Another Destination Club Bankruptcy: The Latest On Crisis And Opportunity
I have been writing about the Destination Club industry for six years now, and have covered the bankruptcies of Tanner & Haley ( Chapter 11 in July 2006), High Country Club LLC ( Chapter 7 in January 2009), Lusso (Chapter 11 in December of 2008 ) Everlands ( this wasn't exactly a bankruptcy, but they did cease operation, and Ultimate Escapes purchased their member list) and Solstice (Chapter 11 in March 2009.) For Luxist, I have written about Exclusive Resorts, Abercrombie & Kent, Ultimate Escapes and Quintess vacations. I have also written and spoke about the dark side of the charismatic idea in print and online. I also spoke about this idea back in 2006 at a NorthCourse Conference in Athens.
So, for many, though Ultimate Escapes bankruptcy news today is terrible, it is not shocking. Rather, in Yogi Berra's words, it is deja vu all over again, as there seems to be a well-known fissure in the non-equity destination club model, and this fissure is one that only four clubs ( Exclusive Resorts, Equity Estates, Quintess and Abercrombie & Kent Residence Club) have been able to patch successfully. This crack lies in assumption: that the economy will continue to grow, members will continue to buy into the clubs and real estate assets will continue to rise. As can be seen through any glass darkly, our economy has NOT worked this way, and many have lost more than just their shirts.
Last week, Jim Tousignant, CEO of Ultimate, spoke to the members in a Webinar, stating the many issues the club faced, due to the ongoing problems in the economy, and how they related to the ongoing problems with the club, because of the rising debts accrued by the club and its operations. Today, filing bankruptcy protection, it was disclosed how deeply in debt Ultimate actually is: according to Bloomberg news that broke the story this afternoon, the club was between $100M and $500M in debt, with assets only between $10M and $50M.
According to Levi Moe, Destination Club News, "Notable unsecured creditors include Trump International Hotel & Tower owed nearly $500,000, multiple legal service fees and settlements, and several resorts that were available to members. The club's Board of Directors authorized the Chapter 11 petition following the recommendation of a Special Committee of UEI's independent directors 'in order to protect UEI's assets with a goal to maximize the value for all of its constituencies, including its creditors, its members and potentially its shareholders.'"
What this means immediately for the members, is terminated travel plans as the leases on many of the Ultimate Escapes properties have been canceled. Other properties that remain, must be reserved and used by October 19th.
One of the wild cards in this ongoing scenario, especially for those who are unfamiliar with ongoing destination club dramas, is the mindset of the 1100 members of Ultimate Escapes. For those who do not quite understand the historic pull
of a destination club, and why members stay, even with its grim history of bankruptcies, here are a few thoughts.
It is the perfect, and often desperately desired want -- homes that provide everything you need and more. The images of destination club websites have been, for want of any better word, seductive: the blue water, the palm trees, where you can just picture yourself, your family, family friends, children and their friends, in this perfect home, in this perfect location, living the perfect romantic ideal. But, lest we forget, it's the pursuit of an ideal – whether it's the perfect wife, love, car, jewelry, home, or vacation – this ideal historically contains a darker side. Re-read, as examples, the myth of Prometheus, and the stories of Dr.'s Faustus and Frankenstein. These tales show those in pursuit of something more, ideal, unneeded, yet wanted badly; and how such journeys can put reason and practicality on semi-permanent hold.
Three years ago, I asked Dr. Richard Ragatz, President of Ragatz Associates, founder of the Ragatz Fractional Interest Conferences, about his thoughts concerning the destination club industry. His thoughts, more practical and economic than mine, reflected obvious hesitancy. His words still ring, more clairvoyant than ever.
" There may be some underlying concerns with non-equity destination clubs that have not yet surfaced," said Dr. Ragatz, "And those are with common sense issues, issues of caution really, that deal with simple, financial questions. Here are some questions I would ask if I were planning on joining a non-equity club. First, I would ask how I could be assured --- when, how and in writing -- of getting my 80% of the membership fee back when I left the club. I would want the "4 in, 1 out" rule ( the rule that said you must have four members join the club in order for you to leave if you are on the resignation list) explained, and how that might impact my leaving the club when I wanted to. Second, I would want to experience the club – and its menu of options for myself before choosing. I would want to know how well they operationalize their services. Third, I would want to be sure I could re-sell my membership once the membership cap is reached, or if there is no membership cap, I will still want to know if I could re-sell it, and what the processes were to do this. Fourth, and probably most importantly, I would want to know how the club itself is financially assured. That is a crucial question, given the fact that with non-equity clubs, you are purchased a membership bond, not a real estate equity deed. If the club, God forbid, were to go out of business, how would I get my money back?"
Dr. Ragatz expressed the money question that, years later, hangs like the insistent Damoclean Sword, over the destination club industry. Certainly, the industry, like so many others at this moment in our capricious economy, depends on SALES, in this case membership sales. If people aren't buying membership in destination clubs, the clubs will fold, sooner or later.
Such economic damage is easily quantified in terms of loss: lack of sales mean no membership deposits, no annual dues for the club. But with this, the members lose also. They lose their deposits, their vacation reservations, and but even more long lasting, they lose their trust in the club. Trust, as in most of the truly important things in life, can't be quantified. How will any potential member then again trust the information provided by a new club, or trust any idea with a coruscating charismatic overlay?
Charisma is usually defined as a HUMAN, not as an ideational term. It is a human quality people are drawn to, a kind of magnetism that certain people seem to possess. The best salespeople, religious evangelists, teachers, politicians, and even criminals have some or quite a bit of charisma. Those who have the ability to communicate on the conscious and visceral levels can transfix audiences: deductive, mathematical logic flies out the window, and in flies inductive, affective sensibility. And it is on the latter that fiscal decisions are too often made. Pictures, websites, seductive promises can do the trick. But they all have two connective components: allowing the potential buyer a feeling of entitlement, as well as allowing him or her a sense of selective exclusivity.
Arguably, rational thinking often become submerged by senses of entitlement /desire for exclusivity. If you feel you deserve membership in a private, members only, exclusive, elite club, then logical due diligence – finding out what the club is made of, reading between the lines of a complicated contract – checking, understand complex math, may take a back seat to the glitter of the charismatic idea.
Take the curious case of Bernie Madoff. He would still be Ponzi-ing, were it not for the deflating economy -- that economy, like everything, deflates after a long run of growth. Admittedly, it is usually not this drastic, but gravity, and well as expansion and contraction do exist as universal forces. If you throw a brick into the air, it will come down. Tides ebb and flow, cells expand and contract, there is a rhythm to things. But many of the business models of the destination club industry are based on fiscal projections based on continuous economic growth.
The connective thread between the Madoff scheme, and the charismatic dream of the destination club industry is a tenuous, arguable one, but it may exist. Both had disciples who believed in the idea and the model, the theory and the practice. No matter what the external warning signs were,, the destination club idea was, and remained, a magnet. It created a need, and, filled it well. It opened the door to a way of living that could be justified as BOTH economical and extravagant – economical because, should you join a high end destination club – you could have access to multi-million dollar real estate portfolios, while only paying annual dues equal to one high end mortgage. Extravagant in that you could access multiple beautiful homes in multiple elite locations – with everything taken care of.
What's not to love?
Many members, it must be said, DO love their clubs, can travel wherever / whenever they want to go, and feel they have made the best vacation decision ever. People who vacation with Exclusive Resorts, A&K, Equity Estates, and Quintess plus a multitude of other fractionals, timeshares and Private Residence Clubs are happy with their decisions. There are thousands whose lives have been made better, the families have become stronger due to great shared experiences, the residences are wonderful, the service in all areas, exceptional. Management is available to talk with the members anytime, anywhere. Yet, there have been other members of Lusso, High Country Club, One Key, Tanner & Haley, Everlands, Solstice, High Country who feel that their expectations and bank accounts have been marginalized and betrayed.
The offices of psychologists are filled with people who feel betrayed, who trusted someone or something, then had their trust stripped from them. The object of therapy is to slowly have trust renewed. But as a former psychotherapist, I am here to say it is a long, tedious, complicated and often fruitless process, mainly because the client often does not want his trust renewed. One undoing is enough for many, actually for most. The quality of life lived after a major betrayal is the same as days lived by survivors of catastrophic recurring illness: you hope for the best, but expect the worst.
Due to the complex mood of the country, coupled with the differences in human ratios of trust versus gullibility, idealism versus practicality, and skepticism versus outright disbelief, selling the destination club idea right now is an enormously complex matter. Yet the economy will eventually re-balance, supposedly in the Q4 2012, maybe sooner. What will take longer is the club's responsibility to re-engage the potential and existing member's trust.
Juvenal, a poet in the late 1st century AD in Rome, wrote, quis custodiet ipsos custodes – or, who will guard the guardians? This is the question, consistent since the days of the Romans, and surely as long as business existed, that transcends issues of money, charismatic ideas/people, and sweet dreams. Who guards the guardians? Who watches the watchers? Who watches the CEOs? The answer? No One. The members of the deceased and deflating clubs have learned an extremely painful lesson: there are no guarantees, no safety nets, no entitlements.
Today, after the Ultimate bankruptcy had been announced, a post appeared on the Tuggbbs website -- a site where all forms of timeshare/fractional/residence club and destination club members and other interested parties, all anonymous, can post their thoughts. Here is what Travel Guy wrote today, in reaction to the Ultimate Escapes bankruptcy.
Member apathy and disinterest is the real problem when DCs end up in this situation. Members can't decide if they should trust management (again), so they don't. Members don't want to throw good money after bad, so they don't. Members don't want to be fools again and risk losing another DC deposit, so they don't. Members don't want to relive the uncertainty of not knowing if their travel plans will be cancelled last minute, so they don't. Members don't know if making another DC dues investment will crash and burn, so they don't.
After their initial shock, pain and anger ... members simply end-up wanting to forget the painful experience of the failed DC and walk away beaten down and disinterested in beating their heads against the wall anymore.
In the coming days, after the head-banging has ceased, it may be noteworthy to see new models emerge, or have members revisit other travel and vacation models. We will keep you posted.