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By: Jeffer, Mangels, Butler & Marmaro

Vacation ownership is one segment of the lodging and leisure industry that is booming - not only in the development of new purpose - built projects, but also in the conversion of hotels that have locations, floor plans and amenities that are desirable to travelers throughout the world. In fact, in recent years, the vacation ownership industry has enjoyed double - digit percentage annual growth rates, growing from 98 resorts in 1973 to more than 1,300 in the Untied States and approximately 3,000 worldwide by the end of 1994, with vacation ownership interval sales increasing from less than $500 million in 1980 to almost $5 billion in annual sales worldwide by 1995.

Vacation ownership is also one of the newer areas of Jeffer, Mangels, Butler & Marmaro’s Lodging & Leisure Group that is booming. We are representing clients in all aspects of vacation ownership - including the acquisition of land and existing hotels and condominiums: the documentation of program, condominium and hotel management agreements: the preparation and filing of applications for the sales of vacation ownership interests with the state authorities and the preparation and recordation of timeshare declarations; and the negotiation of marketing and sales agreements, license agreements (with franchise companies) and affiliation agreements (with exchange companies).

What is Vacation Ownership?

Vacation ownership is the creation, typically for vacation purposes, of long-term exclusive rights to use real property for short-term recurrent or floating - use periods. Vacation ownership project facilities include condominiums, hotels, apartment buildings, campgrounds, boats and recreational vehicle parks.

Vacation ownership interval owners typically own either a fee interest in the subject property, with a related right of occupancy (in California, referred to as a “time-share estate”), or a license or membership right of occupancy in a vacation ownership project, with no real property estate (referred to in California as a “time - share use”)

Interval buyers typically pay a purchase price for their interest, which is based (among other factors) on the location, nature and quality of the project; the length of the use period being purchased; and the developer’s accusation, development and marketing costs. Subsequently, such interval owners generally are required to pay assessments for maintenance fees and, if applicable, for membership and participation in exchange programs (which allow interval owners to exchange their use periods for the use of similar projects around the world).

How Does a Vacation Ownership Project Work?

Every vacation ownership project must employ a managing agent who oversees the daily operations of the project pursuant to a written agreement. In many jurisdictions, the vacation ownership manager’s agreement is separate and distinct from other management agreements that may be relevant to the operation of the overall project facilities, including, by way of example a rental management agreement for units owned by the developer/project sponsor (in large part similar to a hotel management agreement), and a condominium management agreement for management of individual units owned by individual owners, and typically, common elements of the condominium project.

Vacation ownership sponsors and/or associations may enter into license agreements with hospitality companies to take advantage of name recognition, customer sources, etc. Vacation ownership sponsors and associations often enter into a affiliation agreements with vacation with vacation ownership exchange companies to enable interval owners to exchange their intervals through a “bank” for intervals owned by other participating interval owners at other projects.

Intervals may be fixed as to unit and annual occupancy period, or may float as to each. If floating intervals are utilized, unused intervals may be rented by the vacation ownership association or sponsor to the public, with the revenue derived from such rental accruing to the benefit of the vacation ownership association or under certain circumstances the sponsor.

Where Are Vacation Ownership Projects Popular?

Coastal areas in Florida, California, South Carolina, Hawaii, Mexico and the Caribbean although vacation ownership projects are gaining in popularity in noncoastal locations such as mountain resorts and Las Vegas.

What Was Wrong with Timeshare:

There is a historical perception of unscrupulous operators and sellers of vacation ownership intervals who, for example, have utilized high-pressure sales techniques and oversold floating intervals. From the consumer’s perspective, vacation ownership also may mean a risk of unavailability of desired occupancy period, the lack of a ready resale market and a risk that the sponsor may change association.

Who Is Doing Vacation Ownership Projects?

Vacation ownership projects are now being conducted by developers who are entering into relationships with hospitality companies and/or affiliation companies and the major hospitality players, including Embassy, Hilton, Marriott, Hyatt and Disney. These participants should result in a perception that the industry has been legitimized. Vacation ownership projects are enabling hotel managers to generate new revenue sources in an era of slowed hotel development.

Why Develop Vacation Ownership Projects?

In many locations, vacation ownership enables project owners to fill empty rooms and units during slow season. The vacation ownership industry generated approximately 60 million visitor days in the United States in 1992. But other advantages abound: For example, vacation ownership resorts can be built and financed in stages, allowing both developers and lenders to ease back into the resort development business a few units at a time; developers can develop a resort with a timeshare component that could no be developed as a hotel alone; and borrowers can sometimes refinance a bullet loan that otherwise may not be refinanceable in today’s economic environment. But don’t forget, vacation ownership is not the cure for all problems - a failed hotel project will be a failed timeshare project!

Theming and Branding Vacation Ownership Projects

Much like the owner of a hotel, the developer of a timeshare project invests a great deal of time and money into the architectural and aesthetic aspects of a project, and the returns generated might be enhance by the theming and/or branding of that project. Because many readers are familiar with hotels (but not timeshare projects), we will compare or contrast unique timeshare considerations with the more familiar hotel model.

Entertainment Theming

First and most successfully pioneered by Walt Disney in the 1950’s, entertainment theming is spreading like wildfire across all product lines in the hospitality industry - restaurants, hotels, resorts, gaming destinations and vacation ownership projects. It is no longer confined to destination resorts and theme parks.

While entertainment theming is not right for every timeshare project, it should be considered in every new development and every major revitalization of an existing project. One must carefully consider whether theming concepts will be short lived fads or timeless enhancements. Cost-benefit and payback should be carefully analyzed.

To Brand or Not to Brand

Unlike hotels, except for vacation ownership projects that have been developed by brand name companies like Disney, Marriott, Hyatt and Hilton there are only a few franchise companies that have been willing to let timeshare developers use their intellectual property to market and sell intervals. however, it appears that, like hotels, the franchising and licensing of vacation ownership projects owned and developed by credible developers with the integrity and financial strength to stand behind a project for the term of the license agreement will become more common.

First, one must ask whether the vacation ownership project needs to be branded. The answer to this question depends, at least in part, upon whether the project “needs” the brand name affiliation to attract visitors to the location (e.g., an urban location without extensive amenities) or whether it can stand on its own as a true “destination resort.” It also depends upon the cost/benefit analysis as to the value of the franchise to each particular vacation ownership development - but this analysis is different from that applicable to a hotel. For example, a franchise agreement should bring additional room revenues and bottom-line profits to the operation of a hotel. Except in the event of combined hotel/timeshare operation (e.g., a mixed use project like the Manhattan Club on West 56th Street in New York City or a convention hotel being converted to a timeshare project), the branding of a vacation ownership project should add to the sales price of intervals and increase net profits from interval sales.

The cost of a franchise agreement to vacation ownership project is also very different from that of a hotel. Hotel developers/owners pay a franchise fee to the franchise company based upon revenues (with variations thereon) or additional fees sometimes based upon the parties’ ability to track the source of revenues (i.e., room revenues generated by the franchise company may earn a greater fee than, for example, food and beverage revenue). however, in vacation ownership projects, not only developers but also interval owners will pay franchise fees; developers will apply a fee upon the sale (and based upon the sales price) of each interval (as consideration for the value that the brand brings to the developer as a result on an increase in purchase price and velocity of sales of intervals) and interval owners will pay an annual fee as a part of the homeowner association dues (as consideration for the value that the brand brings to the interval owner by ensuring long term quality and operating standards as will as value in the form of enhanced resale prices).

Franchise Agreement Considerations

Franchise agreements entered into between developers and franchise companies will, for a while, look a lot like those entered into between hotel owners and franchise companies. However, over time they will evolve into distinct contracts that will address issues unique to vacation ownership projects. At the outset, particular areas on which the contracting parties should focus include the rights and powers being granted to the franchise company, the amount and basis of calculation of franchise fees, repair and capital improvement standard and responsibilities, compliance with insurance requirements, obligation to maintain common areas, interior of units owned the the association and interior of units owned by the developer, and the term of the agreement, the basis upon which the agreement may be terminated, by whom and with what consequences.

Other Unique Vacation Ownership Issues

many other unique issues arise in the negotiation of vacation ownership franchise agreements. For example, the business deal negotiated between the developer the franchise company may conflict with the provisions of the controlling timeshare (and possibly condominium) declaration, bylaws, rules and regulations, etc., as well as applicable federal and state laws (which will vary from state to state) relevant to the project. In addition, when franchise agreements are executed, the timeshare (and possibly condominium) associations may not yet be formed.

As a result, the timeshare developer will likely be executing documents on behalf of the association and the developer must be aware of all applicable laws which might impose duties on the developer or place limitations upon contents of franchise agreement, regulate the rights of developers under franchise agreements or limit the ability of the developer to bind the association to a relationship with a franchise company. For example, many state regulators limit the term of management agreement to one year for elated management companies and three years for unrelated management companies. Therefore, when negotiating franchise agreements with the same party which will be managing a vacation ownership project, one needs to address the issues unique to a vacation ownership project which will arise in the event that the management agreement is prematurely terminated and the franchise agreement would otherwise survive.

JMBM’s Unique Expertise

As the vacation ownership industry continues to grow around the world, JMBM’s expertise and experience grows. We have represented clients in all aspects of vacation ownership, including:

• The acquisition of land and existing hotels.
• The documentation of program, condominium and hotel management agreements.
• The preparation and filing of applications for the sale of vacation ownership interests with state authorities.
• The negotiation of license agreements with franchise companies and affiliation agreements with exchange companies.

JMBM is a full-service, business law firm of more than 140 attorneys with offices in Los Angeles and San Francisco and with an independent network of over 1,600 lawyers in more than 75 cities world-wide. We have been involved in hundreds of transactions spanning the globe and representing over $12 billion in total sales, financings, and acquisitions of lodging and leisure properties and companies. We handle: financing, acquisition, sale, bankruptcy, ownership structure and dispute issues, securities, litigation, mergers and acquisitions of companies, union and employment matters, employee benefits, repositionings, management of franchise matters, recreational use agreements, trademarks, litigation of any sort, insurance claim, disaster, timeshare and vacation ownership, tax, foreclosure, and virtually every other challenge.