Sharing Time in Vacation Ownership
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the late 1970s and early 1980s have been replaced by the likes of Marriott,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...
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