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Destination Clubs Recover From Crisis

By: Levi Moe
October 2009

‘Once in a lifetime economic crisis.’

‘The economy has, and continues to, negatively affect our prospects.’

‘Our ability to raise capital has become increasingly difficult.’

Destinations ClubsWhile the turbulence of the financial markets and the decline of real estate values on a global level have left few industries unaffected, these were just a few of the comments that executives within the Destination Club industry made as their clubs were forced to cease operations in late 2008 and early 2009.

Destination Clubs take elements of second home ownership overlaid onto the country club model. Members typically pay a refundable membership deposit and annual dues to have access to the club's amenities, but rather than having one centralized golf course and club house available to members, as is the case for country clubs, Destination Clubs purchase luxury resort real estate around the world, providing members a collection of multiple second homes available at their leisure with none of the hassles of paying property taxes or insurance or the responsibility to mow the lawn or clean the gutters.

World Class Service

In addition to the world-class properties, members also enjoy world-class service. Destination Club members typically have a personal travel planner available to them who will help book airline reservations, make restaurant reservations or tee times, and help make your trip as hassle free as possible. Most all properties also have their own personal concierge that will pre-stock the refrigerator with your favorite snacks and beverages and provide you an insiders' perspective to the best local attractions.

Destination Clubs

Just a short year ago, well over 30 of these Destination Clubs were in operation – each with their own unique value proposition, business model, pricing, and benefits. Since then, that number has dropped precipitously as many of the industry's business models were proven unsustainable, magnified and expedited by the global recession.

First officially introduced in 1999, these various benefits attached to Destination Club membership allowed the industry to grow to well over 5,000 members around the world with billions of dollars of real estate available to members. This rapid growth was one of the reasons that several Destination Clubs have been forced into bankruptcy. According to several bankruptcy filings, it was shown that clubs began to heavily finance properties, purchase properties outside of their price range, increase executive salaries, and use portions of the membership deposits owed to members for day-to-day operations, all likely under the impression that sales would continue at the peak levels that got them there.

Destination ClubsWith each club's real estate holdings largely the only protection a member has in receiving their refundable deposit back, declining real estate values quickly eroded the equity that clubs had in their properties, and subsequently their ability to repay their obligations to members.

‘Necessity Breeds Innovation’

As numerous power players within the industry began to topple, the adage ‘necessity breeds innovation’ came into full effect. Many clubs modified their club structure – increasing annual dues to come in line with annual costs; taking pay cuts; and liquidating excess real estate.

However, the true innovation comes in the form of new club structures, looking to provide additional financial assurances to members and potential members alike while taking advantage of distressed real estate values.

Clubs such as Abercrombie & Kent Residence Club, Equity Estates, and M Private Residences have paved the way for additional disclosure to members, providing a greater sense of the club's financial status. Other new destination clubs are expanding on the concept and evolving the model to compete in these lean economic times:

  • Migrate Destinations has launched with a structure where members don't pay an upfront, refundable membership deposit, but simply pay year-to-year annual dues.
  • Residential Private Vacations will soon officially make their foray into the industry, combining various club structures to form their equity club where members own the club's collection of properties.
  • The Ritz-Carlton Destination Club has also joined the sector over the past year, offering deeded memberships to members.
  • The UK-based club Rocksure Property doesn't purchase new real estate until 20 members are recruited.

While still primarily an investment in your way of life, the granular details of the financial components of club membership have rightfully been placed under a microscope by many potential members.With the introduction of these new business structures and with the assistance of the various Destination Club resources such as Destination Club News, Destination Club Forums, SherpaReport, and Halogen Guides, these potential members are growing continually vigilant in their evaluation.

Destination ClubsValue Proposition

With the injection of these new firms, the Destination Club industry is beginning to emerge from one of their lowest points and again approaches their peak level of clubs. The value proposition of a Destination Club membership remains strong, and clubs are increasingly offering preferential pricing and terms to attract new members.

Even with these benefits, joining a Destination Club continues to require a substantial level of due diligence, now more than ever. Understanding the club's financial position and the inner workings of the club model are now paramount in evaluating each club. To learn more about some suggested financial questions, feel free to contact us or any of the other Destination Club resources available.

Levi Moe is managing director of the Veras Group.

 

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