DC4MS

Is There a Destination Club in Your Future?

Mike Fitzhugh and Leigh Shimamoto
Kochis Fitz | Wealth Management Commentary

For as long as we’ve been advising clients, the topic of vacation homes has been one of the most frequent topics of consideration. We’ve helped hundreds of clients think through the personal preference and financial considerations that make vacation homes a good fit for some but anathema for others.

Recently a new category of “vacation home” has appeared – the destination club – providing a compelling alternative to second home ownership for many affluent families. Among our clients, rising interest in these clubs has caused us to become better acquainted with the increasing number of players, and the issues facing prospective members. (Sadly, none of the clubs attempted to influence our objectivity with offers of week-long site visits at any of the tantalizing sites available to members. Instead we have received about 100 pounds of impressive marketing materials; each club seems to have set a 5 pound minimum threshold for its introduction package.)

This article outlines some of the key features of destination clubs and refers interested readers to a third party resource providing more detailed information, including a good list of due diligence questions for serious prospects.
Overview

Most destination clubs are membership organizations. In return for an upfront initiation fee (typically ranging from $150,000 to $400,000), and annual dues (typically $20,000 to $40,000), members gain access to a portfolio of luxury homes in popular vacation locations. Most clubs’ contracts provide for the refund of 80% of the initiation fee when a member withdraws from the club, though typically three new members must join the club before a departing member receives a refund. Clearly, with such sums of money at stake, one consideration in selecting a club is the long-term financial viability of the underlying business. The basic economics of the prevalent business model are discussed later in this article.

Clubs offer a range of membership levels with the more expensive levels providing greater ability to reserve properties during the busiest times of the year, and more “use-days.” It’s hard to argue with the vacation spots available – typically a mix of beach, mountain, golf, and metropolitan locations, though some clubs focus on specific themes (golfing, skiing, fly fishing, international travel).

The clubs assign a personal membership representative to each member. This person serves as a kind of travel agent to assist with booking vacations and coordinate concierge services (would you like a private chef?). Most clubs also have their own online booking system that allows members to check which properties are available during their desired vacation periods, view photos of the properties and diagrams of the floor plans, learn about the surrounding area, and more.

The largest player in the destination club industry is Exclusive Resorts (ER), whose public face and 50% equity owner, is Steve Case, late of AOL. ER controls approximately $1 billion of real estate, or about half of the entire industry at this time. Other top players include Private Escapes, Quintess, BelleHavens, Ultimate Resorts, and High Country Club.
Might This Be A Good Fit For You?

Aside from affordability issues, it seems to us that the destination clubs are most likely to appeal to families that like to vacation with others and either can access the properties that interest them at the times they want to visit them, or are willing to travel to properties that are not their first choice but that have availability. Apparently this profile is relatively common locally, as the greatest concentration of members in almost all destination clubs is from the San Francisco Bay Area!

Except in urban areas (New York, San Francisco, Paris, London), the destination properties tend to be large (3,000 to 5,000 square foot) luxury homes. Such expansive properties allow extended family get-togethers, or room for your kids’ friends to come along. If your family prefers such shared vacation experiences, the economics of club membership versus some of the alternatives can be appealing.

But luxurious homes in beautiful locations aren’t of much use if you can’t get a reservation when you want one. Competition for the use of club properties at holiday and school vacation times can be intense. Clearly, member demand for the Deer Valley, Utah properties will exceed supply during February’s ski week. Families with school-aged children can feel especially vulnerable to these limitations. Thus, a willingness to vacation at properties with availability, even if not a preferred location, is a desirable trait in club members.

Each club has its own solution for their calendar-constrained members and prospective members should thoroughly understand the reservation protocol and test drive the online booking system for each of the clubs that make their short list. We’d also recommend that you speak with existing members (we may be able to help with that, as some of our clients are members) as part of the due diligence process.
The Financial Model

Tanner & Haley, formerly known as Abercrombie & Kent Destinations, was one of the first destination clubs in the industry; last July it voluntarily filed for Chapter 11 bankruptcy. Tanner & Haley had not only offered many of its early memberships at deep discounts, but promised members that anytime they weren’t able to get the reservations they sought, the club would lease comparable properties on the open market for them. Despite some early success, this model resulted in significant negative cash flow and eventually, Chapter 11.

The plight of Tanner & Haley highlights the importance of understanding the financial viability of the club you might be interested in joining. All clubs must now address prospects concerns regarding their financial standing, some by proving meaningful transparency into their operations. The industry has formed what is intended to become a self-regulatory organization of sorts, the Destination Club Association. To gain membership in the DCA, a club must have third party certification that it has passed a “net asset test” and provide disclosures including the number of members that have resigned and the longest wait for a resigned member to receive his refund.

The basic financial model looks like this: a club that promises an 80% refund of the initial membership price gets to book the 20% non-refundable portion as current revenue, along with the annual dues paid by all members. These funds are available to cover sales & marketing, overhead and operations. The 80% portion, in combination with debt financing, is used to acquire and develop the real estate portfolio. Clubs seek to maintain a balance (frequently about 6:1) of members to properties.
Delving Deeper

If you’d like to know more about the players and the economics of the industry, a good next step is to read The Independent Guide to Destination Clubs, from Helium Report. (In addition to providing the evaluation guide to destination clubs, Helium Report provides similar guides to the world of private jets, yachts, and fractional real estate, and serves as an information distribution resource for these businesses. From our review of the Guide and conversations with the destination clubs themselves, Helium Report appears to maintain its objectivity, although it is clearly a proponent of the industry and collects advertising dollars from the clubs themselves.) The Guide is available at Helium Report | Objective Guide to Luxury Vacation Real Estate & Travel. Although you are required to provide some personal information before downloading the Guide, Helium Report’s stated policy is to share your information only with those clubs you request information from (and you don’t have to request any club’s information to download the Guide).

The Guide is a well written and even-handed resource describing the factors which should be considered (including a thorough list of due diligence questions), providing tools for analyzing the economics of destinations clubs versus buying a vacation home and other alternatives, profiling the clubs, and more. Since the Guide is updated only annually, it isn’t always current with the latest developments in this rapidly evolving industry, but the Helium Report website provides articles on recent developments.

As always, your Kochis Fitz client service team is happy to help you assess destination clubs as one of your alternatives in the larger realm of vacation alternatives.