a new vacation concept caters to the wealthiest travelers, but are destination clubs economically sound?
If you build it, they will come. It’s not just a line from a movie, as demonstrated by the very baseball field it spawned in the movie Field of Dreams. The studio built an absurdly perfect baseball diamond amidst acres of Iowa cornstalks. And tourists come back every summer to play ball, buy souvenirs, and escape from daily life. At the end of the day, we’d all like to be somewhere else, wouldn’t we?
Driven by that idea, a flurry of start-ups and corporate spin-offs are building, buying, and leasing golf course McMansions and penthouse apartments the world over, trusting that wealthy travelers will come. Destination clubs combine time-share economics, hotel service, and supersized, second-home comfort with six-figure membership fees to maintain exclusivity. Touted as an economically sound substitute for second- and third-home ownership, the model has sparked new growth in a tired business sector, but even industry optimists look to the future with a healthy dose of caution.
Still, it’s hard to be a pessimist when you’re nestled in an Aspen-style lodge, surrounded by exhilarating views of the Colorado Rockies. That’s where we catch up with Robert Parsons, CFO of Exclusive Resorts, during a weeklong escape with his son. “It’s a very exciting new concept that could revolutionize the luxury travel industry,” he says. “A high-quality, large physical product that can sleep eight to ten people. Let’s get people five-star service in the solitude and privacy of their own vacation home as opposed to a hotel.”
When Parsons joined the company in 2003, Exclusive Resorts was one of a handful of budding destination clubs. Backed by a major investment from America Online Co-Founder Steve Case, the company now dominates the sector with more members, more properties, and as much as two-thirds market share. “It’s a new industry,” says Parsons, a 1981 MBA graduate. “All of us are growing.”
how they work
Membership benefits vary from one company to the next. Exclusive Resorts works like a country
club, which just happens to own resort homes instead of a golf course. Members purchase the right to use the club’s facilities, but acquire no deeded interest in or liability for the property. They pay hefty premiums for luxury services, including phone access to a local concierge, and they join a fraternity that is exclusive by nature. Membership fees range from $195,000 to $395,000 plus annual dues.
Sound like a bargain? It might if you consider maintenance expenses, insurance, property tax, domestic labor, and if your idea of a second home runs into seven figures. But while the market is relatively small, there appears to be plenty of room for growth. Parsons says that less than 5 percent of potential consumers in the segment can identify a single player in the market.
The market is already stretching in the other direction as well. At least one company has introduced a low-end membership that costs less than $100,000 to join, with reduced usage benefits. One industry observer—a venture capitalist who declined to invest in the sector—believes destination clubs are destined to follow the same disappointing curve as timeshare condos. “They’re just repackaging the same product,” he says.
First developed by a hotel owner in the French Alps during the 1960s who sold shares in his hotel rather than renting out the rooms, the timeshare concept hit American shores by the 1970s. The early 1980s were a golden age, when timeshare ownership was perceived as both an investment and a status symbol. That was before market saturation, uneven quality, and unsavory sales tactics tainted the industry’s image. These days, it’s hard to find an undergrad student who hasn’t been lured to a timeshare sales event with hard-to-redeem promises of free travel.
But comparing destination clubs to traditional timeshares is like saying a Hyundai is the same thing as a Ferrari, says Howard Nusbaum, president of the American Resort Development Association. Sure, they both have four wheels and take you places, but they certainly don’t offer the same experience. On the other hand, how often will you drive that Ferrari?
“There’s a group of what I call the rational rich,” Nusbaum says. Rather than tie up $3 million in a vacation home, they prefer a $300k membership that lets them invest the rest. Many of this group belong to the baby boomer generation, many of whom turn sixty this year. “They like the value proposition that fractional and destination clubs offer. That puts this business in a major growth curve for the next twenty years.”
Burgeoning real estate costs will only help on the marketing side, even if they do present business challenges of their own. “An overheated real estate market makes the idea of owning a second or third home so cost-prohibitive that people are saying let’s share in this asset,” Nusbaum says. “It’s sort of like pizza by the slice.”
fractional ownership
To carry that metaphor a bit further, there’s more than one way to slice a pizza—and an endless variety of toppings and flavors. In addition to timeshares, the main alternatives to destination clubs involve fractional ownership. In private-residence clubs, a small number of investors share a single second home. Other fractional ownership plans apply the same principle to larger clubs with multiple properties. Condo-hotels incorporate a service component similar to destination clubs, often at single destinations.
None of these models convinced Stephen Rich, who wanted a good place to take his family on vacation. “There are many people out there who want a second or a third home but don’t have the cash flow to support it,” says Rich, the director of operations and sport development at the Utah Sports Commission Foundation. “As their families grow, they need a good place where they can take their children.”
But Rich found fractional ownership plans too limiting, while destination clubs lacked the investment component. That changed when a local business group presented him with a new option, which they call an equity club. “It resonated with me,” he says. Salt Lake City-based Bellehavens is something like a mutual fund that invests in real estate—except that investors can use the fund’s properties. While Bellehavens is careful not to present their club as a high-value investment, company executives do believe it adds value and security. A user can cash out at any time, selling his or her membership back to the company for market value, minus a fixed percentage. “It’s a very economically viable alternative to owning a second home outright,” says Rich, a 1997 MBA graduate.
While the concept is attractive, it also harks back to the original timeshare concept. If you’re still not clear on the fundamental difference between timeshares and destination clubs—aside from size, hospitality service, and cost—then you’re not alone. “The difference is all in the experience of the property,” Rich says, referring to the four thousand square-foot home overlooking the golf course, the Sea of Cortes, and the Pacific Ocean. “In my friends’ words, it ruined their future vacations. They want to do them all this way.”
industry challenges
Unfortunately, a six-figure membership fee is no guarantee for future vacation satisfaction. In fact, consumers should exercise extreme caution in an industry with so many new faces. “You probably want to test one of the houses out before purchasing the club to observe the detail and level of housekeeping and services,” says industry consultant Richard Ragatz, president of Ragatz Associates, who explains that some companies lack valuable experience in the hospitality industry.
More important, the club must be well funded. “If I were a buyer, I would make sure that my deposit fee is totally insured, so when I decide to leave the money is there,” Ragatz says. “The houses that are placed into the club should be paid for prior to being part of the club, so you don’t use the new purchaser’s member deposits to go out and buy new houses.”
Perhaps the greatest obstacle to a potential buyer is understanding exactly what is being purchased. “There’s basically no regulations these clubs have to adhere to,” says Ragatz, an avowed believer in the destination club business model who is also realistic about the state of the industry. “They don’t have to register with anybody.”
That’s likely to change within a few years, but not without some difficult growing pains. “If one or more of these clubs goes sideways in a negative way, there are going to be some real problems for all of them,” Ragatz says. “Right now, they’ve received a lot of positive media attention. They’re viewed as a glamorous new player in the marketplace. But the media will quickly turn if one goes belly up.”
Nearly every person interviewed considers that development to be a certainty, just a question of time. That will probably lead to government regulation, designed to protect consumers from the unnecessary risks of unscrupulous business practices. No one knows what shape such an intervention may take or how it will influence the industry. In the meantime, it is almost certain some buyers will bet on the wrong horse. Maybe that risk is inherent in the nature of a budding industry, where a new idea proves both profitable and imitable. Caveat emptor.
It’s hard to keep that in mind as you flip through the rich, textured brochures. Stuccoed suburban mansions leer at you from the pages, enveloped in an unearthly glow. The portfolios are growing, promising carefree days with family and friends in an increasing variety of exotic locations. From Thailand to New York City, you can golf, scuba, and ski, safe and insulated from the dual realities of the daily grind back home and the authentic local culture. Beautiful, warm, and seductive, they are almost too perfect—as improbable as baseball in a corn field.
Making Cultural Connections
Most travelers have a Marco Polo fantasy, whether they realize it or not. That moment of discovery, a new sense of place, a human connection with a foreign culture. Those life-changing instants have helped make travel a powerful force for social good since the days of the medieval merchant class. But the same innovations that make modern tourism more convenient can also keep you insulated from the people you’ve gone there to see—and contribute to the erosion of traditional cultures.
Enter sustainable tourism, an increasingly popular approach designed to promote those cross-cultural moments and ensure economic benefits for the host country. Today’s traveler can choose from a wealth of sustainable options, without sacrificing comfort. You don’t have to spend the night in mosquito netting to connect with the local culture. Then again, it might just be a more satisfying experience overall if you did.
Here are three ways to break out of your comfort zone:
1: Think Local—Resort destinations tend to work like little Disneylands, where everything is clean, comfortable, and a little too idyllic. Incorporate locally owned businesses into your itinerary. You get an authentic experience and support local entrepreneurs in the process.
2: Honor Tradition—Culture is the raw material for a tourism-based economy, from music and craftsmanship to architecture and religious festivals. Instead of T-shirts or Mexican souvenirs made in China, why not invest in the work of a local artist? Most regions specialize in some craft—from custom boots to recycled notebooks—and some countries even have officially sanctioned shops that ensure the products sold are authentic.
3: Green is Gold—It’s an old story. We fall in love with a place, develop it for mass tourism, and possibly ruin it in the process. Historical relics are just as delicate as the natural environment. Try dedicating a portion of your trip to eco-friendly activities. Take a walking tour, or explore the lake in a canoe instead of a speedboat.
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Article written by Chad D. Nielsen
Images courtesy of Exclusive Resorts and Bellehavens.
about the author
Chad D. Nielsen is a freelance writer based near Salt Lake City.
