Sharing Time in Vacation Ownership

Author:Mr Mel Weinberger
Profession:Holland & Knight LLP
 
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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the late 1970s and early 1980s have been replaced by the likes of Marriott,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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