CALL TOLL FREE: 1-800-671-8962
Timesharing has come a long way since its inception during the 1960s. The industry’s reputation has improved, while notoriety has declined. One key factor is the advent and evolution of state timeshare regulations, with some federal regulatory and enforcement impact as well. While much of this activity has occurred in the United States, timeshare regulation has grown and evolved in the global marketplace as well.
Another factor is the entry into the market and expansion of major brands with their national and global name credibility. These include hospitality and leisure firms such as Disney, Hilton, Hyatt, Marriott, Starwood, Four Seasons, Westin, and. Embassy Suites. Firms with roots in the timeshare and recreational property segment of the market that have established strong identities and owner loyalty include Fairfield, Berkley, Shell, and Bluegreen.
With industry success, brands have individually and collectively segmented their market, such as from Marriott’s high end Ritz-Carlton to its new modest entry, Horizons. Fractionals of independents and brands, with price tags ranging into six figures, have accentuated this trend, especially to more upscale buyers.
Consumer expectations are now higher, and the buying public is better informed about many aspects of the pleasure and practicality of vacation ownership than ever before. Yet, a transformation is taking place in the industry that could jeopardize timeshare as we’ve known it. This is an overview of various point-based systems.
A Point of Interest:
The Metamorphosis
Vacation ownership actually began over 38 years ago, with the points-based system of Switzerland’s Hapimag, based near Zurich in Baar. After a slow beginning, that company has steadily grown to include over 130,000 member families.
Its system now includes nearly 60 urban and rural destinations mostly in Europe, but also in the U.S., Turkey, and Egypt, and a non-lodging option - boats. Unlike other firms that began with timeshares and later turned to points, Hapimag has always been exclusively points-based and non-profit. The company has usually avoided outside exchanges, relying instead almost exclusively on projects it either owns or leases.
Yet, points did not initially score well with consumers when a new rival appeared across the border in France during the 1960s. That new format was timeshare. Much like VHS overtaking Beta in video recorders, timeshare took hold and readily passed points in popularity. Once this vacation format reached the U.S., in part to counter a poor real estate market and as a more upscale but affordable choice than hotel rooms, growth spiraled steadily upward.
Since its inception, two major forms of vacation timeshares have been available to the consumer:
1. Deeded Ownership: A fee simple ownership that offers the owner the same rights as those attached to any other deeded real estate, but with the time limits inherent in this form. The timeshare week or unit portion of the condominium (usually sold in weekly increments) may have title insurance; the deed is recorded at the county level in the name of the owner; and the owner may sell, rent, bequeath, or give the property away. The legal description and benefits of ownership provide the right of a person to possess, enjoy, and dispose of property to the exclusion of all other persons. A timeshare or interval owner enjoys this right, just as with any other form of real property.
2. Right-to-Use: This form of timesharing equates to leasing the timeshare unit for a period of years and does not include deeded ownership. Actual ownership usually remains with the developer/resort, and full usage reverts after the consumer’s use period expires. The owner does, however, have the option to sell the lease until expiration of the use period. (The resale price is, of course, dictated by public marketplace forces and the number of years remaining before it reverts back.)
But now, with an ever-increasing influx of large, hospitality-based corporations diversifying into timeshare development and the RCI Points Program – the situation is beginning to change -- and it is changing in a big way. These corporate giants recognized a unique opportunity to dovetail and complement their associated company products with their timeshare development activities.
Instead of having two basic choices (deeded ownership and right-to-use), consumers now have a third option from which to choose. But it’s not exactly timeshare -- at least not as we’ve known it in the past.
This third option is a system where the consumer purchases an interest, shares, or “points” in a Vacation Club membership in lieu of (or sometimes in conjunction with) deeded ownership or right-to-use. The point-based system is neither solely time-based nor real estate-based -- it is initially described as “value-based.”
Many methods are used to determine points valuations. All are under the sole control and at the complete discretion of the company running the program. For example, the developer or RCI places a specific “points value” on: (1) the season of the year (high to low demand periods); (2) the size of the unit (from an efficiency or studio to a 3-bedroom villa); (3) length of stay (from one night to a full week or longer); and various other factors.
In contrast to timeshare’s simple and readily understood focus on one-week units, the core idea with points is that buyers purchase the total number of points they believe they will require to meet their individual vacation needs. This form of vacation ownership is becoming more and more encouraged within the industry -- particularly with the larger hospitality-based corporate developers that have diversified into timesharing.
With the much greater complexity of points than has been present in the past with either traditional timeshare format, a series of key question arises: Is this best for the industry? Which members, and under what circumstances? Likewise, does it benefit owners or consumers, and if so, under what circumstances?
A Point to Ponder:
New-Era Vacation Exchange Alternatives
One of the main attractions of vacation ownership has been the owner’s ability to exchange from one resort destination to another. A key ingredient that whets the appetites of prospects during sales tours, and often overcomes their resistance to the typically five-figure purchase, is national and worldwide exchange options.
Indeed, according to the American Resort Development Association’s most recent statistical analysis of U.S. timeshare owners, the opportunity to exchange into other U.S. resorts ranks as the most important motivation for purchasing timeshare. This is consistent with past studies that rank exchanges at or near the top among reasons for buying.
Exchange companies (Resort Condominiums International (RCI) and Interval International (II) are the two largest and most widely used) are an integral part of the timeshare industry. Each has been assisting timeshare owners with exchange requests for over 25 years and has become an integral part of the timeshare landscape.
However, with the rise of “self-contained timeshare and points services” introduced by these new-era hospitality developers, a serious gap could readily arise. It would occur between consumers’ expectations and understandings at the time of sale, versus the reality of what happens once they buy and seek to use their points.
For timeshare, these are a few of the factors that could lead to this gap between promise and performance, along with repercussions similar to those just described:
Many resorts are able to achieve frequent internal exchanges for their owners within their own hospitality-based systems. Some clubs do not necessarily need or desire outside exchange services after the initial sale of the Vacation Club membership. They may also take actions to discourage use of such options.
Even where resorts do allow members to make use of external exchange options, they sometimes take steps to limit owners’ effective access to outside choices. Some have directed exchange companies to keep their members exclusively within their own resorts, even if this is contrary to the exchange “dream” sold at the new sales table.
Exchanges involving points may be complex and confusing to owners. Various methods are used to calculate the number of points an owner has purchased, used, acquired, rented, traded, borrowed, or exchanged.
These methods may change over time, solely at the discretion of the company setting up and running the system. Also, because point-value assessments may differ greatly from resort to resort, and over a period of time, the “one-for-one” exchange through a standard exchange company could hinder satisfactory results.
Instead of having week-for-week swaps, as in the traditional timeshare system, points can lead to gaps. Some traders will need more points to get what they really want. This will lead to greater expenditures. Others may have points left over, with more administrative complexity and resultant system operating costs to keep track of where they stand.
Here is just one example of the many new-era exchange scenarios now available:
At the time of original purchase, John Smith paid $10,000 for 100,000 points. When converted to vacation time, they were equivalent to one week in a 1-bedroom, red season unit. He requested that his home resort convert his points into a week of timeshare so he could bank it with one of the exchange companies.
To his surprise, however, John learned that his points no longer converted to the one week, 1-bedroom, red season vacation to which he had been accustomed. In order to upgrade to the same quality that he originally purchased, he would have to produce (borrow, rent or purchase from the resort) additional points.
John’s home resort then offered him an internal exchange alternative. He could exchange his points for a full week at one of the developer’s associated hotel projects. He would stay in a 1-bedroom [or studio] hotel suite, depending on what was available, during the height of the season in the same vicinity where he initially wanted to take his vacation that year.
Through the new self-contained timeshare services, this “internal exchange” resulted in a completed trade. Thanks to John’s flexibility, it accommodated his request and helped the developer’s hotel through increased occupancy. In other words, this new-era “internal exchange alternative” seemed to make sense from both perspectives -- without the assistance of an external exchange service – if John is willing to settle for a smaller unit and space in a hotel, not a timeshare project, as he prefers.
Points of View:
The Upside
Basically, the buyer purchases a Vacation Club membership or interest that equates to value-based usage at the resort(s) -- quantifiable in “points.”
Point #1: The owner buys it, uses it and then resells the point-value if he or she so desires.
In some instances, even though weeks sold at new sales tables are deeded, owners cannot use properties without going through the point system. Therefore, owners can theoretically, if they so desire, walk away without the responsibility associated with real estate disposition and without escrow or title insurance matters to address.
Point #2: Points are not necessarily limited to timesharing at the resort. Many developers offer other vacation-related services in exchange for the owner’s points (e.g., car rentals, cruises, airfare, hotel lodging, and more).
Point #3: The new-era or “brand” developers add prestige to the timeshare industry. Their management experience and operational expertise in the hotel industry are prime training for timeshare development and management. They have honed their hospitality skills and know what it takes to service vacationing guests.
Thus, in this “new-era” of timesharing, consumers demand a wide range of choices with the flexibility to custom-fit their vacations to their individual lifestyles. Furthermore, the point-based Vacation Club has the aura of more freedom and a lessened burden of responsibility.
Imagine “owning” or accessing timeshare lodging with no fixed time, no fixed unit sizes, no fixed seasons, no fixed check-in days and sometimes, no external exchange fees! But, of course, the big caveat: “subject to availability.”
The Downside
The immediate downside of the point-based Vacation Club is the possibility of consumer confusion and misunderstanding arising out of the very complex nature of points versus traditional timesharing. And complexity arises at every phase of this product. This occurs for the points system operator in the system’s creation, training sales personnel, marketing, sales, documentation, and administration. It also occurs from the consumer perspective and difficulty to understand the product from the time of initial sale and later payments or add-on purchases, through subsequent efforts to use points, or even to resell.
The industry has long been perceived as capitalizing on the consumer’s naiveté regarding this unique product. Do points further exacerbate this perception? There are various point programs available to consumers. Yet, the premise of each is typically the same -- the ambiguity of owning “points” instead of owning “property.”
Counterpoint #1: Ever-Rising Bar
Assignment of point value is in the discretion of the Vacation Club developer, or now RCI Points – whoever controls the system. Consequently, owners have no guarantee that the number of points they originally purchased will be sufficient for them to qualify for the same caliber of vacation each year! In fact, some Vacation Clubs have actual point depreciation clauses as part of their contract.The question then becomes, “Will this perpetual practice of increasing point-requirements (or depreciating value) force owners to continually purchase additional points just to maintain the same vacation quality that they thought they were buying in the first place?”
Counterpoint #2: Dependence on Developer
It is surprising that there is no protection provided the consumer in some of the points-based Vacation Clubs through access to a local Property Owners Association, generally an integral part of timesharing, or a comparable entity. The reason? If there are no “property owners,” why should there be a POA and its connected statutory and common-law protections under applicable law?
Point-based owners have been issued “points” that are only symbolic of property ownership. That brings us back to the fact that consumers must virtually rely on the integrity, honesty, generosity, and fairness of the developer to preserve the value of their purchase. This is not a pleasant thought if the economy, resort, or developer begins to slip.
If there were a decrease in traffic to the developer’s timeshare projects or associated hotels, the developer would inevitably feel the downward pressure. Such negative momentum might then be passed on to its timeshare point valuation structure instead of or in conjunction with special assessments and increased maintenance fees.
This could produce a windfall for the developer if there were a moderate decline. In this situation, at least some owners, left believing they had few alternatives, would hesitate at throwing good money after bad and simply stop payments. The developer then would get a percentage of inventory back to resell as new points without the original development cost (22-25%).
A severe decrease in payments could, of course, jeopardize an entire project or company. This could be a serious danger in the event of bankruptcy proceedings, such as the involuntary Chapter 7 situation that faced Philadelphia, PA-based Epic Resorts and its points system. Consumer owners, as well as sales and other personnel, had to wait for this matter to sort itself out before we could know what rights owners would have to property use and personnel will have to be paid. When we originally wrote this article, it would appear that consumers at least would have stronger and clearer bankruptcy law protections through the traditional timeshare format.
Counterpoint #3: Loss of Real Estate’s Legal Protection:
Membership in a Vacation Club may not offer the same protection as actual real property ownership due to protections afforded by real estate laws and regulations. For instance, point values could degenerate to the extent that it makes no sense to continue in the Vacation Club (i.e., no marketability of their “interest,” and escalating high costs).
This possibility could occur when owners add up monies paid for the original purchase, additional points purchased, internal exchange fees, property taxes, and annual maintenance dues. After examining their options, they may suddenly find themselves with no viable recourse but to walk away or liquidate their points for little value.
Also, “foreclosure” could be a “form letter” from the resort to owners. (Some developers promote “deeded” in the new sales process and then put the deed in a trust in the name of the resort and give the owner shares equating to points.)
This scenario could be a non-issue, or at least less of an issue, if traditional real estate protections were a part of the process and honored fairly. Real estate property owners have open access to the public resale marketplace where the market is literally made by supply and demand of the product, not by one controlling factor (as in arbitrary point valuation).
Also, unfortunately for consumers, resales are restricted. Some Vacation Clubs and RCI Points do not allow a complete transfer of points, add-ons, and awards (which owners are under the impression that they purchased) to a new owner if sold through an independent third party (or even by themselves!).
Is this fact clearly and adequately disclosed to consumers at the new sales table? Do they really understand it at that time? Or do they learn about it much later, when they have paid for their initial purchase, plus some add-ons, or want to sell?
This resale constraint raises many legal issues. On the consumer protection side, it may run afoul of the Federal Trade Commission Act and the whole panoply of state consumer protection laws that require full disclosure and ban false and misleading claims.
It may also violate federal and state antitrust and trade regulation laws. Those provisions include prohibitions against monopolies, attempts to monopolize, unreasonable restraints of trade, and unfair methods of competition. To the extent that developers and others, such as an exchange company, cooperate or agree on the terms of a point system that cross the threshold into improper conduct, they may be deemed to have engaged in a contract, combination, or conspiracy that is one of the triggering antitrust elements.
To be sure, we are not saying that these consumer protection and antitrust provisions are necessarily violated by any particular point system. At the very least, because of far-reaching consequences, including potential private or public litigation and treble damages, each element of your points operating system should receive thorough and ongoing legal scrutiny.
Even in the Bush administration, it is not just the Windows operating system and Mr. Gates that continue to receive attention. Meanwhile, the private bar and state attorney general remains vigilant, as does the fourth estate, the press, as the recent ABC coverage on purported “timeshare scams” makes clear.
Counterpoint #4: Constraints on Availability
What about ready availability of certain accommodations during peak and holiday periods in a point-based system? Since points are the mode of currency (not unit or week numbers or fixed or floating time), the possibility exists that peak times will fill to maximum capacity very early. Is there a guarantee to the owner that certain accommodations will not “max out” during peak times? What protections, if any, do consumer have that the accommodations they want are reasonably available?
In addition, some Vacation Clubs give preferential treatment to owners who purchased at their resort as opposed to members of the same Club exchanging into that resort. Consumers purchase points in a Vacation Club with the impression that they can take full advantage of the internal exchange feature at other resorts within the system. Is this preferential treatment clearly and adequately disclosed to the consumer at the new sales table? If not, does this trigger consumer protection laws?
Counterpoint #5: Much Greater Complexity One further disadvantage of points is that they lead to far more complexity than timeshares at every stage from their creation, sales and administration, through purchase and use. Industry veteran Jim Broughton of Hawaii’s Consolidated Resorts cited this factor in the American Resort Development Association’s (ARDA’s) Point-Counterpoint Debate at its April 2001 Orlando convention as a negative factor.
Layering this complicated system on top of the maze of restrictions and limits adds considerable costs and administrative difficulties for all parties. Points may be profitable for developers, savvy sales personnel, and exchange companies that participate. It is not at all clear that this situation yields a real net economic or vacation gain, however, for consumers.
Sum Counterpoints
One of the truly unique aspects of timeshare has been the benefits that ownership provides as compared to a vacation stay in a hotel room with no value “after the fact.” At the end of the day, timeshare property owners have concluded that they have something tangible, usable, and marketable to show for their vacation dollars.
Therefore, the overall downside for the consumer seems to be lack of control with regard to point valuation, industry point-equivalency, costs, complexity, and legal protection provided by property ownership.
POINT BY POINT:
Shaking Up Tradition?
Is the above a preview of what’s to come? Will this trend of “self-contained resort services” ultimately benefit the consumer, the owner, the industry? How will it affect exchange companies (a core element of timesharing)? These are some of the key issues we need to address.
New-era developers have lent credibility and stature to the timeshare industry. Furthermore, the practice of operating timeshare in conjunction with other associated businesses is such a workable arrangement that it makes one wonder, “Why didn’t anyone think of this, or do it, before?”
Obviously the new-era Vacation Club system may be a boon for the hospitality developer. However, there still remain unanswered questions that could seriously affect the consumer, the exchange companies and the timesharing industry at large.
Exchange company impact:
• Will the new-era developers jeopardize the viability and independence of exchange companies in the future?
• Will traditional exchange companies lose influence on new sales practices?
Legal protections:
• Will the decline of traditional deeded timeshare affect the legal protections afforded by ownership, or lead to higher costs for those who retain the traditional week format and do not convert?
• What protections will those who retain their week status continue to enjoy?
Service quality and cost:
• Will membership interest in a self-contained Vacation Club offer the same services for the same cost without the same stimulus of competition from outside the Club?
• Will the industry be able to standardize exchanges using points and do so in a fair, decent and understandable way?
Value assurances and resale terms:
• Will timeshare owners have a guarantee or assurance that the value of a one-week, 1-bedroom, red season remains the same as when the points were originally purchased? (One of the major attributes of vacation ownership is spending today’s dollars for tomorrow’s vacations. With point-based systems, this is not necessarily the case.)
• Will there be a public marketplace to resell these “arbitrarily valued interests” in Resort Vacation Clubs? Or will consumers find themselves with no choice but to allow their resort to “liquidate” the shrinking value of their vacation? Traditional timeshare has no guarantee - similar to that of residential real estate - that the original investment can be recouped. However, having the opportunity to place a “marketable” property in a resale environment (with the public at large making the market) is a far cry from the significant barrier of having one entity controlling its value and setting its resale price.
• Will all the benefits of the Vacation Club membership and points be transferable to a new owner in an independent resale transaction involving points? If not, why not?
A few of legal aspects and implications
Consumer perceptions and trust
• Will consumers flinch at the seeming contradiction promoted by the new-era Vacation Clubs offering internal timeshare exchange services throughout a hospitality-based system that includes mainly hotel rooms? Ironically, timesharing has always promoted liberating consumers from the “cramped, ill-equipped hotel rooms” by offering spacious and luxury condominium facilities. Meanwhile, market segmentation in the lodging industry has resulted in a wide range of choices, for virtually any taste or budget. Yet, none of these pay-as-you-go options involves the potential cost or long-term commitment of points.
• Will consumers ultimately draw the natural conclusion that using cash, a MasterCard, or Visa at a nice hotel could accomplish very much the same results as purchasing points in a Vacation Club? Further, this may be done without (as noted in our sidebar comment, “The Ultimate Point System: Cash”) the long-term financial commitment or risks. After all, hospitality firms, including some of the leading brands involved in timeshare, including Cendant and Marriott, have avoided or divested themselves of some or all real property ownership in order to generate higher profits and have more flexibility. Should consumers be guided by what the insiders are doing with their own funds?
The lure of point-based Vacation Clubs is compelling. It is hard to resist the ease of entry; but the ease of exit has much to be desired.
Traditional vacation ownership has weathered the test of time. Can point-based Vacation Clubs do the same? As with any change-taking place - whether it’s bad or good - only time will allow it to unfold, as it should.
Copyright ©2003 Alan N. Schlaifer
