General Practice, Solo & Small Firm DivisionMagazine

 

Timesharing for the Next Century

BY MEL S. WEINBERGER

Mel S. Weinberger, a partner in the Washington, D.C., office of Holland & Knight LLP, has practiced in the area of resort, timeshare, and community development and finance throughout the United States and abroad for more than 17 years. He can be reached by e-mail at mwein@hklaw.com.

Once upon a time, being a timeshare developer was regarded by many as the moral equivalent to stealing candy from a baby. During the infancy of the timeshare industry, widespread marketing abuses, and in some instances outright fraud, beguiled unsuspecting consumers into dreaming of spectacular vacations at exotic locales that never quite materialized in the manner promised.

Times have certainly changed, particularly over the course of the past ten years, a period that has seen amazing progress in the areas of product innovation, consumer protection, customer satisfaction, and enhanced profitability for timeshare developers. The villainous timeshare developers of the late 1970s and early 1980s have been replaced by the likes of Marriott, Hilton, Hyatt, Disney, Radisson, Four Seasons, and Westin—names in which most consumers have the utmost confidence. This tarnished history provides a startling contrast to the present state of the so-called “vacation ownership” industry, with annual sales volume in the billions of dollars and significant compounded annual growth expected to continue into the next century.

Timesharing Evolves

The timesharing concept began in Europe in the 1960s and quickly attracted the attention of developers in the United States, many of whom were operating underperforming hotels or motels or unsuccessfully attempting to sell “whole” ownership condominium units. By further legally subdividing condominium units into 52 “unit weeks” or “intervals,” developers were often able to sell a unit in timeshare increments at a far greater aggregate profit than would have been realized through the sale of the “whole” unit to a single buyer.

While many purchasers received a recorded deed, title insurance, and other indicia of real property ownership, some developers sold “right-to-use” timeshare interests that consisted of mere contractual use rights with no corresponding deeded interest in real estate. In both situations, the purchaser usually obtained the recurring right each year during the term of the timeshare plan to occupy a specific accommodation during a specific period of time consisting of seven consecutive days and nights. In some cases, the purchaser could save money by purchasing a “biennial” timeshare interest that allowed occupancy at the resort for seven days and nights every other year.

The growth of timesharing in this country was greatly accelerated by the worldwide exchange services offered by such companies as Resort Condominiums International, Inc., and Interval International, Inc., which attempted to accommodate consumer demand for flexibility in vacation planning. These companies offered consumers a way to exchange the use of a particular resort’s accommodations and facilities for those at a comparable resort in a totally different geographic location and at a completely different time of the year than the timeshare owner’s “fixed” week.

Developers gradually provided flexibility by selling “floating” timeshare interests. With floating interests, each owner expressly relinquishes the right to use and occupy any specific accommodation during any particular period of time. Instead, he must generally telephone a central reservation number, request confirmation of a particular occupancy period (the owner doesn’t always get his first choice), and (like a hotel) be assigned a particular accommodation upon check-in.

Some developers have offered a combination of “fixed” and “floating” occupancy periods so that, for example, a purchaser who is willing to pay a premium can guarantee occupancy at a particular resort during Christmas week each year. In addition, timeshare owners can sometimes reserve “split” occupancy periods that are shorter than seven consecutive days and nights.

These relatively simple forms of timesharing have generally been sold to consumers for between $7,000 and $25,000 per week of guaranteed annual occupancy. The cost depends upon such obvious factors as resort location and the relative demand for accommodations there, combined with the amenities available for use by timeshare owners and the overall degree of luxury afforded.

Fractional Ownership

The trend toward ever-greater use options and the desire to market to a more upscale audience has resulted in the proliferation of “fractional ownership” resorts in which purchasers can buy more than a single week of occupancy per year in some of the world’s poshest resort communities. Purchasers can own a fractional ownership interest for a small percentage of the cost of a comparable “whole” ownership accommodation but are entitled to virtually all of the benefits of whole ownership.

Developers of such ultra-high-end projects primarily target prosperous individuals who could easily afford to pay a million dollars or more for “whole” ownership of a vacation home. Such individuals may choose to forego that option (including rental income) and its attendant management hassles and other burdens. Instead, they prefer to purchase a fractional interest, sometimes for as much as $500,000 or more, which affords them as many days and nights of occupancy as they might reasonably be expected to use in a “whole” ownership context.

Timesharing Moves to the City

While the word “timesharing” normally conjures up images of tropical beaches and magnificent ski slopes, any property, no matter where it is located, can be sold on a fractional or timeshared basis, unless such use is prohibited by local law. After several marginally successful attempts in the 1980s and early 1990s, developers have once again been drawn to the prospect of selling timeshare interests in urban projects. Many people who never imagined purchasing a timeshare interest in a conventional resort location are finding urban timeshares attractive for weekend getaways in their favorite cities. In fact, some have admitted missing the city but needing the extra “push” that owning an urban timeshare interest provides to motivate them to occasionally leave their yards and picket fences behind.

Purchasers always have the option of exchanging their urban timeshares for the use of accommodations at thousands of timeshare resorts located throughout the world. Surveys conducted by the major timeshare exchange companies, Interval International, Inc., and Resort Condominiums International, Inc., suggest that many urban locations would be extremely popular as alternative vacation destinations for their members, effectively increasing the value of urban timeshares themselves.

Leading candidates for urban timeshare development include New York, Boston, Washington, D.C., Chicago, New Orleans, Miami, San Diego, Seattle, Santa Fe, and San Antonio, as well as many of the major cities of Europe. Each has an established infrastructure of culture, arts, restaurants, shopping, business, tourism, and sports activities that attract a suburban, regional, and in some cases national following. In such places, the entire city is the desired amenity, not merely a single beach, golf course, or ski slope.

Given the shortage of affordable quality hotel rooms in many cities, the opportunity to stay in an ultra-luxurious suite at a cost significantly less than the typical nightly rate for a standard hotel room is obviously quite appealing to many travelers. Key attributes of most urban timeshare projects include extremely flexible “hotel-like” daily use and occupancy options—owners can typically break up their one-week timeshare into seven one-night stays and are entitled to “bonus” usage on a space-available basis at a cost well below standard hotel rack rates. Such flexibility meets the needs of those who like to visit the city but not for long periods of time and frequently upon relatively short notice. Special packages can be tailored (albeit at an additional cost to purchasers) for those who are only interested in Saturday night stays or who want to guaranty the availability of accommodations during certain recurring special events (for example, Mardi Gras in New Orleans) or times of the year.

Virtually all urban timeshare projects feature some combination of daily maid service; wide-ranging front desk, bell, valet, and concierge services; private entrances and check-in facilities; 24-hour room service; good security; noise control; and other hotel-like features. In fact, urban timesharing is really a hybrid product that combines the benefits of ownership with the flexibility of use and the services that one typically expects from the best hotels. Moreover, from the developer’s perspective, finished units are essentially hotel rooms that can be rented to transient occupants while sales are ongoing in order to generate extra revenue and offset operating costs.

Urban timeshare projects do face a unique set of legal and practical challenges, including the need to establish a consistent methodology for allocating taxes, utility costs, insurance premiums, and other amounts between the typically two or more separate uses of the single building in which the timeshare project is located. The lack of suitable vacant land in many cities often necessitates the refurbishment of an existing building, which frequently entails major expense to bring the building into compliance with current building codes.

Zoning and transient occupancy tax issues can dramatically affect a developer’s plans to develop a timeshare project in a market that has experienced little if any timeshare development in the past. Phasing of vertical construction is also more difficult in an urban setting, except where an existing structure is being refurbished on, say, a floor-by-floor basis, resulting in higher carrying costs on unsold inventory and increased financing costs for the project as a whole. Overcoming a lack of sufficient parking is another challenge unique to urban timeshare projects.

Mixed-Use Developments

Mixed-use communities that include a variety of different products—residential lots along a golf course, whole ownership condominiums, resort hotels, retirement facilities, and private or semi-private country clubs—are frequently good candidates for the addition of a timeshare or fractional component. In fact, often a timeshare project or hotel alone is not as economically feasible as the combination.

Frequently, the most formidable challenge in designing the legal structure for a hybrid development that includes a timeshare component is attempting to ensure that timeshare owners are continually entitled, at least for some minimum specified period of time, to use the “master” development’s (or hotel’s) recreational facilities and amenities. In many such situations, the timeshare accommodations are constructed on a legally differentiated parcel of land that includes some limited recreational facilities that are made available for the exclusive use and enjoyment of the timeshare owners. However, many if not most of such owners have bought their timeshare interests based upon sales representations that they would enjoy special privileges with respect to the master resort’s golf course(s), tennis courts, spa, and other facilities and amenities in which such timeshare owners have absolutely no ownership interest whatsoever.

The most common solution to this challenge involves the execution and recordation of some form of resort (or hotel) use agreement that clearly specifies timeshare owners’ rights, benefits, and privileges with respect to master resort facilities and amenities. A resort use agreement typically grants all present and future timeshare owners (or a timeshare owners’ association, on behalf of all owners) a continuing right to use some or all of the master resort’s facilities and amenities and details the relevant terms and conditions of such use.

For the most part, timeshare owners are treated as permanent resort residents, hotel guests, or full club members during any period of time in which they occupy a timeshare accommodation. In some cases (usually in situations in which most timeshare owners are within driving distance of the resort), daily use of the resort’s facilities and amenities is permitted on a space-available basis, even if the timeshare owner is not staying overnight in one of the resort’s timeshare accommodations. In consideration for her aggregate use rights, the resort owner (often not the timeshare developing entity) is typically paid some sort of up-front “initiation” fee, annual resort dues, or a combination of both.

Non-Fee-Based Timesharing

As noted above, a timeshare interest may or may not include a deeded interest in real estate. In recent years, both developers and (perhaps more importantly) their construction and receivables lenders have become more comfortable with “right-to-use” non-fee timeshare interests, typically in the form of a lease, license, or membership. The marketing emphasis is placed on the overall recurring vacation experience (i.e., services and the use of real property) rather than on a less costly alternative to a second home.

Once a non-fee-based timeshare developer is able to overcome certain potential income tax and securities hurdles, it often realizes certain benefits over a fee-based product. For example, upgrades to greater use and occupancy benefits are generally far easier to accomplish in the right-to-use context than when additional fee interests must be conveyed to the purchaser. It also is usually simpler and less time-consuming to recover a defaulting owner’s right-to-use timeshare interest than to foreclose on a deeded timeshare interest. However, the greatest leverage afforded to the right-to-use creditor is the right to suspend or terminate the defaulting owner’s use and occupancy rights and retain all amounts previously paid by such owner as liquidated damages.

Vacation Clubs, Point Systems, and Trusts

Point-based “vacation clubs,” with multiple geographically diverse resort locations throughout the United States and sometimes abroad, take the right-to-use concept to the ultimate extreme (although some multiple resort vacation clubs do still couple a club membership with a fee interest in real property). Even developers of single-site timeshare resorts have increasingly been affiliating with other regional developers to create their own networks of resorts for inclusion in a vacation club.

Vacation points, membership points, or the like are simply the currency by which vacation club members ordinarily obtain the right to reserve, use, and occupy the accommodations of the club. These systems use a complex set of reservation procedures that take into account such variables as the size and occupancy limit of the particular type of accommodation desired, time of the year, whether the occupancy period in question includes a weekend or a major holiday, and the specific resort.

Whether the purchaser acquires a fee or a right-to-use timeshare interest, the interest is translated into a designated number of points that can be used on an annual basis during the term of the vacation club’s existence to access the club’s accommodations. Many vacation clubs also offer their members numerous ways to redeem their points for purposes beyond merely staying in the club’s own accommodations. For example, Hilton allows its members to exchange their club points for frequent guest points that can be used to reserve nights at hundreds of the company’s hotels throughout the world. In addition, vacation club members can often redeem their points for discounted airfare, cruises, car rentals, and even merchandise.

Increasingly, vacation club developers create a trust into which legal title to all real estate that corresponds to the memberships being sold is conveyed. The principal beneficiaries of the trust are the vacation club’s members. A trust mechanism is primarily intended to protect members from the imposition of blanket liens and encumbrances upon such real estate that might take priority over their use rights. The arrangement provides a relatively simple way for lenders and various other “lien beneficiaries” of the trust to obtain title to the real estate that underlies a particular membership interest if necessary (most commonly when the applicable member defaults on his purchase money financing or assessment obligations).

Legal Considerations

Increased consumer expectations lead to increased product innovation and greater legal complexity. The timeshare industry is no different than most other industries in this regard. Federal and state timeshare regulators are constantly trying to keep pace with the developers whose activities they regulate in the areas of marketing, sales techniques, project registrations and purchaser disclosures, escrow requirements, and other key components of the regulatory maze.

Developers, particularly those who are relatively new to the timeshare industry, need to consult early with competent professionals—feasibility analysts, accountants, lawyers, architects, sales managers, and others—to obtain the best understanding possible of the legal and practical ramifications of creating either a single-site timeshare project or a multiple resort vacation club. CL
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