Feature: The Fractional Market
01/01/2004
When Dwight Manley and his family arrived at their plush four-bedroom villa on the ocean at Los Cabos in Baja California, they were mildly disappointed to discover that the giant plasma television and deluxe satellite receiver could not bring in coverage of the Evander Holyfield/James Toney fight live from Las Vegas.; function voidFunc() { } voidFunc();)
Second homeowners who buy a wholly owned or fractional-deeded condo at the Four
Seasons Residence Club in Scottsdale enjoy the amenities of the hotel and accrue
tax and equity benefits. (Click image to enlarge)In every other respect, the 5,000-square-foot house, with its massive
swimming pool, oversize Jacuzzi and spectacular waterfall, built upon an outdoor
deck with breathtaking views of the Pacific and within walking distance of the
exclusive Esperanza Hotel, seemed to have been tailor-made for the vacationing
family. The house even came with a full-time concierge, daily maid service and a
private chef. The only thing missing was the proper satellite connection, which
Manley quietly mentioned to the concierge. “Within an hour, a guy showed up with
a new satellite box, put it in, and the fight was on,” says the 37-year-old
president of United Sports Agency, a Newport Beach, Calif., firm that manages
basketball stars.
Most people who own multiple residences spend a
considerable amount of their vacation time dealing with security, staffing and
maintenance issues that often are not addressed while they are away. In
addition, they are paying mortgages, taxes and regular maintenance expenses on
properties that are occupied only periodically or seasonally. Those
disadvantages weighed heavily on Manley’s decision. As a platinum member of
Exclusive Resorts, a Denver private residence club, he and his family have the
use of multimillion-dollar homes in 16 locations around the world—from the Villages
at Mauna Lani on Hawaii and Grand Isle Villas at Emerald Bay in the Bahamas to
private ski retreats in Deer Valley and Whistler—without the responsibility of
maintaining any of them. In the last six months, for instance, the Manleys spent
five days at New York’s Trump World Tower in addition to their two-week Los
Cabos holiday. This spring they have blocked time at private villas in Paris and
London. And by summer’s end they will have cruised the Mediterranean ensconced
within their stateroom aboard the World of ResidenSea.
“It’s a pretty
fantastic creation, especially for a family with kids, because when you travel
you always need more than one room,” says Manley, who paid a membership deposit
(Exclusive Resorts’ membership ranges from $200,000 to $325,000, which is 80
percent refundable upon termination) and annual dues of $16,000 to become one of
only 200 members. “If you are upper middle class, you are accustomed to paying
$2,000 for the right hotel accommodations, and then you’re treated like every
other guest.” Exclusive Resorts was different from the start, he says. “They
didn’t just mail us the keys and say this is what you do with them when you’re
done. The homes include staff and every amenity. You get all the benefits of
second- and third-home ownership without the hassle and the expense.”
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Private Retreats partnered with Abercrombie & Kent to offer members the choice of villas (Villa del Sol, Cabo, below), jets or yachts. (Click image to enlarge)Exclusive Resorts is one of a handful of residence clubs set up by private
investors and luxury hotel chains over the last decade to help affluent
vacationers eliminate some of the burdens and limitations of second-home
ownership. A by-product of the time-share concept, in that members share homes
for a given amount of time, the idea has been vastly elevated in terms of
benefits, services and even the amenities found in the homes
themselves—everything from big-screen plasma televisions and extensive DVD and
video game libraries to private pools—to make membership much more compelling to
the well-heeled traveler. ; function voidFunc() { } voidFunc();)
Although the perks and privileges vary depending
on the club, buyers essentially have two options. The first is to spend anywhere
from $84,500 to $635,000 plus annual dues to purchase a wholly owned or fractional-deeded property with a luxury
hotel brand such as the Ritz-Carlton, Four Seasons or Marriott. For their
investment, owners are given more than double the staytime of a typical
time-share, with the added bonus of accruing tax and equity benefits and, in
some cases, even rental income from second-home ownership. And, at least in
theory, owners have the right to will or sell their deed at any time. As hotel
residents, they are also entitled to use all of the amenities—spa treatments,
24-hour concierge, valet and maid services, even a private wine cellar—found at
a five-star resort. (Click image to enlarge)
With rare exception, most hotel properties are luxury
condominiums built adjacent to the hotel, and members have the option of
spending all of their time at one location or, more commonly, moving about
within the chain on a space-available basis. Some extend privileges to affiliate
country clubs around the world. “For most of our members, it’s not about money
but about time,” says Angela Gyetvan, director of marketing for Four Seasons
Residence Clubs. “We call it the brain drain. With second and third properties,
if you’re not there all the time, you have to worry about maintaining them. So
there is a tremendous advantage to letting us handle that.”
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The Owners Club cottages on Hilton Head Island were the first fractional homes. (Click image to enlarge)The second
option, which is offered by private operators such as Exclusive Resorts, Private
Retreats, Mirabella Estates and, coming this spring, Odyssey Club, is equivalent
to membership in a private country club. The formula has members making a
six-figure investment (anywhere from $150,000 to $475,000), which is 80 to 100
percent refundable upon cancellation, and paying annual dues of $8,750 to
$17,500 to gain access to a wide variety of multimillion-dollar homes. While
there are no tax or equity benefits, members get to stay in lavish homes, villas
and penthouses in exotic locations that would otherwise be out of reach to all
but the supremely wealthy. All of these homes come fully staffed, most with a
full-time personal concierge, housekeeper and private chef. And some clubs have
partnered with private jet companies, yacht charters, limousine services and
safari tour operators to provide those perks as part of the membership.
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Owners Club’s Barton Creek course. (Click image to enlarge)“It’s really the next generation of second-home replacement,” explains Brent
Handler, cofounder and president of Exclusive Resorts, a year-old operation and
the newest player in the residence club game. “It’s very different than a traditional
time-share or fractional format. One of the main differences with Exclusive
Resorts is that it is a nonequity club—with their deposit and dues, our
clients get usage rights. There is no concept of exchange or trading for time.
Instead, it’s set up like a country club, and you can go anytime you like, with
a 90-day advance reservation, and a maximum stay of 14 days at one time. And
because we are not tied to a particular developer, our portfolio of properties
encompasses the best of the breed in every market.” Aside from its chalets and
villas, Exclusive Resorts also owns several Four Seasons–affiliated properties,
allowing members to use the hotel chain’s amenities and services while in
residence.
The fractional homeownership concept, estimated as a $6 billion
business today, originated in 1994 when ClubCorp built 28 identical
three-bedroom, three-bath luxury homes adjacent to its hotel on Hilton Head
Island and sold a percentage of each house to 13 families for their rotating use
throughout the year. The Owners Club, as it is now known, has since added
properties in Telluride, Puerto Vallarta, Barton Creek in Austin, and the
Homestead in Hot Springs, Va. The benefits vary based on location, says Vice
President of Marketing Kate Murphy, who adds that most of the residences are
built around country clubs to accommodate golfers. “Our clients are mostly
semiretired or families with kids. They are usually active travelers and
generally used to a club environment at home.” Murphy notes that ClubCorp deeds
start at $84,000, with annual membership dues between $3,400 and $4,800.
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Exclusive Resorts operates like a private country club, offering vacation villas
in Beaver Creek, Colo., (right) or Los Cabos (below). (Click image to enlarge)The
Four Seasons, Ritz-Carlton and Marriott offer similarly successful residence
clubs, although all have gone through growing pains to get there. “It’s an
emerging business, so there are a lot of different iterations. First they were golf and
ski resorts; now there are beach and urban locations,” says Gyetvan of Four
Seasons Residence Clubs, which has condo-style residences in Jackson Hole, at
Troon North in Scottsdale and at Aviara in San Diego. “It’s like the beginnings
of the computer industry, where you had a variety of different platforms.”
Nevertheless, she says, “this is a new and exciting way to satisfy the need for
a second home but in the context of a brand you trust.”; function voidFunc() { } voidFunc();)
“From a service
standpoint, it is everything you would expect from a hotel
experience—housekeeping, turn-down service, in-villa dining—but delivered in a
residential environment,” adds Beth Vairo, senior manager of brand public
relations for the Marriott Grand Residence Club, which has properties in South
Lake Tahoe and London’s Mayfair district. Vairo handles the same duties for the
Ritz-Carlton Club, which operates in Aspen Highlands and Bachelor Gulch, Colo.;
St. Thomas; and Jupiter, Fla. (Click image to enlarge)
Location is another compelling advantage,
notes Four Seasons’ Gyetvan. “You have to spend a lot to live slopeside in
Jackson Hole these days. And even if you found a property, you wouldn’t be
getting the level of service Four Seasons offers without hiring a huge staff. So
this provides access to an amazing location and the opportunity to live in an
incredibly high-quality environment with all the amenities of a Four Seasons
resort. That’s pretty tremendous.”
Nevertheless, like any real estate
investment, there are gambles. “In the time-share and fractional real estate
business, they allocate use,” explains Rob McGrath, founder and chief executive
of Private Retreats, a five-year-old vacation club that recently went into
partnership with Abercrombie & Kent to expand its services to include
30 different adventure vacations, from African safaris to cruises in Antarctica.
“They sell four or five weeks a year to their members, and when their members
call and the home is available, they can have it. If someone else has reserved
it, they can’t have it. Of course, what happens is that during the summer and
holidays they have 10 requests and they can’t satisfy all of them. If it was my
own home, I could use it whenever I want. What they don’t tell you is that you
get to use it on New Year’s one in every 10 years. In the end, you get what you
pay for in terms of services. But you don’t get ultimate flexibility. We
obviously believe that model is flawed.”
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47 Park St. in London’s Mayfair district is the second property
in Marriott’s Grand Residence Club program (right and below). (Click image to enlarge)Among the other problems is the
issue of personalization and privacy. Most fractional properties allow you to
store personal items that are set up upon your return. “But you give up a
certain amount of personal decorating you might have done,” says McGrath. “And
with fractionals you’re in a condominium hotel. You have to walk past the
concierge and down a public hallway to get to your home. I don’t think that’s
why people buy second homes most of the time. I think people buy because of the
separate entrances and private access and private pools and private barbecue
areas. There isn’t a concierge sitting there when you walk out to get your
newspaper.”; function voidFunc() { } voidFunc();)
Both Exclusive Resorts and Mirabella Estates agree they are
neither time-shares nor fractionals but have similar operating methods, albeit
without the tax advantages. Instead of selling a brand name or singular
destination, they provide members with the option of spending their vacations in
a wide variety of deluxe homes. Deposits and annual fees are based on two-,
three- and four-week vacations allocated on a reservation basis. If you want
more time in a particular residence, you are charged a nominal per diem fee. By
comparison, Private Retreats, with a maximum capacity of 400 members, collects
only half the $16,000 annual dues of Exclusive Resorts’ platinum club members
but charges $150 per night for each of its homes. “Rather than build all the
cost into dues, we’ve split it out between dues and use fees,” explains McGrath.
“The rationale is that the guy who uses a home only five days shouldn’t have to
pay the same as the guy who uses it 100 days or more.” (Click image to enlarge)
The working model for
Private Retreats, and an even more expensive connoisseurs’ version called
Distinctive Retreats by Abercrombie & Kent that launched last month, is also
different than other private clubs. “Our business relies on the
probabilistic-use model used by the fractional jet industry,” says McGrath. “It
means that if we have overbookings, we rent to accommodate our members. Because
we have a low six-to-one ratio of members to property, most of the time our
homes are always available. But a very small percent of the time they won’t be.
In that instance, we have a group of preapproved homes that we will rent. The
premise is that the probabilities will work in our favor over the long run. Of
course, the system is not absolutely perfect, and there are occasions when we
get overwhelmed—the Telluride Film Festival on Labor Day weekend, for instance,
when you get 20 requests and can only put up nine. But we’ve made the odds work
in our members’ favor. I can put up 40 percent of my member base on any given
weekend. The most any fractional project can put up is 10 percent. In the end,
that’s the reality of this business.”
Exclusive Resorts
800.447.8988
www.exclusiveresortsclub.com
Four
Seasons Residence Club
800.365.8611
www.fourseasons.com/residenceclubs
Marriott Grand Residence Club
866.894.7263,
www.grandresidenceclub.com
Private
Retreats by Abercrombie & Kent
800.925.7577
www.privateretreats.com
The
Ritz-Carlton Club
800.278.0121
www.ritzcarltonclub.com
The Owners
Club
800.789.0932
www.theownersclub.com
Also see Robb Report The Pros and Cons