What's Wrong With This Club?

By Daniel Kadlec

Destination clubs, in which you plunk down a sizable deposit and pay an annual fee for access to luxury resort homes around the world, aren't the bargains they once were. Many are raising fees and dues, and some are shedding properties and initiating stricter reservation systems. And in the wake of a July bankruptcy filing by Tanner & Haley, the industry pioneer, the possibility of losing your privileges and your entire deposit has come front and center.

There are some 20 destination clubs, with a total of 4,000 members--a number that is expected to grow tenfold in the next few years. Membership fees commonly run $150,000 to $500,000, with annual dues of $10,000 to $30,000 for 30 to 40 nights per year. Those are big numbers. But the clubs may still make sense for affluent empty nesters with the time and means to get away, especially as an alternative to buying a second home. Even with today's stiffer fees and dues, the cost of a club runs about $60,000 less than the cost of owning a comparable second home over 10 years, estimates Helium Report, an online newsletter.

Still, a lot has changed since the first clubs opened their doors in 1998 promising virtually unlimited access to multimillion-dollar homes from Telluride to Tokyo. The "anywhere, anytime" promise has morphed into "most places most of the time," says Ben Addoms, a founder of Quintess, Catch the Dream, which has 38 properties in 24 locations.

Exclusive Resorts, by far the biggest club with 300 homes in 35 destinations, raised prices 10% this summer. A mid-level membership is now $325,000, with annual dues of $19,500. Ultimate Resort and Quintess have also hiked prices. Crescendo is not only raising prices but also cutting the number of nights you may stay at its properties.

Meanwhile, the industry is consolidating at a furious pace. Ultimately, there will be just one or two clubs in each of three or four price points, says Addoms. A couple of clubs are vying for Tanner & Haley's assets. A few weeks ago, high-end clubs Solstice and Parallel agreed to merge. Just about everything from growth plans to fee structures is in flux, and the industry remains lightly regulated.

Tanner & Haley was the industry's first meltdown. Its 874 members, who had paid from $85,000 (in the early days) to $1.3 million (in more recent years) to join, could lose most of their deposit. The firm owned only 67 of the 200 properties it managed (the rest were leased) and did not have sufficient assets to cover the expense of refunding membership fees.

"We've been calling for regulation for three years," says Howard Nussbaum, president of the American Resort Development Association, a trade group. He believes basic consumer protections that would have prevented the kind of losses experienced by Tanner & Haley members will be in place in some states by spring. But even then, prospective members will need to ask tough questions.

Your top concern is the safety of your membership fee. Most clubs agree to refund 80% when you quit. So insist on proof that the club has enough assets to fully refund all members. Ask how long it takes to get a refund. Most clubs won't pay until they get two or three new members--a problem if growth stalls.

Ask about owned vs. leased properties. A good ratio is 4 to 1. Anything less and the club may be on shaky financial footing. Ask about occupancy rates. A good one is 70% or less, meaning that at any given time you'll have options for last-minute travel. And ask about holiday booking. Most clubs have a lottery or rotation system. Make sure new members are treated equitably and that hot properties have not been booked for years to come. A few questions now may spare you a lot of pain later.

Kadlec's latest book, The Power Years: A User's Guide to the Rest of Your Life, is now in paperback