TIMESHARES VERSUS FRACTIONALS;
NAMING BY THE NUMBERS

By Sarah B. Rezak

People often ask how private residence clubs ("PRCs") differ from timeshare.

Ask this question to a developer or seller of the PRC product, and you'll get a list of reasons why they're completely different products. But look at the legal documents the buyer signs at closing and you'll see they're fundamentally the same, as is the concept behind each. Very simply stated, both are shared ownership of real estate.

Essentially, the difference between the two concepts is the consumer -- and the product they choose. Because PRC buyers generally have higher income levels, more discretionary income, more discriminating tastes and different expectations than timeshare consumers, the vacation product they desire is different. Because the consumers' demands vary, the sales approach, the price point, the services provided and the atmosphere are all different.

The first and most obvious variance between timeshares and PRCs is the size of the existing markets. Ragatz Associates estimates that there are about 2,160 timeshare products existing in the United States (1,600), Canada (110), Mexico (300), and the Caribbean (150). By contrast, the PRC market in North America consists of 73 existing projects in the moderate- and high-priced tiers. There are an additional 60 or so older fractional interest projects selling mostly quarter shares and affiliated with one or both of the two major timeshare exchange companies. These projects, known as "traditional fractionals" are typically lower priced, less luxurious, and offer fewer ownership benefits than PRCs. This article focuses primarily on the 73 PRC projects in the two highest tiers, as they represent the growth area in the industry today. As of May 2003, there were at least 30 additional PRC projects slated to start sales that year.

One important reason for the disparity between the number of timeshare and PRC resort projects is the length of time each concept has existed. Timesharing dates back to the early 1970s. In contrast, 55 percent of PRC projects started sales after 1999.

The locations of PRC projects and timeshare projects also vary. Ragatz Associates estimates that about 24 percent of all U.S. timeshare projects are located in Florida, with the remainder fairly evenly spread throughout the various regions of the country - 16 percent in the Pacific region, 16 percent in the Mountain region, 16 percent in the Central region, 16 percent in the Southeast and 12 percent in the Northeast.

Yet, as you can see in the graph below, PRC projects are much more concentrated in the Mountain region. The PRC concept first appeared in ski destinations, where high prices and land scarcity led to a creative alternative to a million-plus dollar second home. Fully 46 percent of existing PRC projects are located in Western mountain destinations. Only 1 percent are located in Florida.

Most (52 percent) timeshare projects were originally built to be sold as such; the remainder consist of conversions from condominiums (22 percent), hotels/motels (12 percent), apartments (5 percent) and other uses (8 percent). On the other hand, almost all PRC projects are purpose-built to be sold as PRCs. Because the PRC consumer demands high quality unit design, construction and FF&E (furniture, fixtures and equipment), conversions of existing projects have not been common.

On the whole, PRCs tend to contain larger units than timeshare projects. Three- and four-bedroom units are more common in PRCs than in timeshare projects. Some 39 percent of built PRC units contain three or four bedrooms, yet the same holds true for only 7 percent of built timeshare units. At the other end of the spectrum, 42 percent of timeshare units are studios or one-bedroom units compared to only 22 percent of PRCs.

It should not come as a surprise that PRC units have larger areas than their timeshare counterparts. The graph below shows the average square footages for each category of unit among both types of projects. The difference between the PRC and timeshare unit average square footage increases with the number of bedrooms in the unit. For example, the average timeshare studio unit is 500 square feet, while the average PRC studio unit is 565 square feet. This creates a difference of 65 square feet, or 13 percent. On the other hand, the average four-bedroom or larger timeshare unit is 1,800 square feet, compared to 3,290 in a PRC four-bedroom or larger unit. This is a difference of 1,490 square feet, or 83 percent. Across all unit types, the average timeshare unit measures 1,000 square feet, which is about one-half the size of the average PRC unit at 1,990 square feet.

One of the most important differentiating factors between timeshares and PRCs is the level of services offered by each. Typically, timeshare ownership simply involves the shared ownership of a condominium or resort property. In contrast, PRC projects, almost without exception, offer both pre- and post-arrival concierge services - from arranging tee times and tuning skis, to stocking unit refrigerators with groceries and placing family photos in residences. Year-round storage is offered at 69 percent of the Private Residence Clubs, but rarely provided at timeshare projects.

Free transportation, ranging from airport shuttle service to the use of an SUV during the owners' visit, is offered at 41 percent of PRC projects, and ski or golf valet services are also common. While many timeshare resorts are built adjacent to or in the same development as golf courses, few offer priority tee times or greens fee discounts. Yet these perks are offered by 51 percent and 43 percent of PRC projects, respectively.

Since PRCs provide higher levels of service, it is not surprising that their maintenance fees are higher than those of timeshare projects. The average timeshare owner pays $380 annually in maintenance fees compared to the $1,330 per owned week paid by the average PRC owner.

Clearly, the product offering of PRCs has both similarities and differences to that of timeshares, but what about marketing and sales? In both cases, the product is shared ownership of real estate. The consumer has to be made aware of the offering, then has to be asked to purchase the product. But, because the consumer is different, the approach is different. The same marketing methodologies used by timeshare projects are used to attract consumers to PRC projects, but the higher-income PRC consumer has different expectations, and consequently, must be treated differently.

On average, three out of four timeshare purchases are made utilizing financing offered by the developer. Yet, despite the significant cost difference, three out of four PRC shares are purchased with cash. PRC's higher income consumers obviously have less difficulty making large cash purchases than do timeshare purchasers. They also usually have access to financing at lower interest rates than can typically be offered by PRC developers.

For a timeshare project, sticks and bricks, or construction costs, typically only make up 25 percent of sales volume. Marketing and sales costs consume another 45 percent, and general and administrative costs average 10 percent. However, for most PRC projects, much more of the sales price is represented by product cost - typically 55 percent. Thus, in order for PRC projects to remain profitable, marketing and sales costs have to stay around 20 percent and general and administrative costs around 5 percent.

But, let's get back to our initial question: are PRCs different from timeshare? Yes.and no. The jury's still out-but buyers are still flooding in.

Author Profile
Sarah B. Rezak is research manager for Ragatz Associates, a real estate market research and consulting firm located in Eugene, Oregon. Ragatz Associates is a wholly owner subsidiary of Resort Condominiums International LLC. Since joining Ragatz Associates in 1997, Ms. Rezak has made contributions in over 75-vacation ownership consulting assignments, including business plans facilitating the entry of developers into timeshare industry, feasibility analyses, economic impact analyses, and consumer surveys.