The industry’s forum for the trends and issues shaping our future July 2010

Lore Institute’s sales events inspire eager buyer response

5

vacationownership w rld

v wJULY 2010 4

Before you design your legal

structure consult with the Attorney who designed

Calistoga Ranch Club and

Wyndham’s WorldMark, John “Roger” Burk

(916) 784-7030

jrb@jrblawcorp.com

NON-DEEDED IS THE TREND

*

*Not “nonequity” or “right to use”.

Address 3520 13th Ave. SW, Olympia, WA 98512 Phone 360-866-5500 | Fax 360-866-5540 Email evacationownershipworld@comcast.net Web www.evacationownershipworld.com

Scott Burlingame, Editor/Publisher • Helle Burlingame, Survey and Subscription Man-ager • Lynn Burlingame, VP/Advertising • Sarah Kuck, Design Editor

Subscription Prices. Subscriptions: 9 issues (one year) — US$65. Foreign (outside the U.S.) payments must be an international money, a check on a U.S. bank, or a bank with a U.S. correspondent bank. Checks on foreign banks not accepted due to high collec-tion costs. Subscriptions can be paid on Visa or MasterCard. Call (360) 866-5500. Or fax (360) 866-5540 (for faxed orders include whether Visa or MasterCard, name on card, card number, and expiration date).

Publishing Schedule. Vacation Ownership WORLD (ISSN 1088-8071) is published 9 times annually (monthly except for combined March-April, July-August, and November-December issues) by the CHB Company, Inc., 3520 13th Ave. SW, Olympia, WA 98512

Back Issue Prices. 1 to 5 copies, $9.00 per copy; 6 to 20 copies, $8.50 per copy; 21 cop-ies or more, $8.00 per copy. Must be prepaid.

© 2010 by the CHB Company, Inc. Not to be reproduced in any form, wholly or in part, without publisher’s written permission.

Member American Resort Development Association ARDA

IN THIS ISSUE: CONTENTS AND SUMMARY

COVER STORY & PRC/FRACTIONAL UPDATE • A fractional sales strategy that works: Lore Institute’s sales events gen-erate buyers at The Cottages at Cape Kiwanda

Like many fractional/private residence club (PRC) projects, sales at The Cottages at Cape Kiwanda in Pacific City, OR were very slow. So the developers hired Jamie Klein and the Lore Institute to pep things up. And that’s just what happened! Klein suspended sales at the resort to carefully and methodically build up momentum for a one-day sales event. The result? As of early June, in the wake of two such sales events, 57 sales accounting for more than $4 million in volume.

Goldman Sachs lodging study casts favorable light on timesharing

Goldman Sachs released a research report in late May that describes timesharing — despite some negatives — as positive for both hotel company developers and a good value for consumers at large. Vaca-tion Ownership WORLD reviews the study in the first article of a two-part series on timesharing’s value proposition.

5

11

Are timeshare HOAs in trouble?

Many rumors and much gossip is circulating regarding the health of timeshare HOAs. With the economy yet to emerge from the deepest downturn since the Great Depression, many assume that an increas-ing number of timeshare owners are opting not to pay their annual maintenance dues either because they can’t or don’t want to. Is this the case? If not, what is? Four industry experts weigh in.

INDUSTRY WRAP • A briefing on recent news, develop-ments, and emerging trends in the vacation ownership and related industries

COVER PHOTO • Top: The Cottages at Cape Kiwanda in Pacific City, Oregon. Bottom: A close-up view of the Pacific Ocean.

14

19

v wJuly 2010 • No. 260

v wJULY 2010 14

In phone conversations with a wide variety of industry professionals and in particular at this past spring’s ARDA conference in Las Vegas, many in the timeshare industry have alluded to timeshare HOAs being in trouble. Not all HOAs, of course, and not even most of them, but enough, it is feared, to constitute an indus-try phenomenon of worrisome pro-portions. The bad economy, many reason, has caused a number of owners to stop paying their mainte-nance fees either because they can’t or don’t want to. Is this true? If so, what are the causes and what can be done about it? Or perhaps it is true in some cases and not others. Vacation Ownership WORLD decided to con-sult a collection of timeshare profes-

sionals who have spent much or all of their careers working with timeshare HOAs and ask them. They are: Reg Billups, founder and principal The Billups Group & Affiliates; Rob Webb, senior partner in the Orlando office of Baker & Hostetler and ARDA trea-surer and Board member; Jerry Sikes, president of Pro Management, agent of Scottsdale Camelback Resort, and chairman of ARDA’s HOA Outreach Committee; and, Joy Powers, Con-cord Servicing Corporation’s direc-tor of business development.

Q: You hear lots about HOAs (home owners associations) being in trouble these days especially due to the bad economy increasing the number of owners who are either not current on their maintenance dues or in actual

default. Is this true? What is the cur-rent situation with regard to the eco-nomic health of timeshare HOAs?

Reg Billups: Some are in trouble; most aren’t. Those HOAs that were doing a good job of collecting main-tenance dues, staying in touch with their owners/members, and keeping their resorts looking well kept and up to date before the economic crisis, are doing the same now. Those that didn’t are in even worse shape now.

Rob Webb: We have to define being ‘in trouble.’ If delinquencies went up 5% last year to 10% this year: that’s a little bit of trouble. If they went from 5% to 20%: that’s a lot more trouble. If the HOA hasn’t paid a substantial portion of the project’s real estate taxes in the last two years and a tax certificate has been issued on the property, that’s even more trouble.

Probably one of the major prob-lems at resorts that are in trouble is insufficient renovations at the prop-erty. A lot of Boards are getting more reluctant to assess what it takes to keep properties up to what their members expect. They are afraid to

VACATION OWNERSHIP WORLD

Are timeshare HOAs in trouble?Four industry pros explain what is ailing timeshare HOAs and what can be done about it.

Left to right: The Billups Group & Affiliates founder and principal Reg Billups; Baker & Hostetler senior hospitality partner in Orlando and ARDA treasurer and Board member Rob Webb; Pro Management president, agent of the Scottsdale Camelback Resort, and chairman of ARDA’s HOA Outreach Committee chairman Jerry Sikes; Concord Servicing Corporation’s director of business development Joy Powers.

v wJULY 2010 15

charge what it really takes because they are afraid this will cause the default rate to increase. But by fail-ing to charge what it really takes, and not keeping the resort vital and look-ing nice, they are causing defaults of another type.

There’s been a lack of frank and open consumer disclosure about what it really costs to maintain a resort up to the necessary standards. Sales and marketing is always concerned about this number being too big. A lot of timeshares were sold with an overly optimistic HOA budget. There are a good deal of cases where annual maintenance fees should have been increased, but especially due to resis-tance from sales and marketing, they weren’t.

Budgets increase for a variety of reasons: cost increases, reserve assess-ment increases, the forced recogni-tion of bad debt, because brand stan-dards demand a switch to all electric locks from key locks, etc. As delin-quencies and bad debt grow, peo-ple are worried about having special assessments due to bad debt, which in turn can lead to more bed debt that causes more special assessments — it becomes a downward spiral.

I don’t think that there are many timeshare associations on the brink of closing down, but I think it’s fair to say that many timeshare asso-ciations are running as yet unseen levels of delinquency and bad debt and they are dealing with that real-ity in a whole spectrum of different ways. Some effective; some not so effective.

Jerry Sikes: Owners have been affected by the economy — disposable income is down and they are having

a hard time affording annual main-tenance dues or travel at all and hav-ing a hard time selling their time-share even if they want to.

Independent HOAs are having an especially difficult time. Most of the independents have no sources of rev-enue to operate other than their own-

Finally, the reality is that we are a pre-paid vacation industry. The younger generation is not in tune with pre-payment. They are in tune with pay-as-you-go. Timeshare rent-als are now a part of the pay-as-you-go travel industry and that suppresses prices. There is also an over supply

The Scottsdale Camelback Resort, nestled at the foot of the mountains and behind some lush greenery.

Billups: The biggest issue and challenge facing HOAs today is keeping the budgets tight but mak-ing sure that service levels are maintained.

ers assessments. Many brand HOAs are subsidized by the brands because they are maintaining the image and standards of the brand (It’s not always the case but frequently it is).

In addition to the bad economy the older resorts are facing aging issues. The aging issue is twofold: the age of the physical plant itself and the age of the ownership base.

of timeshare resales which is caus-ing the price of timeshare resales to decline. This is the timeshare indus-try competing against itself.

Q: What are the biggest issues/chal-lenges confronting HOAs today? What are some solutions to these?

(Note: All of the timeshare execu-tives/veterans interviewed for this

v wJULY 2010 16

article agreed that the fundamen-tal issues/challenges remain — good times or bad: the Board, resort qual-ity, reserves, delinquencies, and resales.)

Sikes: The aging issue I mentioned earlier is one. Economic conditions and the bad economy’s effect on annual maintenance payments is another. The resale environment — the scam artists and the much big-ger issue of the HOAs and develop-ers just ignoring that the issue even exists — is also huge.

What can be done? First, we have to recognize that these issues aren’t just going to go away. HOAs have to establish policies for key issues and enforce them aggressively. They have to be innovative in other income areas to offset some of the increases in annual fees. This involves find-ing new activities owners and guests will enjoy. Establishing a sustainable resale program is essential. You have to substitute non-paying owners for paying owners.

I can provide a positive resales example. In 1990, the association took control of the Scottsdale Cam-elback Resort (SCR) from the devel-oper. The HOA recognized there was a problem with resales. The HOA didn’t want to be in the resales busi-ness. So the HOA decided to find an individual or company and give exclusive resale rights to this person or company. We found a capable per-son within the first three months of the HOA taking over. Our owners sell through our resale broker. We get a percentage of the sale (a source of revenue for the HOA). We’ve never had resale issues.

How can delinquencies and

defaults be minimized? HOAs have to enforce their ABC (association, bill-ing, and collection) policies evenly. But a certain amount of increased flexibility is called for today, too. Do everything possible to avoid special assessments. You have to keep the owners who have always paid happy, and you have to have mechanisms in place to deal with delinquencies and defaults. Plan for cash flows — this allows you to be flexible to deal with short-term issues (e.g. a guy breaks his leg and can’t work and can’t pay you until he gets back to work).

overstated. If owners and HOAs could (re)sell inventory with relative ease, HOAs wouldn’t be confronting near the problems they are currently facing.

Billups: The biggest issue and chal-lenge facing HOAs today is keeping the budgets tight but making sure that service levels are maintained. One possible solution is to bring in the experts and let them have a look at what you are doing. I have a cli-ent whose resort has always done its own collections with their people on

Webb: There’s been a lack of frank and open con-sumer disclosure about what it really costs to maintain a resort up to the necessary standards. Sales and marketing is always concerned about this number being too big. A lot of timeshares were sold with an overly optimistic HOA bud-get. There are a good deal of cases where annual maintenance fees should have been increased, but especially due to resistance from sales and market-ing, they weren’t.

Webb: The tensions that exist now have always existed, but they are exacerbated by the bad economy. For example, keeping the owners happy vs. raising maintenance dues. A bet-ter way to put it would be keeping owners happy while raising mainte-nance dues appropriately, because if you have to raise maintenance dues to keep the resort running and main-tain the quality of the vacation expe-rience then that’s what you have to do. The resale problem cannot be

the phone. Maybe that’s not the best solution anymore. Tax questions? Consult/Hire a tax expert! Maybe it’s a good idea to stick to your core com-petency and responsibility — provid-ing an excellent resort experience for your owners.

Q: One might imagine that there is now more emphasis on containing costs. Is this the case? What costs are being cut? Where is it OK/not OK to cut costs?

v wJULY 2010 17

Sikes: It might be tempting to take shortcuts like opting for repairs instead of replacements, borrowing against reserves, etc. But that’s a slip-pery slope. There are, however, short-term issues that come up. I budgeted $15,000 for Venetian blinds, but I only paid $13,000. Then I had a water leak I had to fix that I didn’t plan for and it cost me $3,000 so some of the money I budgeted for Venetian blinds went into fixing the water leak. The Num-ber One rule for the association and their Board is to manage the resort and its assets in the best interests of all of the owners. It has to be a long-term approach. You have to have a plan, a reserve study, a resale solu-tion, and you have to enforce poli-cies. Every budgeting year at SCR always contains $30,000 in opera-tional contingency for things/events we just can’t anticipate and $50,000 in reserve funds.

Where is it OK/not OK to cut costs? You manage, not contain, costs. For example, energy costs can’t be con-tained, the utility companies control costs. But what you can do is install energy efficient equipment, changing the weather stripping, etc. These are management issues. Cutting costs is not the answer to anything unless overspending was prevalent.

At any timeshare resort the biggest expense is always going to be payroll. In 2008, at SCR we met with all our staff and we said ‘Everyone is going to get at least a 3% increase in pay.’ We also told them they didn’t have to worry about losing their jobs due to layoffs. But we told them that they all had to step it up. You have to be more productive than last year. We did the same thing in 2009. In 2008 and 2009 we not only met but exceeded

Nighttime poolside reflections at the Scottsdale Camelback Resort.

Powers: We’ve seen as a major change in the col-lection practices of HOAs — identifying and imple-menting a strategy based on the status of the owner as opposed to treating delinquent owners as “one size fits all.”

Joy Powers: One of the ways Con-cord helps HOAs monitor their per-formance is by comparing year-over-year payments made prior to the due date as well as the total amount of money collected at each month-end

2010, that percentage had dropped to 45%. So pre-paid accounts dropped by seven percentage points, which could represent hundreds of thou-sands of dollars depending on that HOA’s budget (in large associations,

our budgets. The bottom line is an effective work force results in cost savings across the board. Each year we ask our staff: what are you going to do new?

Q: Concord Servicing Corporation assists HOAs with their annual bill-ing and collections. From your expe-rience, has there been a rise in delin-quencies and defaults?

for the three-month period immedi-ately following the due date.

I recently analyzed a data sample representing approximately 180,000 HOA accounts across both brands and independent developers and it confirmed a fall-out in pre-pays (the number of people who pay their HOA obligations prior to the estab-lished due date). In 2008, that num-ber was 52% in the data sample; by

v wJULY 2010 18

it could be in the millions). You could see the same trends at 30, 60, 90, and 120 days past the established due date. Again, using the data sample mentioned above, 80% of accounts had paid within 60 days of the due date, leaving 20% unpaid and there-fore delinquent. By 2010, these per-centages were 74% paid, 26% unpaid. Typically at 61 days delinquent, an HOA may have Concord pursue a delinquent account more aggres-sively — perhaps adding a collection fee where allowed. In 2008, 85% of the data sample accounts had paid by 120 days past the due date. By 2010, the number of fully paid accounts at 120 days was down to 80%. In sum-mary, based on the data sample I’ve mentioned, it’s evident that more owners are having greater difficulty paying their maintenance dues, which clearly has major repercus-sions on the health and well being of the respective HOA.

Q: What can be done to combat delinquencies and defaults?

Powers: Some of the best practices include: ensuring communications with owners remain consistent (now is not the time to cut-back newslet-ters and updates to websites) — HOAs need to be sure each and every owner remains ‘on the radar screen.’ It is important to monitor use patterns and exchange membership because owners that aren’t actively using the product may not make their HOAs dues and assessments a prior-ity. Make sure that owners are inti-mately familiar with collection prac-tices and know what happens when they don’t make their payments.

Q: What are some adjustments that you have to make and/or are being made in the current environment?

Powers: If the resort is in active sales with an active loan portfolio, we are seeing HOAs be more attentive to controlling the collection plan for those owners obligated to a monthly loan payment. It’s no secret that when you turn up the volume on HOA maintenance fee collections, it has the potential to negatively affect the performance of the loan portfolio. With the economic crisis tightening the lending community, no developer wants to risk declining performance on a loan portfolio. So we are seeing a bit “softer approach” with owners that may have an active loan.

This is a great segue into what we see as a major change in the collec-

tion practices of HOAs — identify-ing and implementing a strategy based on the status of the owner as opposed to treating delinquent own-ers as “one size fits all.” Is the owner brand new? Does the owner have an active loan obligation? Has the owner been delinquent in prior years or is this the first time they’ve not paid by the due date? Does the board allow payment plans for those owners who may need more time to pay? These are all questions that should be answered in developing a comprehensive col-lection strategy for HOA accounts in today’s challenging environment. As a result, Concord has really stepped up our reporting capabilities for HOAs in order to track results and determine trends related to improv-ing their portfolio performance.

Visit www.evacationownershipworld.com,Vacation Ownership WORLD’s website.

Here you can view a sample article, order a free sample issue, and subscribe. There is info about our advertising opportuni-ties — both in the magazine itself and on the website. There is also a full description of some other products and services we offer, including ordering our highly-regarded Sales Leader Surveys (1995 –present), info about our add-on subscription services, our popular company profiling service, and more!

Visit www.evacationownershipworld.com today!

visit us online