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Homes Away From Home

An alternative to hotels, destination clubs offer travelers a myriad of luxe vacation homes all over the world
Larry Olmsted
From the Print Edition:
David Caruso, Jan/Feb 2007

(continued from page 2)

It is generally acknowledged that the destination club concept was introduced by Private Retreats, in 1998. Shortly thereafter, the innovative company entered a licensing agreement with upscale tour and travel operator Abercrombie & Kent and rebranded itself as A&K Destinations. When the agreement ended in 2005 (the parties chose not to renew), the company again changed names, this time to Tanner & Haley, named for the founder's children. From last July until November, Tanner & Haley had been operating under bankruptcy protection—in November, Ultimate Resort acquired Tanner & Haley's assets for $98 million—and its fast growth and subsequent fall had troubled some would-be investors. Prior to the deal, industry experts had said that Tanner & Haley's problems arose because it never raised much equity capital and it overcommitted on refunds and availability promises. However, many in the industry see the cautionary tale as a silver lining, because in a still young marketplace, other clubs and consumers have learned from the problems Tanner & Haley ultimately faced, and are making an effort not to repeat them. At the same time, the bar has been raised for financial reporting, and alternative mechanisms to secure members' capital have been introduced.

Darin Gilson of BelleHavens is blunt: "Tanner & Haley was a very simple case of a bad operator using bad business practices. It's a shame because this is a great concept and a great alternative to second-home ownership. The principal reasons for their failure were, one, the use of leasing. Well more than half their properties were leased. The properties they did own were highly leveraged with debt service. They made crazy promises, and if you made a reservation by some advance date, they guaranteed availability, which you just can't do. Then they would have to run out and lease more properties." Greg Shove concurs: "With Tanner & Haley, of the roughly 300 houses they had, they only owned 71. Leases are more expensive than mortgages, and Tanner & Haley got upside down with its operating costs being much higher than its annual revenues."

Many other executives of competing clubs did not want to be quoted about Tanner & Haley's missteps, but they all pointed to the number one problem the industry faces, and one of the reasons Tanner & Haley ended up leasing so many homes: at certain peak times, not all members can be accommodated, especially in their first or second choice of location. Each club has a predetermined ratio of members to homes, usually between 4:1 and 10:1, with an industry average of 6:1, according to Shove. So theoretically, at any given time throughout the year, anyone who wants to go on vacation can, because most people are not. But at Christmas, New Year's and school breaks, more of the members want to go than there are homes to accommodate them.

"Despite the ratios, some of the houses are only practically usable part of the year," says Schiciano, explaining that ski properties are much more valuable when there is snow, and hot-weather destinations become unwanted in the summer. "One could argue that Scottsdale is not usable in July and August. So there is not really a six-to-one ratio 365 days a year. If you cannot plan your life out one to two years in advance, you might be extremely frustrated, especially since everyone's spring break falls at the same time. My satisfaction is still very high but it has gone down, since it has become extraordinarily difficult to book the hottest properties. As the club has grown it has gotten more difficult."

Faced with this difficulty, clubs have tweaked their membership and reservation systems to address the problems. Members typically get a certain number of nights per year based on their membership level, and most clubs designate a certain percentage of these nights for advance reservations and the balance for short-term availability. Some clubs even rotate these weeks, so that certain members cannot snap up all the best weeks. Other clubs have created different membership tiers in which those for whom the holiday weeks are essential can buy a more expensive membership that gives them access to these dates, and vice versa.

Jeff Spears joined Exclusive Resorts at about the same time as Schiciano, and both were among the first hundred to join the club. Last year, Spears was a member of the club's steering committee, which annually chooses four members to advise management on the club's direction and policies. His experiences with availability have been more positive. "I've never not been able to get anything, but the two weeks at Christmas and New Year's are the highest desired usage and I have been unable to get my first choice. Counterintuitively, I think it's gotten better as they've gotten more members, adding more destinations and homes. If the members show significant interest in a particular destination, they just buy more homes there, like in Cabo, so the availability issue is moot. Where it is a problem is a place where they had a couple of homes, interest got big, but when they went back, prices had gone up too much."

Exclusive Resorts was started by Brent Handler in 2002, and two years later, AOL founder Steve Case bought a controlling interest. Exclusive has become the 800-pound gorilla of the industry with nearly 2,500 members, by far the most of any club, and likewise, the biggest real estate owner with 300 homes worth about $800 million, and another 100 in development. The club has attracted some 50 professional athletes and entertainment figures, who have joined for the privacy of the homes, which allows them to go to the pool without being mobbed for autographs, something that happens even at top luxury resorts. The celebrities include NFL quarterback Drew Brees, tennis star Andre Agassi and golfer Jack Nicklaus, whose membership has added to the club's stature. "About 70 percent of all members in the industry belong to Exclusive Resorts," said Handler, the club's president, "which means that the vast majority of people who have decided to join any destination club have joined ours. To go from no awareness whatsoever to these kinds of numbers in less than four years speaks volumes to our value proposition, and suggests that there are a lot of people out there for whom the model makes sense."

The advantages of scale are not counterintuitive at all to Handler. "We firmly believe that a bigger club is a better club, and the larger we get, the happier our members are. Our member satisfaction is now at an all-time high, 95 percent. My original concept for the club was to combine the luxury resort experience with the luxury home experience. A big part of our strategy is to partner with the best service providers in the world, which other clubs can't do because of their size. We have 16 homes at the Ritz-Carlton resort in Grand Cayman. We have 10 at the Viceroy resort in Anguilla. Twenty four-bedroom homes is the equivalent of an 80-room luxury boutique hotel, and now we can attract top talent, get the best GMs. Our strategy now is to buy a minimum of 10 houses with centralized amenities. You get more home for the money, better deals and more efficiency for members. The only way to do that is with scale in one location. I don't think there is another club that has even five or six homes in one place." Exclusive's cluster strategy entails building or buying large numbers of homes in certain key locations, such as 10 in a resort enclave in Costa Rica, 16 at a private beach community in Hawaii, 10 in Vail, 10 in Tuscany and 10 in Miami Beach.

Exclusive's size and clout are beginning to have an effect on the rest of the industry. In September, two of its top rivals joined forces when Dreamcatcher merged with Quintess, taking the latter's name. Then in December, Quintess partnered with Leading Residences of the World, a subsidiary of Leading Hotels of the World, Ltd., to create Quintess, Leading Residences of the World.

"The basic industry consensus is that if you don't have 200-plus members, you need to partner because there is consolidation going on. You've got to have size to be a long-term player because as you grow the membership and the price of membership, the value of your homes goes up," says Pete Estler, CEO of Quintess. "Exclusive Resorts is the big dog on campus, but we have close to 300 members positioned at the high end of the market and are focused on building out our portfolio of free-standing homes with an average value of over $4 million dollars."

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