DC4MS

I was invited by Equity Estates to visit their Atlanta headquarters, meet their staff, review their membership offerings, and have lunch with their executives.

Equity Estates (Fund I) is a Georgia company (similar to an Equity Destination Club) organized for the purpose of investing in a diversified portfolio of luxury vacation residences with the objective of providing investors (members) the dual benefits of the use of vacation residences and participation in the potential appreciation of their properties.

The club was formed in November 2006 and is only open to “accredited investors” (i.e. $1m net worth, $200k per year income for past two years, or $300k combined household income) as defined in Regulation D promulgated under the Securities Act if 1933. Their goal is to assemble a $100-120 million dollar real estate portfolio and have 300 Full membership interests with a total membership limit of 400 individual members (including a limited number of 1/2 members called Executive Members).

The two offerings are:
Full membership - $350,000 fee, $16,500 annual dues, 30 nights of use
Executive membership = $185,000 fee, $9,250 annual dues, 15 night of use

Equity Estates plans to use 80% of the membership fee (capital contribution) to acquire properties, furnish the homes, and establish an ongoing reserve of $50,000 per property for future repairs and improvements. The remaining 20% will be used to establish an operating account to pay for the costs associated with running the business.

I spent most of my time (about 4 hours) with Adam Capes, President and was later joined by Philip Mekelburg, CEO for lunch at an incredible Southern restaurant called the Horseradish Grill (highly recommended if you are in Atlanta). They quickly informed me that they are both equal partners and their exact titles were less important to them individually as they work as a team on all major decisions and club strategy.

My first reaction to meeting Adam and Philip was a bit of surprise as they both appear to be very young, not that I am an old guy myself. However, after speaking with both of them, they are clearly wise beyond their years as they both attended the Ivy League Cornell (Class of 95 and 91 respectively) and are very well educated on the current Destination Club industry. Also, it was quite refreshing to spend quality time with two executives that are so down to earth and not concerned about personal egos.

They both explained their business model and growth rate since starting the fund in November 2006. They started with an initial 15 members, added another 12 member over the next year with only the two of them running the fund, are currently have 40 members (May 2008), and believe that they can reach 60 members by November 2008 as they have just added several key staff members to help with sales, marketing, and member services.

One of the challenges that Equity Estates faces is the limitations of their advertising and the requirement of selling only to accredited investors as this investment is more like buying a mutual fund than it is like joining a club. However, if they are able to double membership every 12 months, then it would be realistic to see them sell out by November 2011.

When asked about how they compare to the industry giant Exclusive Resorts, they both answered in remarkably similar, but slightly different ways. They both believe that they are offering a significantly different opportunity than Exclusive Resorts (or any other club) in terms of potential capital appreciation and they feel that they are not really in direct head-to-head competition with any of the clubs. They stated, “It’s not about what can we do the same or different than other destination clubs, it is about what can we do better than the other clubs. We intend to run a financially tight ship and provide a return on our membership contributions that are far superior to any other club offering.”

Adam showed me a real-time spreadsheet of their seven property availability and it looked very good as far as I could tell. There was tons of summer weeks available for 2008 and some of the major holidays were still wide open. It appeared that their Turks and Caicos property was the #1 requested property followed by New York.

A quick calculation showed that there was an astounding 81% availability for the next 12 months (May 2007-May 2008), 71% availability for the next 90 days, 69% for the next 60 days, and 80% for the next 30 days. Adam informed me that their current member to home ratio was 5:1 but their maximum ratio would probably be 7:1 and that they would put a limit on leasing to 30% of their total homes. I was also impressed to see 90% availability for Bachelor Gulch and 85% availability for Deer Valley for the next 12 months. Naples, Florida appeared to be the least popular property in their portfolio.

They place a 23 night reservation limit on members at any one time and can even accommodate reservations five years in advance. They have a lottery system set up for the ever popular Christmas and New Year holidays and guarantee that if you don’t match any property during those two weeks, they will place you in front of the line for next year’s lottery.

One interesting topic of discussion was Equity Estates involvement in the local community and the “Southern Hospitality” that is so palpable in their offices. They have collectively donated over $100,000 to local charities in the form of silent auction vacations. I advised them that they should seriously consider creating a press release announcing this as this was a fantastic way of giving back to the community. As far as having a Southern charm, well most of their members are from the southeast area and that is the standard operating procedures for any company based in Atlanta.

The actual office location of Equity Estates is not located in a typical Class A building and that was done on purpose to maximize their cash flow. As I quickly learned, everyone at Equity Estates is concerned with making sure the majority of the investor money is well spent and upgrading their office decor was not a current priority. However, one of the rooms at their headquarters was professionally decorated like a typical living room in one of their homes and that is where we spend a considerable amount of time. In fact, I don’t think they even have a board room as most of their meeting appeared to take place in that room and after I visited with them, I can honestly say it was one of the most comfortable conference rooms I have ever attended.

The pièce de résistance of the meeting took place when they presented me with their incredibly impressive sales and marketing box. This elaborate leather trimmed box with multiple bound inserts featuring original color photographs of all of their properties has immediately set the high bar mark for the most elaborate (and expensive) brochure of any of the Destination Clubs I have seen. I will post a full review of the kit at a later date as the estimated cost is about $1,000 each. Unfortunately, I have to ship it back to them in a few weeks as they only have 20 of these that they let prospective members take home for a few weeks to enjoy. There are several inserts and more modest brochures that I can keep, but I will be sad to see the presentation box leave in a few weeks.

The club has a target date of November 2021to either wind down (liquidate the properties), sell to another management group, or restructure. They estimate that a $350,000 investment can grow to $767,769 at the end of 2021 if there is a 9% annual appreciation on portfolio owned homes. Adam shared several spreadsheet printouts with me that I will post and discuss in the next week or two as they are too detailed to review here.

When the fund was started in November 2006, the membership fee was $300,000, it was raised to $325,000 within the first year, and then again to the current $350,000 in 2008. They feel that they can raise the price about $25,000 every 6 months and expect to top out around $500,000 when they approach the 300 Full member equivalent sell-out. When they are sold-out , they will then charge a 1% management fee of the Net Asset Value to continue to manage the club.

The main goal of Equity Estates is to return each membership deposit in full at the end of 2021 and then split the capital appreciation of the real estate portfolio 80-20% with the member getting the larger share of the profit. Their second goal is to average a 7% or more property appreciation as this would be the break-even point for a member to recoup all their annual dues and have 100% of their capital contribution returned, in effect providing members 15 years of “net zero” cost vacations.

Equity Estates has an interesting and potentially lucrative Destination Club alternative to all the other clubs and it will be fun to watch them grow and add more properties over time. I will probably meet them again in Miami as they are planning on attending the IMN Destination Club Symposium at the end of the month, but they will probably not even be noticed by the other clubs as they are so modest and low key.

NeilGoBlue

I spoke with them several months ago. As much as I liked a lot of what they said, the one thing that gnawed at me was their assumption of a 9% return. To me, a return like that was so absurd every year for 15 years, that it made me question their whole business model (if they were that absurd with that assumption, what else was 'out of whack'.

Maybe I was making a mountain out of a mole hill... i just had a hard time with it.

DC4MS

I too questioned the 9% rate, but they informed me that the areas where they actually bought property (not leasing) have actually increased in value. The NYC property in particular has risen about $500k already (if I recall correctly) and the others have also increased.

They said the markets they are interested in have an average appreciation rate of 10% or more over the past 10-15 years. But we all know past performance is no guarantee of future returns. Interestingly, most popular vacation spots were expensive in the past, are more expensive now, and will be significantly more expensive in the future. Prices are a reflection of supply and demand and areas like NYC, Aspen, Maui, etc. have pretty tight supply and very high demand.

I actually asked them to recalculate all their projections using a 5% annually compounded rate as this is one calculation where it is better to LESS aggressive when evaluating the club. Adam said he will e-mail me a report in a day or two.

I tried to find some data on vacation home appreciation and here is one (pre 2007 quote) - Between 2001 and 2006, the median home price in the 30 top vacation markets rose 120 percent, according to David Stiff, senior economist for Fiserv Lending Solutions - nearly twice as much as the appreciation in primary markets.

In reality, all the stats are moot because the ROI will be determined by the specific markets Equity Estates buys into and their ability to find bargains. There is no question in anyone's mind that the cost of a NYC condo, Turks & Caicos beachfront unit, home in Cabo, etc. will cost MORE than it does now....what percent increase is anyone's guess.

Kagehitokiri

so theyre leasing properties. any other differences from crescendo's original model?

crescendo announced a ~9% annual increase at one point.

not doing press releases about their charitable contributions = classy.

re their office, i know someone doing a 1 year stint at a hedge fund in CT, who described his office as a "dorm" IIRC.

DC4MS

According to Equity Estates, they can't solicit the general public for a private offering.

This means that they are not allowed to advertise in newspapers, magazines, radio, television, or the Internet.

Fortunately, we are allowed to discuss them as this is a "user generated" content site.