

It will just offer an appreciation component; 80% of then-current pricing...

TarheelTraveler

Bellehavens is true equity, because the real estate is owned by the members. The management company may be owned by someone else, but the dirt is owned by the members. I think by linking the appreciation to membership cost instead of the real estate, they have been able to avoid the very strict limitations on marketing that Crescendo has had.

Bourne

Just a clarification.

By equity I meant the BH and CR model. No leverage whatsoever. Some other clubs give potential upside to deposits and that is different.

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The Nile is a river in Egypt......

TarheelTraveler

I think growth is a good thing generally, with two caveats. 1. As GoBlue has pointed out previously, growth does limit your access to the top level management at the DC and your more direct voice in management. However, with growth, you do have access to a lot more properties, which is the whole point of DCs. Maybe a club like Lusso if at capacity would be a nice compromise.

2. Also, I like growth that doesn't come at the cost of creating a financial nightmare later on. It's easy, as an example, to sell memberships for $3M houses at a cost of say $100K-$200K for 3 or 4 weeks. While it looks like a great deal to the prospective consumer, I'd like to have someone explain to me how that works economically. If 80% of your deposit actually goes into buying the real estate (which I don't think it does with a lot of DCs) versus covering debt financing or operational costs, that's at best $160K that's gone into the dirt. You try to keep your ratios low, so you've got 7 full members per house and $1,120,000 for the real estate. The rest ($1,880,000) is financed at 9% (which is probably good for a DC in this current financing environment) for a yearly cost of $169,200. That's $24,171 just in financing costs per member and before you add per member $3,000 in property taxes, $2,000 in club/home owners association costs, $2,000 in insurance, $3,000 in maintenance/furnishings, $6,000 in concierge/home office employee costs, $1,000 in accounting/legal, etc. We're up to over $41,000 in dues, and I'm sure I've left off some major expenses. This is the run of the mill DC, without some of neat perks like cars, anytime/anywhere concierge services, an extra $1M for the house (i.e., $4M avg. homes), etc. I want someone to explain to me how this is supposed to work economically when your dues are half that, or even lower for early members. Maybe you take that kind of expensive growth if it means you can become a leader in the marketplace and sell out to another company at the end of the day. However, it certainly seems risky from the perspective of the member, who's not going to benefit from the IPO at the end of the day, or if the DC doesn't make it to the IPO stage and has to liquidate with whatever it has left to give out to the non-equity members.

NeilGoBlue

There probably is debt in the 'developmental company'. But the actual club, which owns the properties is free and clear of all debt and is 100% owned by the members.

You get 90% of the value of the current membership on a 3 in 1 out basis

NeilGoBlue

Exactly!

Bourne

There are some properties that the BH management company bought in advance and moved it to BellHavens as debt free properties.

I understand the transfer part but do you have any idea how the process works i.e. debt, if any, separated from the property.

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The Nile is a river in Egypt......

NeilGoBlue

The 'development' company buys the property in advance and let's the members of the club use them..... Members sign up and their deposits are kept in escrow, when there is enough money in escrow, the club purchases a home from the 'development' company..

Bourne

Ingenious.

The development company is going to take their cut anyway. Do it upfront and let members use it till funds are collected.

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