DC4MS

There is considerable debate (with no clear winner) about the value of the "Cost of Capital" (aka Opportunity Costs) to join a Destination Club.

I have asked this question to dozens of individuals across a wide spectrum of clubs and personal net worth. My only conclusion is that there is no clear consensus.

When I designed the DestinationClubForums.com "Comprehensive Membership Analysis Tool" for the major Destination Clubs, I decided to split the tool into two tabs - the first tab does not include capital costs and the second tab allows a user to input a percentage (compounded annually) of their anticipated capital costs. That way, everyone would be satisfied.

Whenever I spoke with a Destination Club sales staff, they preferred to NOT factor in capital costs for obvious reasons....the cost per night will be less. However, they admitted that this topic often comes up for discussion when a person is seriously considering joining their club and they usually agree to factor in a "realistic" cost such as 4%.

The analytical thinkers that I spoke with such as hedge fund managers, financial executives, real estate investors, attorney all account for the capital costs in their decision to join a Destination Club. Most have realistic expectations of a set cost of capital in the single digits, but one person valued his cash at 20% (mezzanine finance business).

The creative thinkers that I spoke with such as entrepreneurs, Internet millionaires, small-to medium sized company CEOs, advertising executives , and risk takers seemed less interested in factoring in their cost of capital. They focused on the "found opportunities" of joining a Destination Club like access to incredible properties, concierge services, ability to entertain clients while on vacation, and bragging rights. One members equated it to buying a yacht or plane....they can't really justify it in terms of a financial investment, but they felt the non-financial benefits far outweighed any cost of capital.

I see both sides of the fence and quite honestly, I am not convinced either way which method is correct. It really is a personal decision.

If you are looking at joining a Destination Club in pure dollars per night as compared to staying in a hotel, renting a home, or buying a PRC, then you should really compare each option equally and the cost of capital would be a real factor for you in joining a Destination Club.

If you are considering joining a Destination Club as a pure lifestyle choice to enjoy all the benefits of Destination Clubs that can't duplicated with any other product, then cost of capital is not such an important factor.

One Destination Club member joked that if they factored in the cost of capital on every major purchase like jewelery for his wife, private school for the kids, art work for his office, he probably would suffer from a "paralysis by analysis" and never spend any of his money and eventually die a rich (but unhappy) person.

I am interested in hearing other "opinions" but lets try to respect and understand each viewpoint as this is an impossible debate to win.

Desties

I think cost of capital is important. Even the most conservative of members should calculate what the after-tax yield would be on the refundable part of the deposit if it was sitting in a money market fund or short-term CD. That's a nearly zero risk resting place, so it should be the floor of risk-free assumptions.

What complicates things is that different clubs offer different things (like 80% of the future value, equity participation, etc.) so it blurs the dynamics, but I think it would be wrong to assume that a deposit has no appreciation value if it wasn't investing in a club.

Just my two cents.

LTTravel

The problem with all these over calculations is they are only valid for the present. There are so many variables that cannot be accounted for. For example, if you use the cost of capital, that is fixed, and only the annual dues are subject to yearly increases. The larger the cost of capital, the lower the actual cost of yearly increases. For example, if you calculate your cost of capital at $15,000 and yearly dues are $15,000 and the yearly dues are subject to a maximum increase of 2x CPI, they your increased net cost increases only by 1x CPI per year because the cost of capital does not change on a yearly basis. It gets more complicated when the maximum increase is CPI + a %, because then it varies by how much the CPI changes. If CPI changes by 4% and the maximum cap is CPI + 4%, then the yearly change is the same as above. But if CPI changes by 4% and your contract allows increases of CPI + 2%, then your cost changes by .75% xCPI per year.
So whether or not you use the cost of capital, calculating what this membership is costing you is impossible, especially when you consider what you count as the cost of your capital, anywhere from 2% to 20%.

When Disney opened Disney World in 1971, the cost of an adult admission was $3.50. Now it is $75.62. When the Contemporary Resort opened in 1971, an article in the paper implied that they would never get anyone to go there with a price for a room around $27. You would have to compound that at 7.5% to get to todays price. Many more examples can be sited. I remember the prices of the Ritz to be around $275 just a few years ago. Now, I can't seem to find any under $500 per night.

So what the future will hold in terms of prices for various things or services is unpredictable. Computers are cheaper than ever, luxury vacations are more expensive than ever. Time will tell whether this young industry has been a financial value to the early adopters. Certainly, the earliest adopters of the successful clubs have no need to calculate the cost of capital now as they paid such low prices and reaped the benefits of the expanding clubs.

All I know is though I think in the back of my head what the cost of capital has been, I try to forget about it and enjoy the wonderful vacations.

DC4MS

Well said!!!

Most of these mathematics exercises are for people considering joining a DC to get an idea of value or for people that already joined a DC to reinforce how smart they were for buying before the frequent price increases

I highly doubt anyone has the "financial fortitude" to allocate an equivalent amount of money (as compared to whatever DC they may be considering) and then put that into a 5 or 10 year CD and only vacation on the interest (minus taxes).

Also, the "cost-per-night" or the "cost per bedroom" metric is a good gauge to compare the costs associated with joining a DC vs renting a home on VRBO.com or some web site.

I like the DisneyWorld example or this interesting website to measure the historic cost of food and other items.

The Food Timeline--historic food prices

One discussion that I never see is what will the cost of joining a DC be like in 5 or 10 years from now as compared to now.

Tedpilot

I think I might be a little different than most - my relative starting point was already committed. Simply, I saved money to buy a vacation home. The side I struggled with in terms of lost opportunity cost was property appreciation...I wouldn't get any with the typical club. I looked into several venues besides outright ownership and came across DCs. That being said, if someone is very sensitive to opportunity costs then they ought to lean toward a club that they get something more back if/when they drop their membership than what they initially deposited. If they're not sensitive then it does not matter. Along these lines then why did I join HCC? Easy, as one of the first members I actually get 80% of the current membership price, my initial cost was far less than a 20% deposit on a vacation home (thus not all saved cash allocated to vacation home = toys), I'll get the same amount of use I was planning on, better homes, service, no problems to deal with except when and where do I want to go. I got very lucky finding HCC when I did and have been fortunate enough to see them expand at a nice pace over the last 2+ years with only a small amount of money at risk. Bottom line: better vacations, lower per night expenses, and no stress over ownership or finding good places on VRBO or the likes.

My simple recommendation to anyone considering any DC...don't wait, prices will continue to go up and that in itself could outpace opportunity costs you might have in the first few years or beyond at current market rates.

safigan

I love your quote that DCs don't "want you to" include cost of capital in their calculations. Until they pay me interest on the deposit, you bet your bippy I'll include cost of capital in the calculation!

The bottom line is, what is your money worth to you? What can you get, after taxes, to invest it elsewhere assuming the same risk? If you assume there is NO risk of not getting your money back (a foolish assumption), then use the T-bill rate, about 4%. If you see the deposit as risky as, say, stocks, then use 11%. If you see the deposit as risky as investing in a venture capital fund that invests in start-ups, then use 20%. Or use something in-between, using your own assessment of the risk that you'll end up losing a part or all of the capital.

DC4MS

I posted the comment about DC sales reps and directors (no names were used) as an example of those that do not "prefer" to include the cost of capital in determining the cost of membership.

I have also received the same answer from yacht brokers, fractional jet sales reps, Private golf club salesmen, exotic car dealerships, etc.

Your points are valid for "you" and others, but not for all.

I have talked to many "high net worth" individuals that absolutely do NOT factor in the cost of capital in their purchase decisions for Destination Clubs or any other discretionary purchases.

I am not a psychologist or a sociologist, but after speaking to someone for a little while, I can almost predict what their impression of capital costs will be as there are certain characteristics of individuals that are pretty common to both sides of the fence.

FYI - some Destination Clubs actually offer the "possibility" of receiving more money refunded upon resignation from the club, than what the member actually paid to join the club.

Desties

I think the distinction between a big-ticket purchase like a sports car or a diamond necklace for the wife, is that factoring the cost of capital on a DC purchase isn't about the investment as much as the comparison to the alternatives.

If you buy a car, you may weigh the various options. Beyond the different makes you're going to evaluate lease vs. buy, buy it outright vs. financing, etc. Those are the equations.

Buying into a DC, in part, is about comparing that value to what it would cost to bankroll a similar vacation, including all of the concierge-level services that remove the question marks from more conventional bookings. That's why I think using annual fees and any per night fees is incomplete without including what the initial deposit is denying you elsewhere.

Yes, it's great that we all approach this differently because there really isn't a single correct answer.

Steamboat Bill

In case you are having trouble sleeping, you can read this document on "Cost of Capital" from the University of South Florida College of Business

http://www.coba.usf.edu/departments/...es/costcap.pdf

safigan

To say that some high-net-worth individuals do not factor in the cost of capital into their DC purchase decisions is simply to say that the cost of capital would not change their decision even if they sat down and calculated it. If the cost of capital is truly a *non-issue* with them regardless of other circumstances, then I'll be happy to hold on to their money interest-free for as long as they want. If anything HNWIs tend to be *more* sensitive to cost of capital issues because they have enough capital to live off the earnings, whereas most people have to earn money the old-fashioned way.

NeilGoBlue

Safigan,

It's never that cut and dry or that simple... when you buy a candy bar for $1... and you could have bought a little debbie cake for $.25... do you calculate the lost opportunity of $.75? Of course not.. You might have some kind of conversation with yourself about the candy bar being too expensive.. but you don't look a the opportunity cost of $.75 for 3 years at 5%.

I'm in a bind like that all the time. I own a capital intensive business. Every dollar I spend is less money I make. (for 3 straight years I've made 25-30% on my money). My wife wants new window treatments..14K...I roll my eyes and think of the opportunity cost...

But, you know what? We need window treatments.. I just suck it up and place the order... So, sometimes we can overanalyze things to death... and at the end of the day.. you just make a decision, d**n the opportunity cost.

If you look really hard...you'll probably see yourself doing that although in a much smaller scale.. some people that have >10Mill just know that they want what they want and it is a lifestyle decision and just like someone might 'gut up' for the candy bar and I 'gut up' for the window treatments, they 'gut up' for the destination club.

safigan

I agree that we can overanalyze things to death; that's one of my weaknesses. So you're right, most people will act with less information than I gather and still make good decisions based on their own priorities. I just like to know the true cost of what I'm spending, including the opportunity costs. Then I feel I'm making a good decision with all the relevant facts. For instance, I find it very useful when comparing two DCs that have different deposits and annual fees-- a way of comparing apples to apples.

LTTravel

I agree that calculating cost of capital is most valuable when comparing one DC to another (just one factor you can use in comparing them)