The drumbeat for regulations for destination clubs got louder after the Chapter 11 bankruptcy filing of industry pioneer Tanner & Haley.

Last month, the American Resort Development Association (ARDA), a non-profit trade organization for the timeshare industry, issued its strongest statement about the destination club industry, echoing Helium Report’s calls for transparency and member deposit protection:

“ARDA stated today that destination clubs that neither financially guarantee their refund obligations nor comply with state timeshare laws pose serious dangers to consumers and to the integrity of all prepaid vacation products…”

Since 2005, Helium Report has taken the lead in advising consumers how to analyze destination clubs carefully before joining. Helium Report spoke with CEO Howard Nusbaum (photo, right) to learn more about the specifics of the organization’s recommendation, as well as understand the differences between destination clubs and timeshares.

Nusbaum anticipates enormous growth in the “vacation ownership” industry over the next 25 years. He described the retiring Baby Boomer population as

“a new breed of affluent people eager to own some type of leisure vacation product…[they] understand pizza by the slice.”

Nusbaum and ARDA have been working with the Destination Club Association (DCA) to draft a “Model Act” for destination clubs. He described the relationship as “collegial” and said some destination clubs are “well-capitalized… and providing a great service [to members].”

For destination clubs, Nusbaum calls for “third party, independent financial assurance” and prefers a bond, insurance, or escrow to ensure membership deposits can be refunded. He stated the third party asset litmus test may not be sufficient since real estate valuations can move up and down.

Nusbaum felt that consumers would be willing to bear the added expense of a bond or insurance – but that would obviously depend on what that cost is.

ARDA focuses on the timeshare industry, including luxury fractional ownership options such as the Ritz-Carlton Club. Destination clubs desperately try to avoid any association with the term “timeshare” – and even Nusbaum concedes the timeshare industry has had a “colorful past.”

Most destination clubs are non-equity memberships, which means consumers do not own any portion of the real estate portfolio. In contrast, most timeshare ownership includes a deed to a specific unit, although there are exceptions. Nusbaum explained the “use plan of accommodations, not the legal structure” defined timeshares, rather than the deed itself.

Helium Report sees a clear distinction between timeshares and destination clubs. Timeshares are generally sold as a week’s usage in small units in a larger property. The average price per week is $16,000. Destination clubs offer access to single family homes ranging from 3,000-5,000 square feet and serve the ultra-affluent market with membership deposits in the $400,000 range. We’ll do more posts in the future comparing the two vacation options.

Regardless of the differences between the two industries, Helium Report shares ARDA’s position that consumers’ deposits must be protected, but notes that the protection may come in many forms. Owners of timeshares or vacation properties do not get a guarantee as to how the market will value their real estate or fractional purchase five years after they have bought it. With destination clubs, the refund obligation is a commitment that, if kept by the club, also has value.

Verifying that such a commitment can be kept is the next step. As we often say at Helium Report, “you’re parking your money in somebody else’s garage.” Click here to read our Top 20 Questions to Ask Before Joining.