The bankruptcy of Tanner and Haley, the prospect of industry regulation and the caution of prospective members are all probably contributing to the industry’s focus on assuring members and prospects that their membership deposit is safe. There are different ways to do this – clubs like Exclusive Resorts can provide a long list of assurances and verification that member’s capital is safe.

LUSSO has decided, as a relatively small club, to raise the bar for non-equity clubs in terms of financial assurance. Their new DepositTrust program provides for the following:

• club financial statements subject to independent audit
• semi-annual report to members on extent to which net assets cover the membership deposit refund.
• the membership agreement now contains the commitment that 85% of the member deposit will be used for acquiring club properties or held in cash.
• members are granted a secutiry interest in all of the club’s real estate, via a trust, so that members are next in line, after secured debt.

LUSSO is addressing several concerns at once here, one of which is very unique. In terms of financial transparency, we think all clubs are moving to a model of disclosure and third-party audit, so this is to be expected. The establishment of a trust that holds the real estate should at least give some comfort that the real estate assets are in one entity, and that can be verified.

The commitment to spend 85% of the member deposit on real estate acquisition or related activities attempts to address one of the operational realities and risks of the destination club model – that clubs have been using some of the member deposit to fund operations and home leases, and not enough to actually buy homes. The most glaring example, with catastrophic consequences, was at Tanner and Haley, where member depsosits were used to lease homes, and fund failed new business initiatives, and not buy hard assets – homes.

We have always said that member deposits need to be used to buy homes, and that investor/risk capital should be used to fund operational cash needs, as these clubs are scaled and get to a break-even state. It’s too much to ask members to bear ALL the business risk. That’s what investors are for.

The DepositTrust program is another example of smart clubs responding to the market – and attempting to distance themselves from some of the issues that have hampered other clubs in the past year.