Cigar Aficionado

When one thinks about the perfect vacation home, images of a secluded beach or a mountainside retreat often come to mind. The choices are varied and tempting, but finding the perfect property can be daunting. Even if a third or fourth home is an option, you still must deal with the difficult realities of vacation home ownership: maintenance, plowing or mowing, furnishings and, of course, mortgage payments and ever rising property taxes.

Now imagine not owning a second home. Instead, consider having a third, fourth or even a hundredth vacation home, all luxurious and well appointed, yet each intimately familiar from the moment you step in the door. You and your family can go on that annual ski, beach or golf vacation and be able to choose from several great locations for each trip. Imagine having all these homes at your fingertips but never having to deal with lawn care or leaky pipes or finding firewood. That is the promise of the destination club, a popular new alternative to vacation real estate investment, which is attracting buyers at a breakneck pace.

The industry, which is only about eight years old and has just caught fire in the last three, now includes about 20 companies each offering its own version of the destination club dream. All follow the same basic premise: club members pay a large onetime fee—a deposit that is fully or partially refundable—plus annual dues and sometimes nightly fees. Each member is entitled to a certain number of nights per year, depending on the club and level of membership. The club uses the fees to amass a portfolio of vacation homes in myriad locations, and members get to use their nights at a combination of these properties. In its simplest form, the destination club model pools would-be vacation home owners and leverages their capital into multiple homes they all can use.

"I didn't intend to start a club," says Darin Gilson, founder and president of BelleHavens, one of the newer destination clubs. "My wife and I were looking for a second home about six or seven years ago, and then the rational part of my mind took over and I thought, 'How much will we really use it?' and my wife reminded me that 'you can't even take care of one home.' So then I thought, 'Wouldn't it be cool if I could have a house and share it with friends?'

"As I thought about that, I started to realize that we might all get bored always going to the same place. That was the final piece of the puzzle," Gilson says. "I thought, 'Wouldn't it be cool if we had a big group of friends to share a portfolio of different houses in different places?' When I started researching the idea, I had never heard of destination clubs, and Exclusive Resorts and Private Retreats were just getting started. Seeing others doing it actually encouraged me, because I saw some traction in the marketplace for the concept."

The reason the concept has quickly gained traction is because many frequent travelers like to go to varied locations and prefer opulent homes to even the most luxurious hotel rooms. But destination clubs are not for everyone, and before you consider which club to join, the question is whether you should join any. One of the most obvious benefits of these clubs is the homes themselves. A man's home is his castle, while a hotel room is not. Houses have more room for kids and adults, or couples or friends, and they have amenities that few hotel rooms can offer, from fireplaces and private pools to full kitchens, billiard rooms and theaters. Yet if you're a solo traveler or part of a couple, staying at top hotels is probably going to be less expensive and not require an up-front investment, while giving you far more choices and flexibility than even the best and biggest clubs can offer. The destination club model is aimed at those who need or demand more space, typically families with children or adults who routinely travel with other couples, friends or relatives and would require multiple hotel rooms in lieu of a house.

"I did the math and saw that when we go on family vacations, I was spending three-quarters of the club's annual dues for a single week, either on renting a house myself or two hotel rooms," says Ken Schiciano, a private equity investor from Wellesley, Massachusetts, who joined Exclusive Resorts in 2003, and travels frequently with his wife and two young children. "The house versus hotel is a big appeal, but with all the amenities the club offers—the games, home theater, movies—it is also much better than just renting houses yourself. When you rent houses you spend a lot of time trying to determine their quality, and I trusted that the club had done that for me. I also travel a lot for work and thought I could use the city properties for work trips, and I have, in New York, London, San Francisco and Paris."

"It is great for groups traveling together whose only choice at a luxury resort has been multiple rooms, often unconnected. Call any top hotel…they won't guarantee you connecting rooms before you arrive. With a destination club you get a whole house…. That's the value proposition," says Greg Shove, who is both a destination club member and an expert on the industry. Shove joined Exclusive Resorts in 2003, in part because he used to be an executive at America Online, and AOL founder Steve Case is the majority owner of Exclusive Resorts. After he joined, Shove's friends asked him so many questions about the industry that he launched Helium Report, a Web-based research site that he calls "a guide that merges a Consumer Reports approach with luxury lifestyle coverage," and now also covers private jet fractional ownership plans.

Besides the room issue, the second major factor to consider in deciding whether a destination club is a viable option is when and where you really want to go on vacation. One of the major selling points of destination clubs is their flexibility, and the more flexible your travel schedule is, the more you will get out of them. But members with children, who make up a substantial portion of the vacation market, will find that they all want to travel at the same times, over Christmas and spring break. And some travelers don't want to go to different places every vacation but prefer a favorite spot, which is one of the arguments for buying a second home.

"Seasonal availability is a real issue," Shove says. "You're not going to get exactly what you want every time. If your goal is to spend every Christmas week in Beaver Creek, a destination club is not for you. The salesman, eager to move a membership, might imply that you can get what you want, but this is not the case. You need to be flexible on at least one of the parameters: location, schedule or lead time. This is not fractional ownership."

Jim Tousignant, chief executive officer of Ultimate Resort, another destination club, agrees. "If you want to go to the same place at the same time every year, then a destination club is not for you. Buying a home or fractional is."

This is one of the most common misconceptions of the destination club industry, because it competes with fractional ownership programs as well as traditional vacation home ownership. In fractional ownership, whether it is a traditional time share or the newer "residence club" models being offered by luxury hotel chains such as Ritz-Carlton, Fairmont and Four Seasons (which function more like destination clubs), you are buying a deeded interest in a particular piece of property. Buying into the Ritz-Carlton private residence club, for instance, allows you to trade a portion of your allotted days for vacations at other locations, but you do not buy into the overall club. If, say, you bought a fractional share at its club in Beaver Creek, Colorado, you would own an interest, perhaps one-twelfth if you purchased a month, of that particular property, and receive a deed to that effect.

While destination clubs are evolving and some have an equity component, most of their members don't own anything other than a membership in the club. The club uses members' deposit money to purchase real estate and the annual fees to cover the operating overhead, including concierge services, maintenance and reservations. In exchange, members have access to a variety of properties, some in city centers, some not, for between one and two months a year.

"The basic model is non-equity, the same as a traditional golf country club," says Shove. "Some clubs offer two or three different levels of financial commitment, anywhere between $50,000 and half a million dollars or more, in return for what is typically between 20 and 45 days of use of the club's real estate each year. Each club is formed around a theoretical profile of its would-be members, which is what drives its real estate acquisition strategy: how big are the houses, how expensive, where are they, what are the amenities? Most clubs do a mix, and most buy one- to two-bedroom urban apartments and three- to five-bedroom vacation homes."

Every club has a mechanism for returning member deposits, usually 80 to 100 percent of the original amount, but certain rules apply. The most common is "three in, one out," meaning that if you announce your intention to leave, you are put on a list, and every time three new members sign up, one can leave and get a refund.

Myriad variations on this basic model exist, and some destination clubs have introduced an equity component. Others are focused on a particular lifestyle such as golf or fly fishing. But across the board, the major differentiator is the value of the homes themselves.

When Exclusive Resorts launched in 2002, for instance, its homes had an average value of around $2 million, and today its average home is worth close to $3 million. Other clubs target less expensive real estate to offer value pricing, while the most expensive purchase one-of-a-kind trophy homes that can run as high as $6 million. What type of house you get is largely determined by the club's vision of its members and the fees it charges. However, with very few exceptions, the dwellings all fall within four categories of locations: beach, golf, ski/mountain and urban.

Within the beach category, the Caribbean, Hawaii, Mexico, Florida and Central America, especially Costa Rica, are the most popular, and virtually every club executive cited Los Cabos, Mexico, as one of its most popular destinations. Most clubs have homes in Scottsdale, Arizona, and Kiawah Island, South Carolina, for golfers. Aspen, Whistler and Beaver Creek are ski resort favorites, and New York, London, Paris and San Francisco are the top urban markets. Urban properties are either condos or suites in hotels that have been specially retrofitted to mirror the standards at the club's freestanding homes. Only a few clubs have gone further afield abroad, one of which, Exclusive Resorts, has four homes in Tuscany (with another six expected to be available there in 2008).

Each club offers hotel-like concierge services that can arrange everything from pre-stocked refrigerators to local activities. Every club also promises certain standards so that every home in its portfolio offers a consistent level of service and a familiar layout. "The one thing these guys have delivered on in spades is the houses themselves," says Jeff Spears, a partner with San FranciscoÐbased Presidio Financial Partners, who joined Exclusive Resorts. "The quality standards are awesome and the setup is consistent—where the kitchen utensils are, the same TV and stereo—it's almost like yours at home, so you don't have to relearn it every time you travel. The kids love it because every place has a video game player and DVD [player]."

The destination club industry is still young, and there have been some growing pains that prospective buyers need to be aware of. The two biggest concerns for consumers are availability of properties and the security of their often-substantial financial investment. The industry's first real crisis illustrates that both concerns are valid and that companies shouldn't shoot for the moon right away.

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."

"You are starting to see consolidation in the industry," agreed Ultimate Resort's Tousignant, whose acquisition of Tanner & Haley's assets out of bankruptcy increased his club's real estate and member portfolio. "When we started three years ago there were only six or eight clubs, and very quickly after us several more started, but in the last year I have seen only one. Clubs are starting to differentiate themselves, and we really only compete against about three of them, including, to a degree, Exclusive Resorts. Exclusive is a great club, but a lot of people don't want to be in a club with 2,500 members and growing. The whole industry started out with the idea of an intimate, private country club."

Besides size and cost of homes, the major differentiator emerging between clubs is the way they secure your investment. This is where Greg Shove's Helium Report comes in handy. His Web site offers a 50-page report on the industry, along with 20 essential questions you should ask before joining. He recommends meeting with a principal of the company and speaking to at least three current members. "We tell consumers that if the club can't answer even one of these 20 questions, do not join. It's that simple.

"We call the deposit 'parking your money in someone else's garage.' That works as long as you can get it back when it is time to go. As we saw with Tanner & Haley, it can become a problem. The ultimate litmus test is, in the worst-case scenario, if they wind down, can they return all the membership fees? That is, do they have enough assets to satisfy every member?"

Exclusive Resorts claims it can. "Our $800 million in real estate, plus cash on hand, minus our liability for member deposits and outstanding debt on the property is a positive number so, unlike many companies out there, if we can sell our real estate for what it is worth, we can cover all our obligations, and that's the quick test of financial security," said Handler.

Some clubs have begun to adopt equity-based models, of which BelleHavens is perhaps the best example, since its members own the houses lock, stock and barrel—without any debt. Gilson, the club's president, also runs Banyan Properties, which builds or buys homes for the club, adds them to the usage pool, and then transfers them entirely to BelleHavens Inc., a nonprofit club. Every time 10 new members join, the club acquires one home, debt free. It currently has about 50 members and 11 homes, five of which are wholly owned by the club, which in turn is wholly owned by its members. This strategy was key.

"One reason people buy second homes is the potential for appreciation, but that was missing in these models," says Gilson. "They gave members usage but not equity. From the beginning we were determined to give equity, which is the best asset protection…. We guarantee one debt-free property for every ten members. Now we are seeing more equity-based clubs, but not all equity clubs are created equal. Some say you'll get the current value of your membership, but that's just a proxy. We sell the same kind of equity you have in your house, because our members own the houses."

"BelleHavens provides a very transparent level of financial security," says Shove. "Crescendo, based in the Bay Area, is another twist: it is really a real estate investment company, regulated by the SEC. You invest, they use the funds to buy homes and then make them available to investors. On the back end it works like a destination club, but gives the investor the opportunity to capitalize on any appreciation. In a traditional or non-equity club, you do not capture any appreciation."

"Our membership actually owns the club," says Quintess's Estler, in yet another wrinkle on the model. "Think of it as a golf country club. The membership fee lets you join. But you can also be an owner by investing additional dollars and getting equity, and 65 percent of our members have chosen to buy a piece of the club, and they own the majority of the club. They get totally transparent financial reporting with quarterly Big Four audit reports." Similarly, Ultimate Resort has introduced a lifetime membership model in which it promises to refund 80 percent of the membership deposit at current value, not based on the original price, which has been the norm.

The industry is still evolving. Reservation systems and policies are being refined and international reciprocity agreements, which will extend the range of destinations offered, are widely expected. Clubs will also continue to add value with special events and activities for members, partnerships with private jet companies and other member benefits. But experts agree that the clubs are first and foremost discretionary lifestyle purchases, not investments. "It's silly to look at it as an investment," says Schiciano, the professional investor. "Pay your money, enjoy your vacation. It is what it is."

Larry Olmsted is a Cigar Aficionado contributing editor.

THE HOTTEST CLUBS

There are now about 20 destination clubs, and more launching. Here are some of the most notable:

BelleHavens: An equity-based club with 50 members and 11 homes. Membership from $200,000 with annual dues of $17,500. www.bellehavens.com

Exclusive Resorts: The largest and one of the oldest clubs, with more than 300 homes and 2,400 members. Membership plans from $225,000 and annual dues from $10,500. www.exclusiveresorts.com

The Markers: A destination club specializing in golf with seven homes in locales ranging from Scotland to Oregon to New Zealand. Plans from $285,000 and $16,500 per year. www.themarkersclub.com

Private Escapes Destinations Clubs: With nearly 300 members and 50 residences, the clubs include three distinct membership tiers: Premiere, Platinum and Pinnacle. Plans from $105,000 and $7,700 annually. www.privateescapes.com

Quintess, The Leading Residences of the World: Recently merged with Dreamcatcher and Leading Residences of the World to create a club with more than 280 members and 49 homes at higher price points than most competitors. From $185,000 and $14,000 in annual dues to $750,000 and $52,000. www.quintess.com

Solstice: A small high-end club that recently merged with Parallel. Ten homes valued at an average of $6 million (six new homes will be added). Membership starts at $505,000 with $26,250 to $68,000 in annual dues. www.solsticecollection.com

Ultimate Resort: Recently bought Tanner & Haley's assets (worth $98 million) and, with the merger, upped its membership numbers from about 100 to more than 1,000 and properties from 10 to 100. Five plans from $120,000 with annual dues of $9,500. www.ultimateresort.com