While the benefits of destination clubs are compelling, the industry is still in its early stages and not without its risks. With membership deposits ranging from $30,000 to $3 million, consumers must be assured that the club they’re joining is one they can enjoy for years and that they will receive the refundable portion of their deposit back if they choose to leave.

In 2006, several new startups have launched, some clubs have stalled in their growth, and an industry pioneer has declared bankruptcy. Meanwhile, leading destination clubs continue to attract members and outside capital while expanding their portfolio of homes and services.

Helium Report suggests you consider four categories of risk when evaluating destination clubs: Business, Reservation, Resignation, and Member Deposit Appreciation.

Business Risk

A sustainable business model must serve as the foundation to ensure member deposit obligations can be met at any and all times. Most clubs commit to using membership deposits to acquire real estate or to be held as a cash reserve.

Operating expenses, including sales and marketing, should be covered by the non-refundable portion of the deposit and annual dues. Many clubs raise working capital to provide them with resources to get started and to survive any downturns in membership sales.

New entrants sometimes find it difficult to grow beyond the initial “charter” members. Competition within the industry is high. We expect to see consolidation among players, which will make it even more difficult for clubs with only a few homes to attract members who are looking for diverse vacation experiences.

As evidenced by the recent bankruptcy filing of industry pioneer Tanner & Haley, destination clubs need to limit the amount of leased homes in their portfolio. Helium Report recommends at least 70-80% of the portfolio should be owned to ensure a sufficient asset base to offset member deposit liabilities.

Reservation Risk

The destination club concept is fundamentally a shared usage model. Prospective members must realize they’re unlikely to reserve the same home, for the same week, every year. In that sense, destination clubs differ greatly from owning a specific week in a timeshare or fractional residence club.

Instead, variety is one of the key features the clubs offer members. Members will have a combination of advanced reservations and last minute access options available to them, depending on the policies of each specific club. It’s important to see if there’s a balance of exotic resort destinations and nearby luxury homes you can access spontaneously.

Resignation Risk

As covered earlier, destination clubs need to have sufficient assets to ensure they can refund member deposits. Most clubs have a clause in the member agreement that requires two or three new member sales before you can resign your membership. Unlike timeshares, there is no secondary market for membership, so the club must have growth momentum in order for you to leave.

There is typically a time limit, however, which requires the club to refund you with 12-18 months. In a worst case scenario, a club is no longer delivering the service it promises, dissatisfied members ask to leave, and the club’s financial resources are severely strained.

Some clubs have included “wind-down” scenarios in their membership agreement to assure members of an orderly liquidation of assets if such a “run on the bank” occurs.

Membership Deposit Appreciation Risk

Several destination clubs promote programs that promise to share the upside of real estate appreciation. We’ve seen many variations on the program, all of which are designed to address consumer concerns that the club enjoys all of the profits of an appreciating real estate portfolio.

Helium Report remains cautiously skeptical of these deposit appreciation programs since they are relatively unproven. Most offer a refund of the “future value” of the membership deposit, which assumes fees will continue to increase over time. In contrast, industry leader Exclusive Resorts only commits to 80% of the amount you paid when joining.

The other clubs are selling against the industry leader with innovative models. For example, Private Escapes Platinum issued a several thousand dollar “club credit” to members earlier this year. Other clubs such as Crescendo and BelleHavens position themselves as equity alternatives where members participate directly as real estate investors.

Helium Report Perspective

Transparency, disclosure, and assurance are three elements that every destination club must provide its members and prospects to mitigate any concerns about the risks outlined above.

Helium Report provides a list of 175 key due diligence questions to ask, ranging from the financial strength of the destination club to experiential details like standardized home theatre systems. Request a copy of the complete 50-page Decision Guide to Destination Clubs to learn more about both the risks and rewards of membership.