The new time-share: a vacation industry redefines itself

The time-share industry has experienced dramatic changes over the last 20 years. The initial time-share developers in the United States consisted of a small group of entrepreneurs whose objective was to make substantial profits by turning around underperforming motels and early condominium projects.

Generally, high pressure marketing and sales tactics were used to generate prospects and close sales. Consumers purchased time-share interests or intervals in a particular resort on a "right-to-use" basis, akin to a contract right for a stated period of time (e.g., 30 years).

The industry had a negative image in the media, with government regulators, institutional developers and lenders, and certainly with the legal community.

But times have changed. The time-sharing industry has been reborn as the vacation ownership industry, and has positioned itself in the decade of the 90's as the fastest growing segment of the travel and tourism industry.

The change is primarily due to the entrance of major hotel and entertainment giants, including Marriott, Disney, Hilton and Hyatt. These major brand affiliations have brought a new level of sophistication to the industry. Sales practices have been reformed. Resorts now consist of new, purpose-built, high-quality units. Developer profits have soared, and as a result, the industry in the United States has been fundamentally re-defined, and is also currently undergoing a major international expansion. Wall Street Shows Interest

Wall Street Shows Interest

Wall Street has recently embraced the industry. Resort Condominiums International, which along with Interval International are the industry's two independent exchange companies, was purchased last year by HFS, Inc. for more than $625 million. In addition, two time-share companies have had successful initial public offerings and a number of independent developers are looking for joint venture partners, with the potential to go public.

The industry is attractive to Wall Street's investment bankers and brokerage houses for a number of reasons. All the major hotel brands now have time-share divisions. Industry gross sales volume on an annual basis is more than $5 billion a year. The number of households owning a time-share interest exceeds 3 million, and the compounded growth rate of the industry has historically been and continues to be 15 to 20 percent a year.

In comparison to the hotel industry, which until recently has been growing at 1 to 2 percent a year, this ongoing expansion explains the attractiveness of time-sharing to major brand names and institutional investors.

As the industry has evolved, the challenges for attorneys specializing in this niche practice have also increased. No longer are sophisticated developers or consumers with heightened expectations satisfied with owning a fixed time-share week or interval, which allows the purchaser to return to the same unit at the same resort for the same week every year. The penetration of the time-share industry by major hotel companies with sophisticated reservation systems, combined with consumer demand for greater options and shorter, more frequent stays, has accelerated the convergence of the hotel and time-share industries, and added more flexible reservation and lodging options.

We are currently seeing a migration from a primarily real estate product to a complex travel and use "vacation club" product, which offers consumers maximum flexibility and their choice of vacation experiences.

Point-Based Products

As attorneys, we are now helping clients to structure multi-site vacation clubs with central reservation systems, short-stay programs (split weeks and daily stays), and membership points (which is a time-share use right expressed symbolically as "points," rather than an increment of time, analogous to frequent flyer miles of hotel awards programs).

A point-based product allows the club members to use smaller increments of time than a traditional time-share network. In addition to being able to use one's points for a week of skiing in Aspen, a long weekend playing golf in Hilton Head and a family trip to Orlando - all as part of a single vacation club - the newest clubs are structured to offer supplemental benefits packages that may include member discounts at hotels, restaurants, golf courses and discounted airfare, rental cars and cruises.

We have just completed the legal structuring of a vacation club located in the southeastern United States for a time-share operator with 17 different fee simple time-share resorts, some almost 20 years old. We helped the developer create a new membership club linking the operator's existing and planned resorts as part of a network. The operator wanted to sell points in the network, not real estate, to potential members, while simultaneously allowing about 25,000 to 30,000 existing owners to become club members and convert, at their option, their real estate time-share interests to points.

In this particular case, each night in each resort was given a point value based on relative weighting of historical use and demand factors. A master club association was established, and resort affiliation agreements were prepared linking the 17 resorts. A trust was created so that existing owners who wanted to become club members could deed or assign their real estate interests in a specific resort to an independent trustee, which held title to the weeks or an assignment of beneficial use rights free and clear of blanket encumbrances for the benefit of club members.

Each convening member or new member purchased points which, depending on the package purchased and the convened value of the member's existing real estate interest, allowed the member certain use rights in the system of 17 resorts (subject to the expansion as demand and sales dictate) on an annual basis. Depending on the demand for the resort, the size of the unit and the season of use, the points package allows the individual member to structure a vacation based on needs and rights rather than the developer's traditional "one size fits all" list of choices. The consumer can buy or rent additional points and "borrow" points from future years or "bank" points for a future vacation depending on vacation preferences for any given period of time.

The attorney helps the developer create a structure to assure club accommodations are not underutilized in one year and overburdened in the next year, creating consumer dissatisfaction.

Lawyers worked closely with industry consultants to establish standards and procedures for a demand balancing system, which was integrated into the reservation system (with appropriate reservation notice periods and home resort priority windows) to assure that points were not oversold and members could receive the benefit of their bargain in terms of reservation of appropriate accommodations.

Standards were also developed so that the developer could add of delete resort locations from the vacation club but maintain resorts of similar quality to the existing network. Most of all, assurances were put in place to provide a continuing one-to-one purchaser to accommodation ratio which assures the consumer that the club has a sufficient number of protected accommodations in trust so that a particular member who complies with the contractual obligations and the reservation procedures can reserve and use available accommodations in accordance with the number of points purchased.

Fractional Interests

A second major product-line innovation in the vacation ownership industry is typically referred to as a fractional interest, in which an owner or member buys 1/10th (5 weeks) or 1/13th (4 weeks) in a condominium unit or a resort. These interests sell for $50,000 to $175,000, but essentially give an upscale owner a fee simple deed to a number of weeks, typically 4 or 5 "floating" weeks, in a destination resort each year, subject to reservation procedures.

For example, our firm has structured high-end golf and ski club products in Colorado, Hilton Head and Orlando involving fractional interests. This concept takes a country club product, adds luxurious accommodations (million dollar units) and amenities, and is targeted to wealthy baby boomers who would like an expensive second home and access to prestigious golf, tennis or skiing resorts without the enormous cost and burdens of full ownership. Most owners only use a second home 4 or 5 weeks a year in any event, so especially with the multiple location feature, this is a very appealing concept. We expect dramatic growth in this product over the next few years as these "private clubs" expand to multiple locations, offering a variety of amenity, spa and health club packages at substantial, yet affordable prices.

Urban Time-Shares Emerge

We are also beginning to see a number of urban time-share resorts in cities like New York, San Francisco and San Diego. The first time-share project located in Manhattan, Bruce Eichner's The Manhattan Club, commenced sales last year. An existing hotel property was vertically cut in half by gutting a portion of the hotel and creating a totally separate space for the newly renovated time-share units. The resulting club is separated from the existing hotel legally, operationally and physically. The club is a distinct real estate entity, tax entity and operational entity with its own reservation system, management company and staff.

Although the purchaser buys a one-week interval, the resort is structured in such a way that a buyer can reserve a single night on a space available basis. It was structured in this manner to minimize the risk for a specialized industry lender who wanted to finance the time-share club but was concerned about problems in the hotel operation negatively impacting the time-share property. The structure of the club is intended to insulate the club from potential problems of the hotel. This product was registered with the Attorney General in New York State, who approved the structure. The product is designed to appeal to a diverse market of potential buyers drawn to New York City for cultural, commercial and other attractions.

We expect to see more urban time-sharing, especially as a key component of a multi-location network of resorts or clubs.

Financing is Plentiful

The growth of the vacation ownership industry has attracted major hospitality brands and Wall Street investors. With these companies comes the increased availability of capital. In the last few years, hard to find acquisition and development loans have become plentiful for top and mid-market developers. Specialized industry lenders now provide the acquisition and development financing, along with working capital and inventory loans, in order to lock up consumer receivables financing, which has always been the mainstay of the time-share industry. Now, with Wall Street's commitment, we are beginning to see a wider range of funding products, as well as the inevitable securitizations and new institutional and foreign money which will undoubtedly bring the cost of capital down and further enhance industry expansion.

In order to compete, the financing specialists in the vacation ownership industry have begun to develop new products and capabilities that address the need for more sophisticated financing product lines, including securitization, borrower-friendly warehouse facilities, financing for the acquisition of time-share companies and hybrid debt/equity relationships between major industry lenders and developers.

Once again, industry attorneys have placed a major role in the development of these new financing products because of their experience and expertise in the underlying security.

The legal complexities of vacation clubs are undeniable, but so is the promise. All of the relevant issues cannot be addressed here, but the above discussion indicates the specialized nature of the industry and the need for close attention to the details of the particular transaction. These transactions are more complex than a condominium project or even a hotel. Unlike whole unit condominium projects or hotels, the time-share attorney must be able to steer a client through a federal and state regulatory maze consisting of vacation club and time-share registration statutes, as well as a broad range of other commercial regulations.

Although the industry has no federal registration requirements, there has been increased scrutiny by federal and state regulators as a result of the raised profile of the industry. Knowledgeable practitioners are required to assure compliance with the multitude of complex federal and state laws which may impact on the time-share product.

(Jeffrey B. Stern is a partner in the law firm of Holland & Knight. Formerly Managing Partner of Ingersoll and Bloch, he has spent more than 20 years in the resort development and finance industry, specializing in structuring and financing time-share resorts and clubs in the United States and worldwide.)

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