Elsewhere: Trouble in paradise?

Tanner & Haley, set up in 1998 under the name Private Retreats, claimed to have invented the perfect vacation concept. For a redeemable initial deposit (from $100,000 to $1.5m), relatively modest annual dues (starting at $7,000) and a $150 per night rate, members of its “destination clubs” would get unlimited access to dozens of luxurious homes in the US, Mexico and the Caribbean (plus daily green fees or ski passes for two) with none of the headaches of actually owning the properties. Best of all, unlike in traditional timeshare and fractional ownership schemes, availability was guaranteed. If members wanted to be in a certain destination at a certain time, they could be.

“Initially we joined for the business – it is a perfect vehicle to entertain customers – but we enjoyed using the club membership for our family as well; the ability to spread out and have all the extra space compared to the limited space you get with hotel vacations,” says former Tanner & Haley member Elliot Foo, president and chief executive of the Rochester, New York-based title and escrow company Closing USA.

It seemed too good to be true. And indeed it was. Last year, Tanner & Haley declared bankruptcy, acknowledging that its costs were significantly outpacing revenues – resulting in a 2005 net operating loss of 54m pounds – thanks mainly to the club policy of never refusing a travel request. That meant that in addition to buying and maintaining its own portfolio of homes, and benefiting from the price appreciation on them, it also had to rent properties from third parties in popular destinations at popular holiday times. The business model was unsustainable.

The news was a shock not only to Tanner & Haley’s 874 members, who were in danger of losing their hefty deposits, but also to the thousands of people, mainly from the US, who had joined similar destination clubs since the industry took off in the late 1990s. Helium Report, an online newsletter that covers these companies, says there are now more than 20 managing 600 homes with an average value of $3m each. These include Exclusive Resorts, a group backed by America Online founder Steve Case; Yellowstone Club World, run by former Hilton Hotels chairman Dieter Huckestein; and Crescendo, whose chairman Michael Burns helped conceive the Marriott hotel group.

All charge members in the same way as Tanner & Haley: an initial deposit, refundable or partly refundable if the member decides to leave, annual dues and sometimes nightly rates. They also offer the same benefits: access to an array of private homes with gourmet kitchens, lavish grounds and gracious hosts who manage everything from roof repairs to restaurant reservations.

But executives running the other clubs insist that they are structured in ways that protect participants and profitability.

And independent observers back them up. Tanner & Haley’s “financial problems came about partly because of its ‘members-first’ policy,” says Nick Copley, chief executive of another industry website, Sherpa Report. Other groups, by contrast, limit members to a certain number of days per year, depending on the size of their deposits and dues, and don’t guarantee “anywhere, any time” vacations. Money is primarily invested in owned property, not spent on rentals.

Former Tanner & Haley chief operating officer Richard Keith, who left in 2003 to start a competing club, Private Escapes, says the Tanner & Haley model did not work because it was taking membership contributions and using it for the expenses of a lease. “You have to be investing the majority of that in appreciating assets. That was one of the reasons I left.

“For the industry,” he adds, “this was probably the perfect wake-up call.”

Since the collapse of Tanner & Haley, six US clubs have banded together to form the Destination Club Association (DCA), a group aiming to boost the industry’s credibility and improve its transparency. To belong, companies must have regular, independent audits, release certain financial information to members and have enough real estate assets to cover 100 per cent of members’ refundable deposits.

New clubs have also started to offer more protection and, in some cases, more upside for members. The Asia-based Banyan Tree Private Collection, for example, which launched in November 2006, holds its properties, mainly two-bedroom villas, in a separate company with members as shareholders. The initial, redeemable fee is $120,000 and annual dues are $3,000. For that, members will get one week in a two-bedroom villa with an on-site concierge as well as treatments at the spa and use of the championship golf course.

Crescendo, which launched in the summer of 2005, is both vacation club and investment fund. For $350,000 and $23,500 each year, members get six to eight weeks at a choice of multi-million-dollar homes in eight resort locations as well as a 60 per cent share in any appreciation on the properties. Membership can be sold back to the club after a year and the refund will be based on the book value of the club’s portfolio at the time.

“Crescendo [offers] a combination of the experience of luxury homes and concierge service and the upside of a real estate investment fund,” says Andrew Hargadon, a professor at the University of California, Davis, who has studied the business model. “Call it ‘experience investing’. This is the future of vacation home ownership and destination clubs.”

Two London businessmen, Mike Balfour and John Lovering, recently launched the Gibraltar-registered Hideaways Club, which bills itself as the first European destination club and will cost ?207,500 to join and ?10,000 in annual fees. “The key thing is that our members will get an investment,” says Stephen Wise, chief executive. And “they get the usage at a very much subsidised rate in a large choice of villas.”

Jamie Cheng, co-founder of Helium Report, is encouraged by these new launches and innovations. “Originally launched in 1998, the industry has expanded rapidly in the past few years,” he says. Now it “is stabilising and business models are maturing”. His analysts expect the existing clubs to attract 1,500 new members and buy 250 new homes this year, bringing their total customer base to 5,500 and real estate assets under management to $2bn.

Of course, the industry’s first high-profile failure has made potential club joiners increasingly cautious. “Before Tanner & Haley, the majority of a call with a prospective member was to talk about the great properties, the homes and the amenities. The last five minutes of the call might be focused on financials and risk,” says Keith at Private Escapes. “Now it’s the opposite, with the first 80 per cent of the call addressing risk and the final 20 per cent on the lifestyle.”

Mark Tavill, a 47-year-old retired businessman from California, says he examined the Private Escapes business model in detail before he signed up. The initial membership fee, which starts at $105,000, and annual dues of $14,500 are average for the industry and the club will refund 90 per cent of the deposit when a member leaves. The company says it keeps members’ money safe and reduces financial risk by buying investment-worthy property with relatively low leverage – it often lays down 50 per cent of the purchase price outright – and very rarely leases homes. As per DCA guidelines, it also brings in an independent audit firm to conduct an annual review of the company’s internal control structure.

“Once I was satisfied that the club had stability, then I was happy to pay the initial fee because I knew in the long run that it would be cheaper for us than to continue paying the amount we were on our annual family vacations,” Tavill says. Stress relief was another consideration. “It’s just an easy, uncomplicated way to take a vacation.”

Copley at Sherpa has lots of advice for people considering joining a club. “Your top concern is the safety of your membership fee. Most clubs agree to refund 80 per cent when you exit, 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, which can be a problem if growth stalls.”

Members should also ask about owned versus leased properties. Copley says a good ratio is four to one.

And, of course, the quality and spread of homes is important. “Destination clubs are still a great alternative to five-star resorts and villa rentals but prospective members must do their due diligence,” say Cheng at Helium. “Ask: ‘Is this the club that’s right for me and my family?’ ”

Some specialist clubs listed on his website include Fly Fishing Destinations, requiring a $35,000 deposit; The Markers, which charges an initial $325,000 and focuses on golf; and at the very high end, Yellowstone, which offers access to a range of luxury homes in several countries and charges members an upfront fee of $3m.

As for Tanner & Haley, its members have been allowed to join Ultimate Resort, which charges $15,000 a year but has agreed to waive the $120,000 to $215,000 joining fee associated with lower tier membership, in return for some of the defunct club’s assets. According to Jim Tousignant, founder and chief executive, 675 people have switched and nearly 200 have already upgraded to better plans. The Ultimate Resort residences are valued at $2m on average and range from a 3,200 sq ft estate with ocean views in the US Virgin Islands to a one-bedroom condominium in New York City’s Trump Tower.

“When the situation happened with the Tanner & Haley club, we were looking at a total loss,” says Foo, who made the switch. “Now, we are able to keep all the benefits we had previously but we feel more secure about the future of the company.”