RESORT LAW

Is It Time to “Retire” Your Struggling Timeshare Resort?

October 2011

By Erik Newman*

The great recession has forced many timeshare resorts into financial duress. Some signs of financial ill-health are obvious, such as outdated furnishings or amenities that are non-functional or obsolete. Other signs are less visible, such as a lack of interest from the secondary sales market, diminished reserve funding, or owners abandoning their intervals to so-called timeshare “relief” or postcard companies. Understanding when it is in owners’ best interest to “retire” timeshare operations and transition to an alternate use of the resort property is one of the toughest decisions a homeowners association (“HOA”) or manager can make.

All resorts, but particularly struggling ones, should undertake a regular self-analysis of whether it is in the best interest of their owners to continue operations as a timeshare property. This article discusses how to undertake that self-analysis and the key planning considerations in making the decision to transition a timeshare property to an alternate use.

Develop a “Performance Snapshot” of a Timeshare Resort’s Health

To make an informed decision about maintaining timeshare operations, you need to take a performance snapshot of a resort’s health. The snapshot should identify:

  • What percentage of intervals are non-performing in their maintenance fee obligations, either because they are unsold or the owner is delinquent?
  • What is the resort’s annual shortfall in income relative to expenses and accumulated deficit?
  • Are reserve levels consistently increasing?
  • Have reserves been used to cover regular maintenance expenses that exceed budget allocations?
  • How many owners are contacting the resort looking for exit options?
  • How many owners are listing their intervals with third parties in the secondary market or using relief companies?

This performance snapshot should be developed and compared with previous snapshots regularly. The goal is to identify problem areas in time to implement an effective response. Once the metrics decline sufficiently from past peak performance, a destructive downward spiral can set in where underperformance frustrates sales and reinvestment and fuels further decline.

Understand Your Timeshare Resort’s Lifecycle and Plan Snapshots Accordingly

HOA’s and managers need to be mindful of their resorts’ age. As a resort ages, so does its ownership base. Many of the early timeshare purchasers have owned their interests happily for several decades. But needs change and resorts with a substantial ownership base in the 50 year-old-plus age bracket should be more vigilant in their self-analysis. Unless these resorts adopt innovative resale and exit programs, they risk ever-diminishing maintenance revenue to post-card scams and delinquent owners who either can’t afford to, or don’t want to vacation as they previously did. Resorts that wait too long to take their performance snap-shot may significantly impede their ability to complete the complicated process of transitioning from timeshare to an alternate use.

Transition Plan Options

If the performance snapshot demonstrates that continued timeshare operations are unsustainable and cash infusions from owners via special assessment or from lending sources is unavailable, a transition away from timeshare operations may be necessary. As a general benchmark, a healthy resort should have maintenance fee non-performance rates below 5%. A resort whose rates regularly exceed 10% is a candidate for retirement and transition.

The transition plan may involve a sale of the property, if there is sufficient demand. Knowledgeable realtors should be consulted to realistically assess market demand. The operation and carrying costs from a prolonged and ultimately unsuccessful marketing effort may leave a resort with few options other than bankruptcy.

A second transition plan option is merger with another regional resort or resort club network. This approach can decrease maintenance fees by spreading common expenses among a larger pool of owners associated with better-performing resorts.

Under certain circumstances a resort may be configured to enable downsizing as a viable transition option. Consider whether a portion of the resort could be separated from the timeshare operation and sold or leased for a different and more productive use. Experienced legal counsel and financial advisors can help a HOA understand its performance snapshot, evaluate transition options and implement a transition plan.

Communication and Leadership Are Essential

Communication, above all else, is needed to accomplish the challenging task of repurposing a timeshare resort. A considerable level of owner support will be required to authorize the transition plan since it will entail either a termination of timeshare operations in the case of a sale of the property, or major restatement of policies and procedures in the case of a merger. A resort’s bylaws will typically dictate the percentage of ownership approval that must be obtained by vote as well as the conventions regarding notice and vote administration to ensure that pursuing a transition is uncontestable. If the transition plan entails a termination of an underlying condominium, or similar cooperative ownership structure, particular state laws requiring a super-majority vote may be have to be satisfied. It can easily take in excess of a year to coordinate and obtain sufficient owner authorization and regulatory approvals necessary to start the transition process.

Effective leadership is also essential in carrying out the transition plan and obtaining the appropriate authorizations. If a transition is planned for appropriately far in advance before conditions have deteriorated significantly, it can be difficult to convince owners of the need for change and obtain their approval. But if a resort waits until the need is self-evident, it may be too late to put the plan into action. Leadership and communication are key to bridging the gap and initiating the transition process appropriately in advance.

Once sufficient owner support has been coordinated, a resolution should be adopted that very broadly authorizes the HOA Board or manager to take any reasonable actions necessary to carry out the transition plan. If the approval resolution is too narrow, minor deviations from the original concept for the transition plan could require a subsequent special meeting and vote, resulting in costly delay.

Identify Capital Needs

Fundamental to any transition plan is an assessment of short term financing needs to supplement operating expenses or discharge HOA debts to clear title. With adequate planning, a conventional line of credit may be secured. As part of their underwriting due diligence, lenders will confirm that the borrowing has been duly authorized. This underscores the importance of communication and leadership in obtaining the requisite owner approval votes and authorizations.

If the financial condition of a resort is sufficiently distressed, access to conventional financing may be severely limited. Private financing may be available, but frequently at rates that are 5 to 10% percent higher than conventional lending. Under these circumstances, it may be preferable to forsake financing, terminate operations, shutter the property and focus on marketing the resort to a purchaser. Individual owners are another source of financing that can be explored.

Consider a Survival Budget

If cash flow challenges dictate that the property be shuttered during the transition period, a survival budget must be developed. This budget ensures that essential expenses are paid, such as property taxes, insurance and utilities. Failure to develop and fund a survival budget could result in degradation of the physical plant, which in turn jeopardizes the likelihood of finding a purchaser or may yield a significantly lower purchase price. Failure to pay property taxes may result in a property being acquired by the municipality in which it is located by tax deed or equivalent procedure.

While a survival budget is by definition the bare minimum for survival, care should be taken to follow applicable employment laws. Unless obligations to employees required by state and federal laws are met, even as operations are being wound down or terminated, officers and directors of the resort could incur personal liability.

Clearing Title to Clear the Way for a Successful Transition

Most transition plans will require clear title to the real estate comprising the resort because neither a purchaser nor a merging party will be willing to assume the debts and liabilities of a resort. The resolution approved by the owners should delegate broad authority to the HOA Board or manager to negotiate and obtain the discharge of liens and debts. In the case of a resort embodying a condominium, clearing title can be a complicated affair. Individual units may have mortgages that will necessitate discharge with the owner’s cooperation. Identify those encumbrances early in the transition process to ensure that owners of encumbered units are brought on as supportive partners in the transition, since their cooperation is essential. Clear title will likely be a condition of any purchase or merger agreement and must be planned for accordingly.

Selecting Partners for Plan Implementation

The conversion plan will falter if you don’t have the right partner, be it a broker in the case of a contemplated sale of the resort, or a developer or professional manager in the case of a merger. That partner should have demonstrated experience in selling or repurposing similar under-performing resorts and should always provide a realistic assessment of the anticipated sales price and timeline with benchmarks. Prospects who are unable or unwilling to satisfy each of those requirements should be disqualified from consideration.

Professional property managers can also assist by leveraging their affiliations with other resorts. For instance, if a transition plan is not reaching the necessary level of owner support to move forward, dissatisfied owners might be offered ownership options at different resorts in exchange for their support. Managers can use techniques such as this to simultaneously assist one resort with a transition away from timeshare operations while helping another resort facing lesser challenges improve its financial condition through an infusion of new owners.

Conclusion – Adopt “Snap Shot” Monitoring To Preserve Transition Options

A resort may arrive at the decision to transition to an alternate use of the resort property in one of two ways. Preferably, a resort will have followed the model recommended in this article by diligently monitoring its performance snapshot and deciding to pursue a planned transition. Alternatively, due to poor leadership, planning, management, or combination thereof, a resort may have moved past the tipping point towards insolvency or bankruptcy. In either case the key considerations in managing a transition are similar, but the result for owners can be quite different. In the case of a carefully planned and executed transition owners may realize some return on their original purchase. However, owners at a resort undergoing a distressed transition are unlikely to realize any return and could even incur additional personal financial liability for deficiencies owed to the HOA’s creditors.

* Erik Newman is admitted in New Hampshire.

Erik Newman
You may contact
Erik Newman at 603-545-3638.

Related practice areas:
Resort Law
Real Estate Development