Excerpt from our comprehensive Decision Guide to Destination Clubs. Click here to request a free copy (50-page downloadable PDF).

Top 10 Terms: Refundable Deposit

The refundable deposit is the portion of the membership deposit that will be returned if you leave the club. Typically, the amount ranges from 80% to 100% of your initial fee. Some destination clubs offer a refund on the future price of the deposit, implying potential break-even or a gain if fees increase over time. The two important elements to understand are how the deposit works and how the club ensures they can pay the deposit to you.

Basic model

Let’s say you select a destination club with a $300,000 membership deposit and an 80% refundable deposit. In general, the refundable portion (80%) is allocated to real estate acquisition, providing the club with $240,000 of capital.

Then, the club books the non-refundable portion (20%) as revenue and uses the funds to cover overhead, sales and marketing, and sometimes operations. From the start, you know that your out of pocket expense is $60,000 whether you stay with the club for one year or ten.

Variable model

Some clubs offer 100% back in the first year and then reduce the amount to 80% in subsequent years. The offer is designed to address your concerns of “buyer’s remorse” and gives you a chance to experience the homes with low financial risk. These programs came about as a result of increased competition as clubs jockeyed to gain new members.

We’ve also found the inverse of this program, where a club offers a larger percentage of the deposit based on your tenure: 80% in the first year, 90% after 3 years, and 100% after 5 years. The staggered rates are designed to encourage you to stay in the club.

Future Value model A recent twist on the refundable deposit is a promise to return 80% of “the then-current value of membership deposit.” This tongue-twister term means the percentage is applied to the going rate when you retire, rather than 80% of the amount you originally paid.

The model assumes membership deposits will increase over time as the club expands and demand grows. Using the prior example, if the membership deposit were to increase to $400,000 in five years, then you would receive 80% of $400,000 instead of 80% of $300,000 if you resign your membership. In this case, you’d theoretically receive $320,000, which is $20,000 more than your original deposit.

Destination clubs began offering these programs as an innovative response to prospects’ inquiries about participating in the upside of the club. The offer assumes the membership deposit will grow. In a few cases, fees have actually decreased, although most clubs do ratchet up their rates as they achieve membership milestones (50 members, 100 members, etc.).

The destination clubs are careful to avoid positioning this offer as an investment and open themselves to securities regulation. These incentives are not tied to real estate appreciation or the enterprise value of the organization.

The membership deposit programs vary from club to club. The bigger question is how these deposits are secured so you know your money is available when you want to resign. Does a bond, an insurance policy, equity in the homes, or “trust” back the deposit? Are funds held in escrow?

Leaving a club sounds easy – the membership base is growing, fees increase, and you get your deposit back. But what if the opposite is true? Service levels are lower than you expected, new memberships have stalled, and many people want to resign? Then, it’s important to consider the Resignation Ratio and Wind-down scenarios, which we describe in more detail in the complete Decision Guide to Destination Clubs.

Click here to request a free copy.