TIMESHARES MOVE INTO A HIGHER BRACKET

By Holly Hubbard Preston
International Herald Tribune, January 8, 2005

Jeff Spears said he "looked into everything" when he and his family were thinking of buying a vacation home, even sharing ownership with a bunch of strangers.

An investment banker based in San Francisco, Spears had the kind of budget that would permit him to purchase his own house and share it with no one.

So the fact that he was even considering fractional ownership of a timeshare represents something of a paradigm shift for the worldwide timeshare industry, where a hard sell and slightly shopworn properties have been the norm.

"To a lot of people, the word timeshare has become synonymous with scam, and people are very frightened of it," said Sandy Gray, founder of the Timeshare Consumers Association, which is based in England.

But things are changing. Gray said that while sales growth in midmarket timeshares in Europe was effectively flat, that had done little to tarnish the reputation, and rise, of the luxury timeshare resort clubs.

"Really, they are the only bright spot in the European market," Gray said. "It's that top 2 percent where all the growth is."

George Goeggel never imagined that he would find himself selling vacation home timeshares. Yet with resort development economics being what they are, Goeggel, a veteran hospitality executive, has found that engaging in such real estate transactions are becoming a necessity to finance the development of new resorts.

Goeggel is managing director of Auberge Resorts, an operator of luxury hotels based in the Napa Valley, the Northern California wine region. Auberge has been steadily expanding its network of luxury properties in the United States and Mexico.

Seeking to grow, the company has increasingly met with resistance from its real estate development partners who want more "immediate upfront returns" than a hotel can offer, Goeggel said.

As a compromise, resort operators like Auberge are teaming up with real estate developers to create an elite tier of timeshare properties, offered via the auspices of "private residence clubs" in or around a luxury hotel setting.

Depending on the program guidelines, they can purchase a specific unit or simply the rights to one.

The cost of ownership can range from $100,000 to $800,000, depending on the size of the share. There are also annual fees, which will increase with inflation.

Relatively new to the 40-year-old timeshare concept begun in Sweden, these residence clubs are starting to open across the globe.

Among those luxury resort operators at the forefront, along with Auberge, are DeVere Group of Britain, Ritz-Carlton Hotel, Four Seasons and Marriott Hotels & Resorts.

Auberge Resorts, for instance, is selling a one-fifth fractional share for $710,000 and one-tenth share for $425,000 in a new Napa Valley establishment, Calistoga Ranch.

Unlike more traditional timeshares, which generally parcel out shares in weeklong periods, the fractional offerings being sold by Auberge and others allow for 73 days' lodging in the case of a one-fifth share and 36 days for the one-tenth.

Owners are required to pay yearly dues of $10,000 to $20,000 depending on the type of share purchased. For Calistoga Ranch, owners of fractional shares have a lease-hold arrangement, in which they hold title to the building but not the land.

Auberge Resorts is also selling fractional ownership in a new resort, the Esperanza, on Mexico's western Riviera, that gives owners title to the land and the property.

There are private resort clubs like De Vere Resort Ownership that offer smaller blocks of time, more in line with the traditional timeshare model. De Vere is in the process of building a new luxury residence club, Carrick, on Loch Lomond in Scotland, near its flagship residence club, Cameron House.

A more upscale version of that property, Carrick is selling single fixed-week shares at the residence club for £8,000 to £39,000, or about $15,000 to $73,000. The resort operator has reported total sales of £4.5 million, with single customers purchasing multiple weeks at as much as £100,000.

Not a single lodge has been built, and the property is not scheduled to open until the spring of 2006.

While it is not hard to understand the economic motivation for the people creating these properties, what about the people who are buying into them?

The key benefit, said Joel Greene, a real estate broker in Miami, is that they offer investors the opportunity to own big blocks of time in a luxury vacation home in a highly desirable location for a small fraction of the cost of buying a single-family home.

Likewise, they have none of the headaches associated with maintaining the home, since those things are covered by the annual dues. And then there are the perks - hotel-style services including housekeeping, room service and a concierge.

"We didn't look at this as an investment in anything other than our vacation," said Robin Morgan, speaking of the one-twelfth share, or 21 days, that she and her husband, Ken, purchased at a preconstruction rate at the Ritz-Carlton Club in St. Thomas, the U.S. Virgin Islands, in 2001 for $85,000.

The couple have since picked up a second one-week timeshare at the Marriott Waiohai Beach Club on the Hawaiian island of Kauai for $70,000.

Robin Morgan is a self-employed real estate owner and manager based in Laguna Nigel, California. While she and her husband did not expect the timeshare to be a cash cow, they did want the property to pay for itself in time.

To determine that, they established how much time they might actually spend on vacation every year at the property or one of the other three Ritz-Carlton clubs offering reciprocal membership trades.

Next they looked at what it would cost them to be repeat visitors at a comparable resort hotel in St. Thomas for 21 days versus actually owning a unit. They factored in a 6 percent financing on a 20-year loan they would receive from Ritz Carlton's in-house financing arm, along with anticipated annual dues of between $7,000 to $9,000.

"A unit like this rents for $2,000 per night," Robin Morgan said. "When we amortized what we were paying for the share, it ran around $523 per night, or $11,000 per 21 days."

This meant that the couple were getting an apartment of 1,640 square feet, or about 150 square meters, for less than the price of a 450-square-foot room at the hotel. "We couldn't afford to do this any other way," she added.

In addition to the amortized benefits they foresee, the Morgans like the fact that they can trade their shares for stays at the Ritz Carlton's three other private residence clubs for a fee of $100. Likewise, they are eligible for a 30 percent discount when staying at a Ritz Carlton hotel anywhere in the world.

As U.S. residents, the Morgans are also eligible for a 40 percent tax-rate deduction, which works out, she said, to $1,836 per year.

The only thing that the Morgans are not expecting is any return on their investment if they resell the property. "That's not where the value is," she said. That is because real estate timeshares, like fractional jet ownerships, generally depreciate in the secondary marketplace.

Luxury residence clubs have prestigious locales to bolster their value, say brokers like Joel Greene who believe they will do better in the resale market than their more modest predecessors.

"With timeshares, there is so much supply and not as much demand that invariably, no matter what price you pay, a timeshare generally won't appreciate," said Greene, who along with his father owns Condo Hotel Center, a 30-year old real estate brokerage business based in Miami.

There is a lot of inventory all over the world. As of Jan. 1, 2003, the American Resort Development Association estimated that there were 1,590 timeshare resorts in the United States alone, with a total of 132,000 units. New markets are opening up daily, with operators moving into uncharted territories like India, China and Thailand.

To see any meaningful appreciation, experts say, the property has to sell out. That is not always easy despite the highly desirable locations and rave reviews of many of these fractional luxury clubs.

The Phillips Club, a private residence club in New York City founded in 2001, continues to receive highly positive reviews for its services and accommodations. The development's management company, Millennium Partners, said prices for its fractional share offerings were up only slightly from their opening levels of five years ago: $125,000 to $300,000, or $1,500 per square foot.

The club, which has 350 members, was still well short of its stated goal to sell out its 704 memberships by the end of 2004. Pamela Malkani, a partner in Millennium and director of hotel operations, said resale prices through local real estate brokers were 5 percent to 15 percent higher than the original sale price.

It is because of the tough secondary market, coupled with all the fine print that generally comes along with timeshare ownership that some prospective buyers choose not to bite in the end. It was this aspect of timeshare investment that turned off Spears, the investment banker. "The secondary market is ugly," he said.

While he looked into buying a fractional share in a private residence club, Spears said he "couldn't make the math work" in terms of his family's vacation needs and patterns and what was being offered. The other thing that bothered Spears was the "exit strategy" from residence clubs.

Developers of such clubs can preclude owners from reselling their shares until all units in their phase have been sold out. Even when they can, certain resorts require first right of purchase or ask that sales be handled through their own resale arms.

In the end, Spears bought into a Denver company, Exclusive Resorts, a new breed of luxury residence club backed by Steve Case, a founder of America Online, who became chairman in November.

Similar to a nonequity country club membership, Exclusive Resorts members pay an upfront membership deposit of $375,000, of which 80 percent is refundable if a member chooses to resign. Members also pay annual dues of $10,000 to $20,000 depending on the number of days they exercise their membership during a year.

In exchange, Spears and his fellow 999 members have 30 to 60 days access to 200 fully staffed private residences at 30 sites. Company literature places the collective value of those properties at more than $500 million.