Pictured above, left to right: Scott MacGregor and Joe Takacs
Natural disasters, along with the current pandemic, have resulted in both the permanent and temporary closing of timeshare resorts. At times, however, timeshare resorts have permanently ceased operations for causes other than those that are “natural”. The Associations simply run out of money to sustain operations.
The indicators of an unwanted shutdown were discussed during a recent TBMA Conversation Series Webinar, moderated by Shep Altshuler, TBMA president and panelists Scott MacGregor, Senior VP, COO, Lemonjuice Capital Solutions and Joe Takacs, CEO, TheMVPService.
Both MacGregor and Takacs agreed that Board Members have to pay attention to key indicators about the financial health of the association. They are responsible for running multi-million-dollar operations. Often, the Boards that are managing resorts that are facing revenue issues do not have the experience to run that level of business and should not be afraid to reach out for help and advice.
If warning signs exist, and the Board is not proactive in protecting the resort’s assets, they may end up following in the footsteps of those resorts that have, unfortunately, done very large special assessments or permanently closed.
Takacs: “If you’re using next year’s money to pay this year’s bills, and you’re not telling your owners; to me, that would be a major concern. If you have units out of order for an extended period, that may be an indication that you do not have the funds to repair it. A third red flag is often not foreclosing because you can’t afford it.”
MacGregor: “An important leading indicator is when a board isn’t thinking about potential outcomes in the future. Seldom is resort insolvency a sudden occurrence. Often it is the result of something that has been building up over a period of years. The number of dues paying members decreases as the property ages and the cost of maintaining it keeps growing, the result can be closure.
Failing to plan at least 2 or 3 years ahead, not fully understanding the financial health of the association, and not considering options are of significant concern. It is often hard for Boards to recognize the leading indicators because they may get buried underneath the things that are happening today.”
Track trends: Delinquencies, deferred maintenance, complaints, rentals, and sales (or lack thereof).
Takacs and MacGregor discussed why Board Members should track trends in delinquencies. It was mentioned that ten years ago, at TBMA conferences, a 10% delinquency at a property was considered a warning sign, but it was not considered fatal. Today, resorts that are reporting delinquencies of 20% to 50% may not be sustainable. A managed plan to transition the property can and should be considered by the Board. High delinquencies often result in a tightening up on spending on upgrades that lead to deterioration of the units.
Takacs: “High delinquencies require an analysis of rental and sales revenues. That additional income may not be sufficient to fund operations with the decreased fees collected. As a high-level guide – resorts should generate $7,000 to $10,000 per door, per year. So, a resort with 100 units/doors should be ‘renting’ at a pace of one million dollars annually to stay viable. Even if you have a good onsite sales program or sold a large number of units to a bulk buyer, the sales process cannot not stop, EVER. About every 15 to 20 years, you have to sell your inventory all over again. Often, the kids don’t want it, So, it’s like being on a treadmill, continually replacing an owner, taking weeks back, selling and reselling them again. For many resorts, that effort may not be attainable.”
MacGregor: “A resort is a collection of owners. If you’re getting to a point where a substantial amount of income is coming from rentals, that means a substantial number of your owners are not paying their maintenance fee. Many of them have gone through the unpleasant collection process. They may turn to the exit companies that are charging them thousands of dollars for service that should not even exist; that’s not really a service.
Even if you are in a high demand area, and you’re paying the bills because you are generating good rental income, that’s happening on the backs of owners that have had to give up their timeshares for one reason or another.”
Impact of an unmanaged termination
Takacs: “An unwanted closure is a disaster. We were working with a resort where the Board sent a letter to their owners and said, we are going to have to file bankruptcy. That resort has been closed for almost two years. The utilities had been turned off. Things deteriorate, the resort is falling into disrepair, and will most likely be unsalvageable. Sometimes, the only thing in a case like that that can be done with the buildings is/was to tear them down. Options have to be explored before it’s too late.”
MacGregor: “As Joe said, every day that you wait and do not plan, you end up wasting the asset. It’s just adding insult to injury. The owners have not only lost their property, but most likely lost the potential upside of the financial benefit, because very often, those properties are in highly desirable destinations. Right now, it’s a great real estate market. It is a tragedy when resorts fail to deal with the benefits of planning.”
Steps that should be considered
Boards should not ignore their owners. Getting feedback is an important step when considering the future of their resort.
MacGregor: “Boards do take this very personally. They may see the change in the use of the timeshare as a failure. This is clearly not the case. An objective, analytical approach is required.
Owner feedback is extremely helpful. Ask the owners about what they think, and then pay attention to how they respond to you, Surveys are important, but they have to be structured so the owner provides detail as opposed to just answering ‘Yes or No’. Examples are: How do you see yourself using your timeshare in 3 or 5 years? Or, how would you feel if your assessments go up more than two or 3%? Detailed insight into owner sentiment will be to your advantage when considering options for the highest and best use of the property.”
Takacs: “Board Members do care about doing the right thing for the Association and owners. I fully agree that owner feedback is an important step. But, getting insight about what’s going on in the industry is also important. Finding out what other resorts have done will help with your deciding the steps that are necessary to be taken.
Board Members who are hesitant to take the necessary steps may be doing so because they see not having sufficient funds to sustain operations as a sign of failure. They should think just the opposite. Major hospitality brands and public corporations are constantly planning and adapting to changes that are needed. The Board should look at their resorts from a business perspective.”
Regardless of whether or not the Board feels that the resort is in great shape structurally and financially, or the resort has been showing symptoms of decline, they should start evaluating its real viability at the earliest possible date.
These measures take time: Pending issues such as dealing with sunset provisions, deciding on options to avoid an unwanted closure, evaluating full or partial conversion, or securing a bulk sale of the property. Surveying owners, conducting titles searches, and getting owners to vote all come into play and need advanced planning.
Finally, collaboration with industry experts familiar with the processes of right-sizing a property, legal counsel and accountants are of utmost important.
Scott MacGregor: Email firstname.lastname@example.org or (321) 236-6663.
Joe Takacs: Email email@example.com or 407-366-1573.
TBMA: Email firstname.lastname@example.org; visit tbmassoc.org.