but then we’d have to shoot ourselves

As with any emerging industry, destination clubs are popping up with an amusing variety of business models. It makes our job interesting and your selection tricky. An obvious first question is: so I’m dropping a big wad that gets tied up for 10-15 years…do I get any piece of the underlying real estate appreciation? The answer generally is: no. There are all kinds of worthy justifications. The clubs rely on the deposits as a fundamental part of their economic model – essentially a low cost of capital with which to lever to buy properties. Take it out, and it ain’t such a great business to be in.

But for members used to asset appreciation in country clubs and aircraft, this could be a practical or philosophical deal-killer. A few of those folks have started competing clubs to offer just this sort of opportunity. So instead of “no”, the answer can range from “sorta” to even “yes.” But making the choice is not as simple as you’d hope.

Since these “equity” clubs smell like investments, Dubya’s SEC is gonna keep an eye on them. There’s prequalification, paperwork, oversight and a bunch of regulations that you often see in private equity funds and similar investments. The real buzz-stomper is that these clubs can’t advertise. So they end up being an inadvertent secret…never the most popular slide on the business plan powerpoint.
Equity clubs reach their market just as other investments do: word-of-mouth. So far, it appears to be working for Crescendo, chaired by Michael Burns, who started Marriott Vacation Clubs. COO Chris Soderquist tells us they’re enjoying great demand, and that the SEC prequalification (called “accreditation”) helps keep their conversion rate high. Accreditation requires a personal net worth of $1mm, or annual income of at least $200k for the last two years.

So should you consider an equity club? Certainly, but there are trade-offs – you never get something for nothing. It may very well work out that a non-equity club best fits your financial profile. But if you just can’t get over the thought of parking your cash in someone else’s garage, an equity can provide some investment upside. But remember: deciding what company will provide the most consistent vacation home experience is very different from deciding what is a good real estate trust to invest in.

In the coming weeks, we’ll provide some concrete guides to help assess the financial parameters of the various memberships.