It’s one of the realities of the destination club industry’s growing pains. New clubs underestimate their capitalization needs to get over the initial membership hump and end up shutting their doors a year or two after rolling out splashy marketing plans. Portofino Destinations Club is the latest statistic following start up players like My Global Playground. A filing for involuntary Chapter 7 bankruptcy was made on May 28. We sat down with Jamie Cheng, Halogen Guides chief analyst to talk about Portofino’s demise and what this means for the destination club industry as a whole.

How many members were affected?

Cheng: It’s tough to say. The club reportedly had anywhere from 50 to 70 members at its peak. It had clearly been struggling for some time, so it remains to be seen how many members there were at the end. Last fall, the president of the club left. This spring, a lawsuit was filed by a club member. Bills were reportedly going unpaid. It seems unlikely that any members who were privy to the club’s shaky financials would have been able to get out early with their money in hand.

What went wrong?

Cheng: In short the club was under capitalized. In a past interview with Ron Tapp, a member of Portofino’s executive team, he admitted that the club didn’t operate with a nice cash cushion. In early May Tapp explained that the club was attempting to convert to an equity model, seeking additional investments from club members in hopes of revamping the club and setting it on stronger financial footing. But who knows if a cash influx would have worked as a long-term fix?

The club’s membership deposits and dues couldn’t support the operation. It’s those annual dues that cover costs like home maintenance, taxes, insurance, and management salaries. The annual dues on Portofino’s plans ranged from $5,900 to $29,900 a year, which is actually quite low for the industry. Portofino’s 45-day plan had dues of just $21,900; in contrast the 40-day plan at Exclusive Resorts has yearly dues of $39,900. It might be far from a bargain price, but Exclusive Resorts fees are definitely more in line with what it costs to keep up a stable of homes.

Is this bankruptcy a negative mark on the industry as a whole?

Cheng: No. This is not a Tanner & Haley disaster. Certainly a bankruptcy isn’t welcome news in the industry, but if anything, it makes existing clubs work harder reassure new members of strong financial footing. It also brings up the issue of financial disclosure again to the Destination Club Association, the industry’s trade group. Portofino wasn’t a member of the DCA, but a failed club inevitably brings up these big questions.

Additionally a failed club with little brand name recognition may be a sign that new club start-ups need to have an early leg up to attract members. We’re seeing this with the entrance of Abercrombie & Kent to the industry. The club is kicking off its big membership push this fall, and no doubt they have a ready pool of potential members in the form of travelers who have booked A&K safaris or one of their private jet tours. Brand matters. And the strongest clubs will not only amass great real estate portfolios but build up stellar reputations for customer service and opening their books to members.