During a TBMA Conversations Series Webinar on January 7, 2021, Shep Altshuler, TBMA president, moderated a discussion focused on the importance Trust Conversions have played within the Legacy Resort Community, and why timeshare HOA’s should include these conversions in their future planning to offer new products, and to revive their membership.
Altshuler was joined on the webinar by panelists W. John Funk, Attorney, Gallagher, Callahan & Gartrell, P.C., and Lee Johnson, CEO, Premier Resorts Group.
History of Trust Conversions
Funk began with a brief history of trust timeshare development. In the 1970s, most early timeshare projects were “right to use.” That meant that a purchaser had the right to use the resort for one week during a designated week or during a period of the year. There were no ownership rights held by purchasers and usually the term of the contracts was 25 years. At the end of the term, the use rights reverted to the developer unless the contract was extended. Many of the early projects were converted hotels and motels.
The Windrifter tax ruling in the late 1970s changed the structure of timeshare projects. Right to use contracts were viewed as long term leases requiring expenses to amortized over the life of the contract. Since many contracts were paid in the early years, this created tax problems since the income and expenses were not in alignment, resulting in adverse tax consequences. The timeshare industry collectively decided to move to deeded timeshare to solve the problem.
A few developers realized that there would be problems with the deeded approach – they required a condominium structure, higher closing expenses, mortgages, foreclosure costs and complicated title issues (50 to 51 interests per condominium unit) and looked for alternatives.
A trust model began to be used in the late 1980s, primarily in New England. It gradually gained acceptance in other parts of the country. Basically, title to the real estate was placed in trust and the developer sold beneficial interests in the trust to purchasers with basically the same rights and duties as deeded owners. The interests being sold were not real estate, but personal property and that solved a lot of the problems – no deeds, recorded documents, foreclosures, title issues.
Fast forward to the early 2000s. Older deeded timeshare resorts, generally referred to as legacy resorts, began to experience problems. Many were operated by associations. They had no active sales programs. Delinquencies began to rise. Foreclosures were required to take back timeshare interests. Owners were unable to sell their interests and became frustrated. Resorts did not help them or provide a market. That provided opportunity for fraudulent companies to offer owners a way to escape their obligations by passing title to LLCs that had no intent of paying assessments or contacting resorts to change the ownership.
In response, some legacy resorts looked to trust conversions as a solution. It involves putting association owned-weeks from delinquencies, takebacks and other sources into a trust and then selling beneficial ownership interests to purchasers. Over time it was hoped that a significant portion of the timeshare interests would be placed in trust. By having the timeshare interests in trust, it then gave the resorts some greater flexibility to meet market demand by creating new products. Johnson commented that in recent years he has begun working with legacy resorts that have made trust conversions and was able to increase their sales volume. This opportunity was addressed in the next segment of the webinar.
Managing the process of planning a conversion and costs
Funk stated that any resort contemplating a trust conversion should first engage in a “sustainability” study to understand its circumstances and options. There is no point engaging in a trust conversion if it will not help the resort to succeed. The study looks at membership, delinquencies, the state of its physical plant, its finances, its management, its board of directors, and its location, market, and competitors. The resort will learn if it has a future in timeshare or should consider re-sizing, merger, or repurposing. Johnson emphasized that a sales program cannot succeed unless a resort has its house in order.
Johnson said that he meets with management at a resort and plans the conversion process. He works with management and lawyers to review the existing documents, prepare the trust documents, select a trustee, examine legal issues, identify new products, and establish a system to set up and manage the trust system. He reviews the inventory mix and plans for acquiring more weeks to fund the trust. Also, part of the process is working with exchange companies to qualify the resort’s products for exchange.
The costs vary depending on the resort’s state of affairs. The resort should budget at least $25,000, but Johnson stated that a strong sales program can rapidly recover these costs.
What products are sold and by whom?
Johnson said that the hottest market in timeshare is short term products. He finds that the sale of points based on the timeshare inventory in trust is very popular. The purchaser is in control of his or her vacation experience – go anywhere, but make short term commitment. The products are designed to be renewed for a nominal price ($100). He noted that he can sell the new products alongside traditional timeshare to tailor the sale to the purchaser’s want and desires.
What are the benefits of trust conversions?
Johnson pointed out that it reinvigorates a resort by having an ongoing sales program and bringing in new purchasers. He explained that the resort shares in the revenue gained from new sales and increases its annual assessment income.
Funk added that the inventory going into the trust has clear title and ownership of timeshare weeks is consolidated in the trustee. In the future if a vote is required on any matter by the owners, the trust can represent a large block of shares. The costs of deeded ownership are avoided, and no foreclosure is required to take back delinquent interests. All in all, a trust conversion under proper circumstances can enable a legacy resort to not only survive but prosper in the future.
Pictured, from left to right, W. John Funk, Lee Johnson.