Since mainstream media has been so positive about the destination club concept for the past two years (see post from earlier this week), it’s only a matter of time before the sentiment might turn a little bearish. A new article from Time magazine is the first we have seen (besides Helium Report) that starts to paint a more realistic picture of this new category.

The article centers its industry criticism around Tanner and Haley, one of the industry leaders with about 700 members – picking on implied availability issues, a home that was not located where the brochure said it was, and poor quality furnishings in one home. The article also suggests doing your due diligence carefully, and quotes Dick Ragatz, a respected timeshare consultant, on what to look out for.

Helium’s take:

We’re often asked by readers to dish dirt on clubs – on home availability, financial stability, quality of homes etc., and we are collecting good anecdotes from readers on what clubs do well and what they don’t. But a few stories does not necessarily indicate a pattern, at least not until we hear it from enough people. When we do, we’ll publish the facts. Or better yet, we could add a message board feature to our site so that club members and readers can write about their own experiences.

We do know that is that this is not a simple business to run. Quality and consistency of service delivery (from home availability to what utensils are in the kitchen) is a challenge for all clubs. Four Seasons has been around over thirty years, and they manage and maintain hotels that for the most part are similar wherever you go – lobby, restaurants, rooms that are usually under 1000 sq. feet and so on.

Destination clubs don’t have it so easy – many homes, at least in peak periods, are busy from one week to the next. On one day, a large family may be checking out and another arriving. A 4,000 sq. foot home has to be cleaned and prepped in time for the arriving family, including some water wings for little Johnnie so he can jump in the pool the moment he arrives.

We’ve pointed out before that the industry has over 20 clubs operating and more coming – but not all of these clubs will survive as standalone clubs. The reality is that the destination club business model is evolving, as clubs learn their real operating costs, their cost of capital, access to debt and so on. But the basic model should look something like:

• Membership deposits + Real estate debt finances the home portfolio, but always in balance so that there is enough equity to retire memberships if needed.
• Membership dues X Number of members should cover annual operating costs (including debt service).
• Some amount of corporate debt, or cash invested in the business (in exchange for equity) provides the short to medium term financial cover needed to get the club to scale.

The article suggests that a member should get a bond (probably of little value in terms of deposit refund assurance) or insurance (offers a lot more value) before joining a club. There are in fact several ways to get comfortable on this issue:

• Leading Residences of the World provides membership deposit insurance as part of their membership – we like this approach.
• DreamCatcher, Private Escapes and Qunitess offer prospective members a close look at the financials of the club before joining.
• BelleHavens, as we wrote about yesterday, employs a club structure that ensures that homes are held debt-free in the membership entity.

We’re making the finishing edits on our Decision Guide to Destination Clubs. We’ll cover these topics and more to help you avoid a “Club Mad” experience.