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Vacation Club's Woes Are Bad Trip for Rich

Tanner & Haley's bankruptcy filing shakes industry that provides luxury properties to affluent members. Seeking a refund on a $450,000 deposit

By AVERY JOHNSON and MICHAEL CORKERY
August 5, 2006

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To Richard Korpan, Tanner & Haley Resorts seemed to have invented a great vacation concept. Its "destination club" offered members the run of a blue-chip portfolio of vacation homes -- with none of the headaches of actually owning them.

After plunking down a $450,000 membership deposit, the 64-year-old retired chief executive of Florida Progress Corp., an energy company, spent time in upscale homes in Telluride and Aspen, Colo., and in a luxury apartment in Manhattan. Tanner & Haley arranged for lift tickets for his family, stocked the homes with groceries before he arrived and even provided a birthday cake.

Best of all, says Mr. Korpan, his membership documents promised that once he had been a member for 18 months, Tanner & Haley would refund his membership deposit when he wanted out. Last winter, after he bought a second home in San Diego, he asked for his money back. At first, he says, the company said he'd receive it within 30 days. When that didn't happen, he says, it promised to wire the money within the week. Eventually, it stopped returning his phone calls.

On July 23, 62 corporate affiliates operating under the Tanner & Haley Resorts name sought federal bankruptcy protection. The Chapter 11 filings, which disclosed operating losses of $64 million in 2005, have left Mr. Korpan and many of Tanner & Haley's 873 other well-heeled members angry, confused and embarrassed. They want to know what happened to their cash deposits -- which started at about $85,000 for early members and went up to about $1.3 million for more recent ones -- and to thousands of dollars they each paid in annual dues and property-use fees. As unsecured creditors in the bankruptcy, members say, they could lose much of their deposit money.

"There are a lot of presidents of companies, CEOs, lawyers and doctors...really bright people, who feel kind of naive, myself being one of them," says Chris Stevens, 33, a Sacramento, Calif., home-building executive who put down a $750,000 deposit to join the club in March.

For decades, promoters have offered vacationers alternatives to choosing between hotels and second homes. The time-share industry sells chunks of time at particular resorts or sets of resorts. In most cases, buyers own deeded interests in the properties, which they can resell. In that industry's early years, it was tarnished by questionable marketing tactics, among other things, and state regulations were put into place.

Tanner & Haley offered a novel twist on the time-share concept for the very affluent: It would buy homes in desirable locations around the world, then charge membership fees for access to them. The model is more akin to a country club than a time-share. Members own no property at all; they just have the right use an array of homes for a set amount of time each year. The concept caught on, and a loosely regulated industry took shape. There are now more than 20 such destination clubs, including Denver-based Exclusive Resorts LLC, which is controlled by America Online co-founder Steve Case.

Interviews with Tanner & Haley members and with former employees, along with bankruptcy-court filings and lawsuits, suggest that the privately-held company, based in Westport, Conn., had struggled for months to pull in enough new members to stay afloat. The company had trouble lining up enough homes in desirable locations and had to lease some properties at high cost. Some members say the quality of accommodations began slipping. More troubling, members say, the company was unable to make good on its promise that members could get back their deposits.

Some members say they agreed to the hefty membership deposits only because the company said most of the money would be used to buy real estate, which they figured would appreciate over time. The bankruptcy filing listed $308 million of "member deposit and other liabilities." The company says it had borrowed $61 million, and that it owns only $130 million in real estate.

"I can't imagine where all that money went," Mr. Korpan says. A Tanner & Haley spokesman says the company will be reviewing that question and reporting its findings to the creditors committee in bankruptcy court.

Tanner & Haley's troubles have shaken the destination-club industry, prompting competitors to try to reassure members that their own finances are sound. Exclusive Resorts and another club, Private Escapes, have sent members letters recently outlining how their business models differ from Tanner & Haley's. Mr. Case has urged the American Resort Development Association to consider regulation. Earlier this summer, the industry formed an association of its own to self-police.

At the center of the storm is Tanner & Haley's chief executive officer, Rob McGrath, who pioneered the destination club concept. A former trader at J.P. Morgan Chase & Co. and Nomura Holdings Inc., Mr. McGrath, 46, had been captain of the Dartmouth College ski team and spent six years racing professionally before attending business school, the company says.

"Unfortunately, the dramatic growth of the business ultimately revealed flaws in the business model that led us to seek Chapter 11 protection," Mr. McGrath said Thursday in a prepared statement. He said the company believed it could reorganize successfully and continue to service its members, but he declined to respond to specific questions about the company's troubles.

A Tanner & Haley representative says the company remains in business and continues to "meet substantially all" previously booked travel plans of its members.

Mr. McGrath started the first-ever destination club, Private Retreats, in 1998. It offered houses in a handful of destinations, including Vail, Telluride and Steamboat Springs, Colo.; Jackson Hole, Wyo.; Scottsdale, Ariz.; and Cabo San Lucas, Mexico. From the beginning, he devoted considerable time to personally helping members, a demanding crowd that often had very high standards for service. Mr. McGrath would regularly receive more than 50 phone calls and 200 emails a day from members, the company says.

Membership grew quickly. In 2003, he struck a deal with London-based Abercrombie & Kent, a 44-year-old luxury-travel company known best for high-end safaris. Abercrombie's clients are wealthy and discerning, and are given to taking exotic vacations in small groups. Mr. McGrath agreed to a hefty licensing fee to Abercrombie & Kent for use of its valuable name. An Abercrombie spokeswoman says Mr. McGrath's company was contractually obligated to inform prospective members that Abercrombie was neither involved in nor responsible for the "management, operation, and maintenance" of the clubs. Tanner & Haley says it complied with this provision.

After changing its name to Abercrombie & Kent Destination Clubs, the company launched a higher-end club called "Distinctive Retreats," which required a deposit of $392,000. Members say the company told them that for every six people who joined, it would buy one new home.

Mr. McGrath got a boost in 2004 when Andrew Harper's Hideaway Report, an exclusive travel guide, recommended his venture to its 25,000 readers. "I was just really sold on the idea," says Mr. Harper. "It was a very compelling alternative to second-home ownership." He says he is now "deeply embarrassed" by his recommendation.

Potential members took notice of the recommendation. "I concluded it must be a pretty solid venture because it was Andrew Harper and Abercrombie & Kent," says Bruce Bishop, a 54-year-old lawyer from Norfolk, Va., who says he is owed $450,000.

Mr. McGrath's company eventually decided that the royalty fees to Abercrombie & Kent were costing it too much money. The two companies severed their relationship last year, and Mr. McGrath renamed the company Tanner & Haley, after his two children. Abercrombie said at the time it wanted to "maintain full control" over its "valuable brand name," but did not elaborate.

By then, Mr. McGrath no longer had the market to himself. Numerous competitors had begun offering similar products. Helium Report, a Web site for the wealthy, estimates there are now 24 destination clubs in the U.S. and Canada. Exclusive Resorts LLC accumulated 2,200 members and became the market leader.

Some of Tanner & Haley's competitors charge members an up-front deposit of as little as $30,000, while the most exclusive ones now ask for about $3 million. Like Tanner & Haley, most offer to refund up to 100% of deposits to members who resign, provided a specified number of new members join after the request is made.

Over the past year, Tanner & Haley's problems began to intensify. The company had begun buying undeveloped lots and investing in resort developments before they were built. It experienced delays on some projects. In a conference call with some members in December, Mr. McGrath acknowledged that the company had purchased too many homes in some locations, such as Nevis in the West Indies, and not enough in others, such as Colorado.

"I respect some of the frustration that I've heard from some of you guys," Mr. McGrath said on the call, in reference to a delay in a Hawaii project. "It's not like we aren't screaming, too." A digital copy of the call is stored on a Tanner & Haley membership Web site.

In Florida and some other vacation spots, Tanner & Haley bought homes in exclusive developments, then sometimes faced complaints from homeowner associations or local officials that using the properties for business purposes violated zoning regulations or community bylaws.

Members on vacation began detecting worrisome clues about the company's finances. Jim Hammond, who says he owns several restaurants in the Southwest, put down $215,000 to join the club about three years ago. He says he became worried about the number of leased properties that he and his wife were staying in. About a month ago, his wife stayed in a leased home in Hawaii, when an owner unaffiliated with Tanner & Haley came in to hang art on the walls. Last month, Mr. Hammond said he asked for his deposit back, but never received it. "They entice you into these things and they don't even buy the houses," he complains.

Randy Heady, a Dallas commercial-real-estate investor who paid $450,000 to join in 2004, says he signed up to stay at what Tanner & Haley described as an oceanfront home in Nassau, but arrived to find the house on a canal with no access to the beach. The building "would shake and shimmy from morning to night" from low-flying aircraft, he says. The company says that because of a delay on a property development there, it had to rent more homes than usual, but that it would never knowingly put a member into a less-than-optimal property.

David Latko, a 53-year-old author and radio host from Frankfort, Ill., arranged to stay on a houseboat on Arizona's Lake Powell. The air conditioning in it didn't work, he says, causing it to get so hot his children's Oreo cookies melted. The company says the air conditioner wasn't broken, but that the outside temperature was so high it couldn't adequately cool the boat. Mr. Latko also says the heating malfunctioned during his stay in Telluride last Christmas, and he had to rely on two space heaters provided by a concierge. The company says it responded promptly to his complaints.

Mr. Latko says Mr. McGrath told him at a meeting of a members' advisory board in January: "David, you just keep falling through the cracks." Mr. Latko says he told the company in May he wanted to quit, but he didn't get his deposit back before the bankruptcy filing.

Some members say the only fault they found with the club is that it spent too much money trying to please them. Robert Darvin, 65, president of In Home Furnishings in Norwood, Mass., says that on a recent trip to Kiawah, S.C., the club stocked the home with "every kind of toy imaginable" for his grandchildren. He says he paid $417,000 to join in 2004, and that he'd be willing to kick in up to $20,000 more to keep the club going.

By last summer, the company was having trouble paying bills, former employees say. "Utilities were getting turned off, corporate [debit] cards were getting turned off, and the excuse was that membership sales were slow," says Kurt Strauss, the company's former general manager in Florida. "There was a big fear that members would redeem" their memberships. A company spokesman says that debit-card maximums were sometimes exceeded on holiday weekends, and that "clerical issues," not lack of money, may have prevented it from paying electric bills on time on one or two occasions.

There was confusion over its deposit-refund policy. Under the standard policy -- a common one in the industry -- a resigning member could receive a full refund, but only after three new members joined. But Mr. Korpan, the retired energy-company executive, says he was told two years ago that if he remained in the club for 18 months, he would get back his $450,000 deposit plus an additional $25,000, regardless of whether new members joined. Mr. Korpan sued a Tanner & Haley affiliate in Colorado state court for the return of his deposit. The company declines to comment on the suit.

Even though problems were mounting, Tanner & Haley launched other ventures offering members fine wine and high-end car rentals, but they did not generate significant revenue, the bankruptcy filing indicated. A new club level called "Legendary Retreats," which required a roughly $1.3 million up-front commitment, was started last year, but attracted only 15 members, according to the filing.

Tanner & Haley executives had been aware for some time that the financial situation was getting worse and were trying to raise more capital, both debt and equity, a company spokesman says. The company didn't realize until late June that additional funding would not be available, the spokesman says. At that time, it hired XRoads Solutions Group, a restructuring firm.

At the end of June, Tanner & Haley installed Holly Etlin of XRoads as a financial adviser. She says she determined that Tanner & Haley "was very shortly going to run out of cash." She ordered it not to accept any new members and to put a moratorium on returning deposits. Within weeks, the company had sought bankruptcy protection.

On Thursday, a bankruptcy-court creditors committee was formed. "We want to find out where the money went. We want to preserve vacations as much as we can. And we want to get the company on sound financial footing," says Michael J. Reilly, the committee's lawyer. Evaluating Mr. McGrath's future with the company, he said, "is front and center" on the agenda.