The formation of the Destination Club Association in 2006, which counts Exclusive Resorts, Ultimate Escapes, High Country Club, Solstice, the Lusso Collection, Quintess, LRW and Abercrombie and Kent Residence Club among its members, was meant to bring a greater level of accountability and transparency to the industry. Its most important contribution is requiring clubs to pass a net asset test as a condition of their membership. Halogen Guides takes a look behind the net asset test to see how it works and why it’s so important for club members.

What is the net asset test?

The net asset test measures the total assets of a club against the total value of member deposits in order to determine whether it will be able to pay back members in the event of a club’s demise. The DCA considers the test passed if a club can cover at least 66.66 percent of its deposit obligations to members. The test looks at a club’s assets plus cash and marketable securities and subtracts any debt secured by club assets. If a club refunds 80 percent of a membership deposit,it must have assets equal to 66 percent of that deposit refund obligation. DCA guidelines require clubs to have their properties appraised each year, so market swoons can dramatically impact the ability of a club to pass the test.

Who verifies the club has passed the test?

The DCA’s bylaws require an annual independent audit of the club’s finances as a condition of membership. For now, clubs are free to choose any auditing firm, but according to DCA president and Exclusive Resorts senior vice president and executive counsel Adam Wegner, there have been plans to establish a single auditor for all DCA members. If a club fails a test, it won’t be part of the trade group.

Why does the DCA set the bar below 100 percent?

Wegner said that there was much discussion among DCA members about exactly where to set the number. In fact, he said, some had hoped for an even lower bar. The primary reason for a lower than 100 percent threshold, said Wegner is that destination club’s primary assets are real estate holdings which “are not cash and whose market value can vary.” In fact, the 66.66 percent threshold recognizes that a major downturn in the real estate market could lower the value of a club’s real estate holdings in a way that a club might not be able to reasonably anticipate. It also reflects the understanding that clubs are leveraged for growth, which at any given time might see them taking on debt in advance of expansion. In the end, while 66.66 percent might not assure members of the full security of their deposits, it provides a good deal of insurance that they will not lose it altogether.

Nevertheless, most destination clubs target a number that exceeds that required by the DCA. Exclusive Resorts holds assets which exceed 100 percent of the refundable portion of member deposits. Quintess, Lusso Collection, and High Country Club top that measure as well. Abercrombie & Kent Residence Club president Jarvis J. Slade, Jr. noted that his new club will easily surpass the net asset test because all home are owned debt-free. Of course, that assumes that those homes don’t decline in value.

Why does the net asset test matter?

Remember Tanner & Haley? Enough said. Back in the summer of 2006, the club collapsed into bankruptcy. As members clamored for their deposits, most found they were out of luck since up to 80 percent of the property portfolio was made up of leased homes. Tanner & Haley simply did not own enough assets to pay back members’ deposits. The net asset test is designed to protect against exactly this situation. It forces clubs to maintain good finances as a last line of defense for member deposits. The best clubs will pass the test (and even exceed it) and open up their books to show you how they did it.