Once upon a time, being classified as a "timeshare developer" was regarded by many as the moral equivalent to stealing candy from a baby. During the infancy of the timeshare industry, both in the United States and worldwide, widespread marketing abuses and, in some instances, outright fraud, beguiled unsuspecting consumers into dreaming of spectacular vacations at exotic locales that never quite materialized in the manner promised.
Times have certainly changed, particularly over the course of the past ten years, a period that has seen amazing progress in the areas of product innovation, consumer protection, customer satisfaction, and, of course, enhanced profitability for timeshare developers. The villainous timeshare developers of the late 1970s and early 1980s have been replaced by the likes of Marriott, Hilton, Hyatt, Disney, Ramada, Four Seasons, and Westin--names in which most consumers have the utmost confidence--as well as numerous highly successful independent operators. While no one can alter the tarnished image of timesharing's past, such history does provide a startling contrast to the present state of the vacation ownership industry, with annual sales volume in the billions of dollars and compounded growth expected to continue at from 15 to 20 percent per year for the foreseeable future. Talk among timeshare developers of initial public offerings is rampant after several phenomenally successful IPOs during the past two years, and the attractiveness of timesharing to Wall Street's investment bankers and venture capitalists has yielded commitments to invest substantial equity in the industry with hopes of immense profits to follow.
Unfortunately, along with its newfound respectability, the timeshare universe has also become increasingly complicated and undeniably fraught with both legal and practical pitfalls every step of the way. This article attempts to pierce this veil of complexity and highlight some of the recent trends in timeshare development, the potential pros and cons of different forms of timesharing, and where some of the largest growth opportunities appear to be as the industry heads into the next century.
Early Forms of Timesharing
Having originally begun in Europe in the 1960s, the timesharing concept quickly attracted the attention of developers in the United States, many of which were operating underperforming hotels or motels or unsuccessfully attempting to sell "whole" ownership condominium units. By further legally subdividing condominium units into 52 "unit weeks" or "intervals," such developers were often able to sell a unit in timeshare increments at a far greater aggregate profit than would have been realized through the sale of the "whole" unit to a single buyer. While many purchasers received a recorded deed, title insurance, and other indicia of real property ownership, some developers sold "right-to-use" timeshare interests that consisted of mere contractual use rights with no corresponding deeded interest in real estate. In both situations, the purchaser usually obtained the recurring right each year during the term of the timeshare plan to occupy a specific accommodation during a specific period of time consisting of seven consecutive days and nights. In some cases, the purchaser could save money by purchasing a "biennial" timeshare interest that allowed occupancy at the resort for seven days and nights every other year.
The growth of timesharing in this country was greatly accelerated by the worldwide exchange services offered by such companies as Resort Condominiums International, Inc. and Interval International, Inc. that attempted to accommodate consumers' demand for flexibility in their vacation planning by offering a means of exchanging the use of a particular resort's accommodations and facilities for those at a comparable resort in a totally different geographic location and at a completely different time of the year than the timeshare owner's "fixed" week.
Developers themselves gradually adapted to their purchasers' goal of achieving flexibility by selling "floating" timeshare interests. In a floating timeshare regime, each owner expressly relinquishes the right to use and occupy any specific accommodation during any particular period of time. Instead, he or she must generally telephone a central reservation number, request that a particular occupancy period be confirmed (not always the owner's first choice), and (like a hotel) be assigned a particular accommodation upon check-in. Some developers have offered a combination of "fixed" and "floating" occupancy periods so that, for example, a purchaser who is willing to pay a premium can guarantee occupancy at the resort in question during Christmas week each year. In addition, timeshare owners can sometimes reserve "split" occupancy periods that are shorter than seven consecutive days and nights.
The foregoing relatively simple forms of timesharing have generally been sold to consumers for between $7,000 and $25,000 per week of guaranteed occupancy, depending upon such obvious factors as resort location and the relative demand for accommodations there, combined with the amenities available for use by timeshare owners and the overall degree of luxury afforded.
Financing
Because most timeshare developers wish to make purchase money financing available to qualified purchasers at the time of sale, the need has arisen for even well-capitalized developers to raise cash quickly in order to pay front-end development and marketing costs until cash flow catches up with expenditures. Typically, such a developer either sells or hypothecates (i.e., pledges) its timeshare receivables to one of several specialized timeshare lenders, including FINOVA Capital Corporation, Textron Financial Corporation, Heller Financial, Inc., and Credit Suisse First Boston Corporation, and uses the loan proceeds partially to satisfy any blanket liens that encumber the timeshare interests being sold and to meet other immediate cash needs. In many instances, the spread between the interest rate charged by the developer and that charged by the hypothecation lender is sufficiently large that the developer ultimately generates greater profits from making purchase money loans than from selling the timeshare interests themselves.
In recent years, several timeshare developers have successfully securitized their timeshare receivables as an alternative to selling or hypothecating them. In addition, new sources of equity are increasingly becoming available from large institutional investors in this country and abroad, reducing the overall cost of capital in the process.
Fractional Ownership
The trend toward ever greater use options and the desire to market to a more upscale audience has resulted in the proliferation of so-called "fractional ownership" resorts in which purchasers can buy more than a single week of occupancy per year in some of the world's poshest resort communities. Purchasers can own a fractional ownership interest for a small percentage of the cost of a comparable "whole" ownership accommodation but are entitled to virtually all of the benefits of whole ownership.
For example, the initial Owners Club project was developed in Indigo Run Plantation on Hilton Head Island, South Carolina, by a joint venture between The Melrose Company, a local developer, and Dallas-based Club Corporation of America, the nation's largest owner and operator of private clubs. For between $40,000 and $50,000, Owners Club purchasers acquire a deed to a one thirteenth undivided fee interest in a freestanding three-bedroom cottage on a separately platted lot and are afforded up to 27 days and nights of occupancy each year, with additional "bonus" occupancy available at a relatively nominal cost on a first come, first served, space-available basis.
Occupancy periods at the Owners Club can last as few as three and as many as 11 consecutive days and nights, as long as the aggregate annual maximum of 27 days and nights is not exceeded. As additional Owners Clubs are developed around the country (as many as a dozen or more are planned), members will be entitled to divide their use and occupancy among the various geographic locations, with similar accommodations to be constructed at each. The primary lure of membership in the Owners Club is the opportunity to play golf on some of America's best courses, including the ability to reserve tee times far in advance and receive discounts on greens fees and cart rental costs. Purchase prices of ownership interests at future Owners Club locations will vary based, at least in part, upon the price of comparable "whole" vacation homes in the same resort market.
Another fractional resort prominently featured in the news lately is The Franz Klammer Lodge, located in Telluride, Colorado. Purchasers of fractional ownership interests in this ultra high end project receive a recorded deed to a one tenth undivided fee interest in a two or three-bedroom condominium unit, along with the right to use and occupy the resort's accommodations for up to five weeks per year. The project's developer has primarily targeted prosperous individuals who could easily afford to pay one million dollars or more for "whole" ownership of a vacation home but instead choose to forego that option (including rental income) and its attendant management hassles and other burdens in favor of purchasing a fractional interest for as much as $200,000 that affords them as many days and nights of occupancy as they might reasonably be expected to use in a "whole" ownership context.
Timesharing Moves to the City
While the word "timesharing" normally conjures up images of tropical beaches and magnificent ski slopes, any property, no matter where it is located, can be sold on a fractional or timeshared basis, unless such use is prohibited by local law. After several marginally successful attempts in the 1980's and early 1990's, developers have once again been drawn to the prospect of selling timeshare interests in urban projects. Moreover, many people who never imagined purchasing a timeshare interest in a conventional resort location are finding urban timeshares attractive for weekend getaways in their favorite cities--in fact, some have admitted missing the city but needing the extra "push" that owning an urban timeshare interest provides to motivate them into occasionally leaving their yards and picket fences behind. And purchasers always have the option of exchanging their urban timeshares for the use of accommodations at thousands of timeshare resorts located throughout the world. Surveys conducted by the major timeshare exchange companies, Interval International, Inc. and Resort Condominiums International, Inc., suggest that many urban locations would be extremely popular as alternative vacation destinations for their members, effectively increasing the value of urban timeshares themselves.
In order to be successful, urban timesharing requires a specialized marketing approach that is tailored to the urban setting and the demographics of the target market. The Manhattan Club, which began sales last year, is planned to include as many as 360 condominium units of varying sizes on the top ten floors of the Park Central Hotel, located around the corner from New York City's Carnegie Hall. The property is being renovated and converted to timeshared ownership on a floor by floor "phased" basis. Owners, many of whom are suburbanites inclined to spend a few days and nights in the city from time to time and not have to rush back home, are entitled to use all of the hotel's amenities and are granted unusually flexible use and occupancy options to accommodate their busy schedules.
Similarly, Marriott is currently developing a timeshare project at Boston's historic Custom House that will include 80 units to be owned on a timeshared basis for a term of 60 years. The building in question, which was constructed in 1849 and through which goods coming into Boston Harbor were taxed and cleared for sale, will also include a museum, an owners' lounge, and an observation deck overlooking the harbor. Preliminary sales results at the Custom House have been phenomenal, even with a typical week in a one bedroom suite during non-holiday times of the year costing about $17,000.
Shell Vacations, LLC, a highly successful independent timeshare developer based in Chicago, is developing two timeshare projects in San Francisco, one near Fisherman's Wharf and the other, the Inn at the Opera, in that city's theater district. The latter project consists of 48 studio, one bedroom, and two bedroom units, with weekly prices starting around $13,000. While timeshare interests in all of these urban projects include deeded interests in real estate, a variety of complex legal factors can sometimes make the sale of "right-to-use" timeshare interests, typically in the form of a lease, license, or club membership, a more desirable option for developers.
Other cities considered leading candidates for urban timeshare development are Washington, D.C., Chicago, New Orleans, Phoenix, Miami, San Diego, Seattle, and San Antonio, as well as many of the major cities of Europe. The common denominator is that each has an established infrastructure of culture, arts, restaurants, shopping, business, tourism, and sports activities that attract a suburban, regional, and in some cases, national following. For example, a recent study by the Travel Industry Association of America concluded that Washington, D.C. is this country's top tourist destination for people interested in visiting historical and cultural attractions. Effectively, in places like Washington, D.C., New York, and Boston, the entire city is the desired amenity, not merely a single beach, golf course, or ski slope.
Given the shortage of affordable quality hotel rooms in many cities, the opportunity to stay in an ultra-luxurious suite at a cost significantly less than the typical nightly rate for a standard hotel room is obviously quite appealing to many travelers. Key attributes of most urban timeshare projects include extremely flexible "hotel-like" daily use and occupancy options--owners can typically break up their one week timeshare into seven one night stays and are entitled to "bonus" usage on a space-available basis at a cost well below standard hotel rack rates. Such flexibility meets the needs of those who like to visit the city but not for long periods of time and frequently upon relatively short notice. Special packages can be tailored, albeit at an additional cost to purchasers, for those who are only interested in Saturday night stays or who want to guaranty the availability of accommodations during certain recurring special events (for example, Mardi Gras in New Orleans) or times of the year. For ultimate flexibility, urban timeshare projects can employ a "point" system whereby a purchaser's timeshare interest is translated into a designated number of points, the annually recurring currency by which owners obtain the right to reserve, use, and occupy the project's accommodations and facilities. Such points are sometimes also redeemable for discounted airfare, cruises, car rentals, and other goods and services.
Virtually all urban timeshare projects feature some combination of daily maid service, wide-ranging front desk, bell, valet, and concierge services, private entrances and check-in facilities, twenty-four hour room service, good security, noise control, and other hotel-like features. In fact, urban timesharing is really a hybrid product that combines the benefits of ownership with the flexibility of use and the services that one typically expects from the best hotels. Moreover, from the developer's perspective, finished units ARE essentially hotel rooms that can be rented to transient occupants while sales are ongoing in order to generate extra revenue and offset operating costs.
While timesharing has typically been regarded as a vacation product targeted to the leisure traveler, some urban timeshare developers are also attracting businesses that must frequently procure hotel accommodations for their out-of-town visitors. Such users of timeshare units would obviously expect a full range of business-related services (including meeting space) to be provided as well, and developers are doing their best to accommodate them. Marriott and other urban timeshare developers have been pleasantly surprised over the greater than expected corporate demand for timeshare weeks in urban locations, although certain cities like New York are clearly better candidates to attract the corporate buyer than more leisure oriented urban locations such as Miami and Las Vegas.
Urban timeshare projects do face a unique set of legal and practical challenges, including the need to establish a consistent methodology for allocating taxes, utility costs, insurance premiums, and other amounts between the typically two or more separate uses of the single building in which the timeshare project is located. In particular, the lack of suitable vacant land in many cities often necessitates the refurbishment of an existing building which frequently entails major expense to bring an older building into compliance with current building codes. Furthermore, zoning and transient occupancy tax issues can dramatically affect a developer's plans to develop a timeshare project in a market that has experienced little, if any, timeshare development in the past. Phasing of vertical construction is also more difficult in an urban setting, except where an existing structure is being refurbished on, say, a floor by floor basis as is the case with The Manhattan Club, resulting in higher carrying costs on unsold inventory and increased financing costs for the project as a whole. Overcoming a lack of sufficient parking is another challenge unique to urban timeshare projects.
Product Hybrids--Vacation Ownership as Part of a Mixed-Use Development
Mixed-use communities that include a variety of different products, from residential lots along a golf course to whole ownership condominiums, resort hotels, retirement facilities, and private or semi-private country clubs, are frequently good candidates for the addition of a timeshare or fractional component as well. Among the opportunities created by such an arrangement is the chance to cross-market to a "captured audience" of existing resort residents and guests. The possibility also exists that timeshare owners will so enjoy their use of the resort's facilities and amenities that they will eventually purchase one of the developer's more lucrative products.
Frequently, the most formidable challenge in designing the legal structure for a hybrid development that includes a timeshare component is attempting to ensure that timeshare owners are continually entitled, at least for some minimum specified period of time, to use the "master" development's (or hotel's) recreational facilities and amenities. In many such situations, the timeshare accommodations are constructed on a legally differentiated parcel of land that includes some limited recreational facilities that are made available for the exclusive use and enjoyment of the timeshare owners. However, many, if not most, of such owners have bought their timeshare interests based upon sales representations that they would enjoy special privileges with respect to the master resort's golf course(s), tennis courts, spa, and other facilities and amenities in which such timeshare owners have absolutely no ownership interest whatsoever.
The most common solution to this challenge involves the execution and recordation of some form of resort (or hotel) use agreement that clearly specifies timeshare owners' rights, benefits, and privileges with respect to such master resort facilities and amenities. A resort use agreement typically grants all present and future timeshare owners (or a timeshare owners' association, on behalf of all such owners) a continuing right to use some or all of the master resort's facilities and amenities and details the relevant terms and conditions of such use.
For the most part, timeshare owners are treated as permanent resort residents, hotel guests, or full club members during any period of time in which they occupy a timeshare accommodation. In some cases (usually in situations in which most timeshare owners are within driving distance of the resort), daily use of the resort's facilities and amenities is permitted on a space-available basis, even if the timeshare owner is not staying overnight in one of the resort's timeshare accommodations. In consideration for his or her aggregate use rights, the resort owner (often not the timeshare developing entity) is typically paid some sort of up-front "initiation" fee, annual resort dues, or a combination of both.
A final crucial piece of the puzzle, whenever relevant, is the execution and recordation of a non-disturbance or subordination agreement signed by each blanket lienholder in connection with the resort's facilities and amenities. In those instances in which such a non-disturbance or subordination agreement proves unobtainable, some state timeshare regulators have been willing to allow developers merely to disclose to purchasers that their use rights with respect to the encumbered facilities and amenities could suddenly terminate if the developer defaults on any obligations that are secured by a blanket encumbrance thereon.
Fee Versus Non-Fee Based Timesharing
As noted above, a timeshare interest may or may not include a deeded interest in real estate. In recent years both developers and, perhaps more importantly, their construction and receivables lenders, have become more comfortable with "right-to-use" non-fee timeshare interests, typically in the form of a lease, license, or membership. The marketing emphasis is placed on the overall recurring vacation experience (i.e., services and the use of real property) rather than on a less costly alternative to a second home.
Once a non-fee based timeshare developer is able to overcome certain potential income tax and securities hurdles, it often realizes certain benefits over a fee-based product. For example, upgrades to greater use and occupancy benefits are generally far easier to accomplish in the right-to-use context than when additional fee interests must be conveyed to the purchaser. It also is usually simpler and less time consuming to recover a defaulting owner's right-to-use timeshare interest than it is to foreclose on a deeded timeshare interest. However, the greatest leverage afforded to the right-to-use creditor is the right to suspend or terminate the defaulting owner's use and occupancy rights and retain all amounts previously paid by such owner as liquidated damages.
Vacation Clubs, Point Systems, and Trusts
Point-based "vacation clubs" with multiple geographically diverse resort locations throughout the United States and sometimes abroad take the right-to-use concept to the ultimate extreme (although some multiple resort vacation clubs do still couple a club membership with a fee interest in real property). Even developers of single-site timeshare resorts have increasingly been affiliating with other regional developers to create their own networks of resorts for inclusion in a vacation club.
"Vacation points," "membership points," or the like are simply the currency by which vacation club members ordinarily obtain the right to reserve, use, and occupy the accommodations of the club, pursuant to a complex set of reservation procedures. Whether the purchaser acquires a fee or a right-to-use timeshare interest, such timeshare interest is translated into a designated number of points that can be used on an annual basis during the term of the vacation club's existence to access the club's accommodations. Many vacation clubs also offer their members numerous ways to redeem their points for purposes beyond merely staying in the club's own accommodations. For example, Hilton allows its members to exchange their club points for frequent guest points that can be used to reserve nights at hundreds of the company's hotels throughout the world. In addition, vacation club members can often redeem their points for discounted airfare, cruises, car rentals, and even merchandise.
Typically, club members are provided with a grid that shows the key parameters of accommodation usage, including size and occupancy limit of the particular type of accommodation desired, time of the year, whether the occupancy period in question includes a weekend or a major holiday, and the specific resort at which such accommodation is located. Each box within the grid contains a certain number of points, allowing the member to custom tailor each year's vacation(s) to the then present needs and desires of his or her family. Thus, for exactly the same number of points, the member might be entitled to reserve a studio unit for seven consecutive days and nights during "off season" at a resort that has relatively low demand versus only three days and nights in a two-bedroom unit in Hawaii or in Colorado during ski season. Furthermore, the member can usually purchase or rent additional points from the developer, "borrow" points from a succeeding year, or "bank" unwanted points in a given year for use in making future reservations.
Increasingly common as a key adjunct to the vacation club concept, particularly from the perspective of lenders and state timeshare regulators, is a trust into which legal title to all real estate that corresponds to the memberships being sold is conveyed. The principal beneficiaries of the trust are the vacation club's members. Establishing a trust mechanism is primarily intended to protect members from the imposition of blanket liens and encumbrances upon such real estate that might take precedence over their use rights. The arrangement further provides a relatively simple means by which lenders and various other "lien beneficiaries" of the trust can obtain title to the real estate that underlies a particular membership interest if and when the need to do so arises, i.e., most commonly when the applicable member defaults on his or her purchase money financing or assessment obligations.
Rather than merely serving as a passive custodian of the unencumbered real property involved, the trustee, preferably a company that is completely independent of the developer, is usually charged with a number of important obligations. For example, the trustee, in its fiduciary capacity, is typically responsible for maintaining adequate insurance on the trust's assets, collecting all club dues and other income of the trust, and ensuring that all club expenses are paid from such funds on a timely basis. The trustee also monitors transfers of membership interests, maintains accurate books and records of all trust transactions, ensures that the same are audited on an annual basis, and otherwise seeks to ensure that members' use and occupancy rights are adequately protected. The trustee also commonly issues some form of membership certificate that evidences each member's beneficial interest in the trust. Typically, some or all of the trustee's duties and responsibilities are assignable, in the trustee's sole discretion, to one or more third parties, including a "club manager" or a non-profit corporation formed as the vacation club's "umbrella" entity.
Subject to applicable state law, a vacation club trust agreement usually provides a mechanism for the developer to add accommodations and facilities to the trust, delete accommodations and facilities from the trust, and substitute one accommodation or facility for a comparable accommodation or facility. Perhaps most importantly, for the benefit of purchasers, their purchase money lenders, and state timeshare regulators, the trust agreement normally provides that the number of points that correspond to all real estate, legal title to which is held by the trustee for the benefit of the vacation club's members, shall at all times equal or exceed the total number of points available for use by all then existing members. In other words, the developer cannot oversell memberships in the vacation club--one member's right and practicable ability to utilize his or her entire annual allotment of points to reserve and occupy the club's accommodations must not depend upon any other member's failure to reserve or occupy such an accommodation for any reason.
What, if any, are the potential disadvantages to a developer in offering a point system? For one thing, setting up a point system is generally more time consuming and document intensive than merely establishing the legal structure for selling individual floating timeshare interests. More sophisticated personnel and computer hardware and software also may be needed to operate such a system on an ongoing basis and balance demand adequately among the relevant variables to ensure that all of the vacation club's accommodations are utilized to the optimum extent--once purchasers have committed their hard earned dollars to join the club, fulfillment of their general reservation desires and expectations becomes paramount. Finally, salespersons who sometimes have a tendency to over "hype" a point-based timeshare product must be monitored closely.
Legal Considerations
Increased consumer expectations leading to increased product innovation and, ultimately, enhanced consumer demand inevitably result in greater legal complexity. The timeshare industry is no different from most other industries in this regard. Federal and state timeshare regulators are constantly trying to keep pace with the developers whose activities they regulate in the areas of marketing, sales techniques, developer registrations and purchaser disclosures, escrow requirements, and other key components of the regulatory maze. Developers, particularly those who are relatively new to the timeshare industry, would be well advised to consult early with competent professionals, including feasibility analysts, accountants, attorneys, architects, sales managers, and others in order to obtain the best understanding possible of the legal and practical ramifications of creating a single site timeshare project or a multiple resort vacation club. Learn from those who have paid their dues, have the requisite experience and abilities, and can guide you toward achieving greater profits than you ever contemplated.
'The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.'
