Vacation Club Basics: What You Should Know to Get Started
 
September 1, 1999
 
Mel S. Weinberger- Washington

Vacation clubs are the "hot" resort development product of the decade. Typically containing multiple geographically diverse resort locations throughout the United States and frequently abroad, vacation clubs offer consumers the ultimate in flexible vacation options and related privileges. Far more than merely an alternative legal structure to the traditional timeshare concept, vacation clubs yield numerous practical benefits to developer and consumer alike while generating their own unique set of legal and practical challenges.

Most, though not all, vacation clubs employ "vacation points," "membership points," "vacation credits," "SunOptions," or the like as the currency by which members obtain the right to reserve, use, and occupy the club's accommodations, pursuant to a complex set of reservation procedures. The reservation system is intended to maximize the collective use rights of all club members and must be susceptible to periodic point reallocations in order to alter the weight of the various demand balancing criteria. Whether the purchaser acquires a fee (i.e., deeded) or a right-to-use timeshare interest, such timeshare interest is typically translated into a designated number of points that can be used on an annual basis during the term of the vacation club's existence to access the club's accommodations and facilities. Many vacation clubs also offer their members numerous ways to redeem their points for purposes beyond merely staying in the club's own accommodations. For example, Hilton and Marriott allow their members to exchange their club points for frequent guest points that can be used to reserve nights at many of the companies' hotels throughout the world. In addition, vacation club members can often redeem their points for discounted airfare, cruises, car rentals, and even merchandise.

Club members are usually provided with a grid that shows the key parameters of accommodation usage, including: (i) size and occupancy limit of the particular type of accommodation desired; (ii) time of the year; (iii) whether the occupancy period in question includes a weekend or a major holiday; (iv) the specific resort at which such accommodation is located, including the cost of constructing and operating such resort; and (v) the historical occupancy percentages and level of demand for accommodations at such resort. Each box within the grid contains a certain number of points, allowing the member to custom tailor each year's vacation(s) to the then-present needs and desires. Thus, for exactly the same number of points, the member might be entitled to reserve a studio unit for seven consecutive days and nights during "off season" at a resort that has relatively low demand versus only three days and nights in a two-bedroom unit in Hawaii or in Colorado during ski season. Furthermore, the member can usually purchase or rent additional points from the developer, "borrow" points from a succeeding year, or "bank" unwanted points in a given year for use in making future vacation reservations.

Increasingly common as a key adjunct to the vacation club concept is a trust into which legal title to all real estate that corresponds to the memberships being sold is conveyed. The principal beneficiaries of the trust are the vacation club's members. Establishing a trust mechanism is primarily intended to protect members from the imposition of blanket liens and encumbrances upon such real estate that might take priority over their use rights. The arrangement further provides a relatively simple means by which lenders and various other "lien beneficiaries" of the trust can obtain title to the real estate that underlies a particular membership interest if and when the need to do so arises, i.e., most commonly when the applicable member defaults on his or her purchase money financing or assessment obligations. Finally, conveying a vacation club's underlying real estate to an independent trustee is intended to protect such property from the claims of the developer's creditors in the event of a bankruptcy.

Rather than merely serving as a passive custodian of the unencumbered real property involved, the trustee, preferably a company that is completely independent of the developer, is usually charged with a number of important obligations. For example, the trustee, in its fiduciary capacity, is typically responsible for maintaining adequate insurance on the trust's assets, collecting all club dues and other income of the trust, and ensuring that all club expenses are paid from such funds on a timely basis. The trustee also monitors transfers of membership interests, maintains accurate books and records of all trust transactions, ensures that the same are audited on an annual basis, and otherwise seeks to ensure that members' use and occupancy rights are adequately protected. The trustee commonly issues some form of membership certificate that evidences each member's beneficial interest in the trust. Typically, most of the trustee's duties and responsibilities are assignable, in the trustee's sole discretion, to one or more third parties, including a "club manager" or a non-profit corporation formed as the vacation club's "umbrella" entity.

Subject to applicable state law, a vacation club trust agreement usually provides a mechanism for the developer to add accommodations and facilities to the trust, delete accommodations and facilities from the trust, and substitute one accommodation or facility for a comparable accommodation or facility. Perhaps most importantly, for the benefit of purchasers, their purchase money lenders, and state timeshare regulators, the trust agreement normally provides that the number of points that correspond to all real estate, legal title to which is held by the trustee for the benefit of the vacation club's members, shall at all times equal or exceed the total number of points available for use by all then existing club members. In other words, the developer cannot oversell memberships in the vacation club-one member's right and practicable ability to utilize his or her entire annual allotment of points to reserve and occupy the club's accommodations must not depend upon any other member's failure to reserve or occupy such an accommodation for any reason.

What, if any, are the potential disadvantages to a developer in offering a point system? For one thing, setting up a point system is generally more time consuming and document intensive than merely establishing the legal structure for selling individual floating timeshare interests, and the registration process in most states is typically more time consuming and expensive for vacation clubs. More sophisticated personnel and computer hardware and software may be needed to operate a vacation club's reservation system on an ongoing basis and balance demand adequately among the relevant variables to ensure that all of the vacation club's accommodations are utilized to the optimum extent-once purchasers have committed their hard-earned dollars to join the club, fulfillment of their general reservation desires and expectations becomes paramount. Finally, salespersons who sometimes have a tendency to over "hype" a point-based timeshare product must be monitored closely.

On the other hand, most vacation club developers have concluded that the numerous advantages which the typical club structure affords both the developer and its customers far outweigh these potential disadvantages. The bottom line appears to be enhanced consumer satisfaction and greater developer profits. However, a developer's desire to satisfy increased consumer expectations inevitably results in greater legal complexity. Accordingly, vacation club developers would be well-advised to consult early with competent professionals, including attorneys, accountants, feasibility analysts, and others to obtain the best understanding possible of the legal and practical implications of marketing, selling, and operating this exciting new resort product.

For more information, contact Mr. Weinberger at 202-828-5009 or at mweinber@hklaw.com