|By Kyle Stock, The Post and Courier,
Charleston, S.C.McClatchy-Tribune Business News
Sep. 11, 2006 - When it came to vacations, money wasn't a problem for Greg Shove.
The challenge for the Bay Area technology executive was booking adjoining rooms at a Four Seasons hotel or finding a big rental property with the amenities of his own home: a flat-screen television, decked-out kitchen, lots of toys for his three kids and extra rooms for the nanny and some guests.
On New Year's Eve a few years ago, Shove, 44, gladly forked over $3,000 for a suite at a five-star California resort. But the rooms were small and the service was bad.
"That was when I said, 'There must be a better alternative," " he recalled.
The alternative for Shove and thousands of affluent travelers like him was to pay $325,000 to join a vacation club -- a $240,000 deposit that he might or might not get back, a $60,000 upfront fee and $25,000 in annual dues. In exchange, Shove got the right to book 45 nights a year at a portfolio of plush properties.
Memberships at vacation clubs, also known as destination clubs, are surging, riding the crest of U.S. wealth and tapping into the tiny part of the socioeconomic pool that dabbles in hedge funds and horses.
About 4,500 members are spread among roughly 24 clubs in the industry now, according to the Helium Report, a newsletter that Shove started to cover the ins and outs of the industry.
The concept is similar to that of time shares, but the properties are bigger, and there are only six to eight members per unit, rather than dozens. And those who buy in get nothing more than a promise in return, not a deed or some form of equity ownership.
These are consumers to whom a $1,000 to $6,000 nightly payment seems inconsequential, or at least reasonable. Small businesses also are snapping up vacation club memberships to entertain clients and grant incentive getaways to employees.
But the nascent industry suffered a major blow in July when the No. 2 club filed for bankruptcy, leaving more than 800 people scrambling for their deposits.
Charleston city officials also have been scrambling over the past year to keep vacation clubs from getting a toehold within municipal borders.
"We felt very strongly that we didn't want them cropping up in residential areas," Mayor Joe Riley said last week. "We figured it would be a matter of time."
Lee Batchelder, the city's zoning administrator, said there was a concern that vacation club properties would propagate "a revolving-door" situation.
Charleston City Council passed an ordinance July 18 that beefs up the definition of "accommodations" to include vacation clubs and reiterates that accommodations are restricted to a few small zones, currently clustered around King, Meeting and Market streets.
Riley's prediction, however, came true a week later when one of the founders of Private Escapes LLC, a Colorado-based company, bought 47 Smith St. for $2.5 million.
The company touted its acquisition in a press release last week and profiled the historic mansion on its Web site as one of the first properties offered in the company's new "Pinnacle" membership, a more expensive option than its other two club options.
The company declined to comment last week, asking The Post and Courier to hold any stories to keep from "ruffling any feathers that don't need to be ruffled at this time."
"For some reason they are very finicky about the zoning there," said Alana Watkins, a Private Escapes spokeswoman.
Clubs such as Private Escapes are having more success elsewhere. Their holdings dot the country's travel meccas, such as Aspen, Hawaii, New York City and Lake Tahoe.
In fact, there are a number clustered just outside Charleston. The town of Kiawah Island has allowed the clubs to build, buy and stay, but officials considered tightening regulations on them in the past year, according to Kiawah Mayor Bill Wert.
"Basically, they've been good neighbors, and we haven't had any more problems with them than we've had with other rental properties," Wert said.
Private Escapes spent almost $2 million on two Kiawah homes in 2004. Exclusive Resorts, the Colorado-based company that dominates the industry, touts eight residences on the island. It also leases a ninth property nearby.
But the industry's shortcomings also can be traced to the exclusive Lowcountry island, specifically to two homes owned by Tanney & Haley Resorts, a Connecticut-based club operator that filed for bankruptcy July 23.
Tanner & Haley is a descendant of one of the first U.S. destination clubs that was launched in 1998. It boasted more members than all but one competitor, but it lost $64 million last year, according to court filings.
The company's troubles caught much of the industry unaware and reminded members of some important fine print, a clause that most clubs have precluding members from retrieving their deposits until two or three new members sign up.
If there is a run on the bank, so to speak, the money likely will stay put.
Rob McGrath, the company's founder and chief executive, resigned Aug. 15. At the time of its bankruptcy filing, Tanner & Haley had 874 members who had paid deposits of $85,000 to $1.3 million each, depending on when they joined. But the company had been leasing a large percentage of its properties and had only $130 million in real estate assets compared with $308 million in debt.
Chris Elliott, a former journalist who now writes a travel blog titled "Ellipses," said the bankruptcy called attention to the fact that club members own little more than a promise.
"The people investing in this are now thinking, 'Have I just been scammed?' " he said.
Vacation clubs quickly tried to distance themselves from the fallout by pointing out errors in the company's business model.
The tactic appears to have worked. Exclusive Resorts said the 30 days after the bankruptcy was its busiest yet for new memberships. It now has 2,300 members and 300 properties, up from 350 clients in 2003, the year it launched with a portfolio of 33 homes.
The company pointed out that it tries to own, rather than lease, three out of four of its properties. And it said none of its members have had to wait to get their deposits back although it has a clause that three new members must sign up first.
Shove, the Bay Area executive, is still a big believer.
He said the bankruptcy "is telling every consumer to do a lot of due diligence and be very informed before making a decision."
"You have to believe and have very high regard for the management of the club and the economic underpinning," Shove said.
Vacation clubs combine elements of two difficult businesses, real estate investing and hospitality. Both are tough on their own and particularly challenging when tackled in tandem.
But Shove believes the concept will float, not flop, and that the client list will grow from its current 4,500 members to between 50,000 and 100,000.
The operators, he said, are motivated to sell, "but it's no good to them if you want to quit two months later. These clubs are very anxious to deliver a good experience."
Elliott, who spends much of his time writing about scams and bad customer service in the travel industry, is not so convinced.
"Who knows what's going to happen?" Elliott said. "It could blow up in their faces, or it could be an aberration and the growth will continue."
As for the vacation club advertised on Smith Street, Riley said the property is in violation, and city officials soon would "attend to" the infraction.
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Copyright (c) 2006, The Post and Courier, Charleston, S.C.
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