News for the Hospitality Executive
.Special Implications of
"the Downturn" for Vacation Ownership: Strengths
and Vulnerabilities You Should Consider For Your Project
|By David Sudeck, Hotel & Timeshare Lawyer | JMBM
Global Hospitality Group®
Time for more time share or fractional product in your project?
Our clients with hotels or hotel mixed-use projects that are not yet completed and open, or that have unsold residential components, are increasingly stopping to take stock of the situation. Most of them are re-evaluating whether a change in the mix of uses would improve absorption in light of rapidly changing consumer travel, purchase, income, and savings patterns. We are working with our clients to optimize product mix and modify the legal structure of their projects accordingly.
Where appropriate, we are still encouraging clients to incorporate a for-sale vacation ownership component in their projects. Studies by ARDA (the American Resort Development Association), the Washington-based trade association representing the vacation ownership and resort development industries, show that the long-term success of the vacation ownership industry is virtually assured by great demographics, strong consumer demand for vacation ownership product and the variety of new products being offered by a sophisticated industry to satisfy a broad range of consumer desires. However, in the near-term, we see that all real estate and leisure products will be affected by the Financial Crisis, with its impact on the economy, available financing, and consumer confidence.
Is the Vacation Ownership industry immune from the downturn?
Howard Nusbaum, President of ARDA, recently addressed the state of the timeshare industry in this turbulent economy. In his open letter for September/October 2008, entitled "Timeshare, Recession Resilient?" Mr. Nusbaum observed that while the entire hospitality industry may be negatively affected by the economic downturn, there are a number of reasons why timeshares in general should be better situated than other real estate product, and even hotels.
But in his November/December open letter, Mr. Nussbaum was less optimistic. He said, "I don't have to tell you that our vacation ownership industry is feeling the pain from this credit market crisis, but only as victims and not as part of its cause. And remember that during previous downturns, our resort occupancies have outperformed hotels and our sales have outperformed traditional second home and condo sales--and we can work toward that same outcome this time, too."
Other than a near-term shortage of receivables financing, all other factors that have sustained the timeshare industry for years continue unabated.
What happened to the short-term outlook for vacation ownership? "Financing. Financing. Financing." - Although it has fared better for a longer time than other hospitality and real estate products, the vacation ownership industry has finally been hit by the global credit freeze. Receivables financing has become increasingly scarce and much more expensive. This is the financing -- the liquidity lifeblood -- that allows resort developers the funds needed for operations, payment of debt service and the origination of more seller financing. It is secured by the paper taken back by the developer-seller from timeshare interval purchasers for the portion of their interval purchase price over their cash down payment.
A case study with Textron. Textron Financial has been one of the leading providers of financing for timeshare resort properties for more than 18 years. Textron Financial's website says that the company "provided more than $810 million in new financing to vacation ownership and hospitality industries in 2007."
Even at The Lodging Conference in Phoenix in late September, Textron executives said that they were "still in the market and very active." However, Textron Financial Corporation's most recent Form 8-K filed with the SEC in October 2008, showed a dramatic change. It said:
"In recent weeks, volatility and disruption in the capital and credit markets have reached unprecedented levels. In light of current market conditions and in order to reduce Textron's short term funding requirements, on October 13, 2008, the Board of Directors of Textron approved the recommendation of management to downsize Textron's commercial finance business, Textron Financial Corporation, ("TFC"). Under the approved plan, TFC will exit its asset based lending and structured capital divisions . . . In addition, TFC will also limit new originations in its ... Golf Finance and Resort Finance divisions. [emphasis added]"Textron's statement that it will limit new receivables financing lines is troubling, and other smaller sources of receivables financing are following suit, or charging higher premiums for the much-needed financing. The availability of on-site approvals and ready seller financing has been a critical ingredient for the success of the timeshare industry. Anything that significantly reduces this availability is bad news for unsold projects without established financing commitments. Those with existing lines have been, for the most part, successfully renewing and extending their credit facilities.
Sales slowdown from dearth of receivables and seller-financing for vacation ownership product
As the withdrawal of Textron and other receivable financing sources
restricts or closes down seller financing, the industry is likely to look
to third party financing from sources willing to lend directly to the consumer
-- the buyer of a timeshare interval. But even in better economic times,
only a few lenders understood and were comfortable with vacation ownership
product financing. Until someone fills "the gap," there will be slower
absorption as potential buyers are forced to self-finance (pay all cash
or draw down on their home equity lines), wait to purchase, or purchase
on the resale market at a lower price point where they can afford to buy
using cash rather than debt. Slower absorption is likely to result in downward
pricing pressure and, in some cases, lender workouts.
10 Reasons that Time Share keeps going and going like the Energizer Bunny
Other than a near-term shortage of receivables financing, all other factors that sustained the timeshare industry for years continue unabated. As soon as liquidity is restored and financing returns for timeshare and fractional receivables, we expect that the traditionally resilient timeshare and vacation ownership industry will rebound quickly.
Ten factors supporting the industry's impressive strength include:
1. Active Sales Force/Manufactured Demand - The vacation ownership industry has not historically been cyclical because the industry has been able to successfully manufacture demand through an active selling process (rather than relying on passive demand) that includes inducing the consumer to visit the property and educating the consumer to purchase the product.Where do we go from here?
The availability of on-site approvals and ready seller financing has been a critical ingredient for the success of the timeshare industry. Anything that significantly reduces this availability is bad news. The data demonstrates that there is healthy demand for timeshare and other vacation ownership product, but the lack of financing and reduced consumer confidence is chilling sales absorption numbers. As long as it lasts, the credit freeze will adversely affect sales and the industry as a whole.
As traditional receivables financing lines remain unavailable, we suspect that developers will begin to bulk sale their receivables to traditional banks, which should begin making loans again as TARP money is funded, enabling banks to handle large write-offs of bad loans. In the mean time, there is a lot of money sitting on the sidelines waiting to invest in performing assets, and timeshare industry defaults are lower than credit card, car loans and other consumer debt. Therefore, for those developers with staying power, financing help hopefully will be on the way soon.
The availability of on-site approvals and ready seller financing has been a critical ingredient for the success of the timeshare industry.
Anything that significantly reduces this availability is bad news
Does that mean that the vacation ownership industry will avoid the loan workouts that other real estate product types are facing? We hope so, but in this game of musical chairs, poorly-conceived and/or unfortunately-timed projects with vacation ownership components may have been caught "without a chair" as the music stopped. Unfortunately, waiting for a return of liquidity can be expensive, and some lenders will be unwilling to extend their matured loans to wait for improved conditions.
About the Author
David Sudeck is a member of JMBM's Global Hospitality Group® - a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. David joined JMBM after most recently running a condominium development company as well as a real estate brokerage company. As a result of his combined business and legal experience, David brings to JMBM and to his clients his legal expertise, his finance, entitlement and development knowledge, and his extensive relationships with investors, lenders, brokers, developers, and service providers. At JMBM, David primarily focuses on the formation and registration of condominium, timeshare and fractional interest regimes, the negotiation of hotel, spa and restaurant management agreements, and the development, acquisition, sale and leasing of hotels and restaurants. David has assisted timeshare and fractional interest developers (including one of the largest independent timeshare owners in the country) with the preparation and registration of their project documentation.
David can be reached at firstname.lastname@example.org
or 310-201-3518. Look for David's timeshare and vacation ownership articles
on HotelLawBlog.com under the "Timeshare" TOPIC or go to www.HotelLawBlog.com/timeshare/.
|Also See:||Vacation Ownership Properties 101: What are they? How do they work? How are they regulated? / David Sudeck / September 2008|
|Pending Government Approvals of Timeshare Laws, Vacation Ownership Set to Take Off in Dubai, Saudi Arabia, Jordan / March 2007|
|The American Resort Development Association Examines the Growing Variety of Vacation Home Options / October 2006|
|Timesharing - Enviable Growth Lures Major Hospitality Companies / Arthur Andersen / Fall 1996|