Is there any potential return on the initial fee?

Membership and Equity represent two opposite ends of the destination club spectrum. Originally, clubs started as membership organizations, providing members with access to luxury residences but no part of any upside in real estate value. New clubs entered the industry and tried to differentiate by offering appreciation on the initial deposit. On the other extreme, clubs such as Crescendo and Destinations Private Resorts position themselves as equity-based ownerships.

A pure membership club such as Exclusive Resorts is comparable to a health club membership at LA Sports Club. You pay an initial fee, of which 80% is non-refundable, along with annual dues. A gym only provides members with access to equipment and a well-run facility. Members do not receive a percent of any profits and are not considered shareholders in the club. Similarly, a membership-based destination club charges a large initial fee to join and then provides premium services for the cost of annual dues.

At the other end of the continuum, equity clubs offer members a chance to invest in the real estate portfolio. The clubs typically de-couple home access from the equity component. Becoming a member gives you the option to buy into a limited partnership that owns the real estate. Destinations Private Resorts teams 8 members together to own a 12% stake of each home. The remaining 4% is held by a separate entity which the members join and gain access to other residences. The nature of the program limits the way they can advertise and solicit potential investors.

Some clubs are blurring the line between membership and equity, carefully choosing words to imply equity appreciation when the program is not in fact an investment vehicle. These clubs are most likely to face scrutiny from the SEC or timeshare regulators.

We recommend you consider clubs that are clearly positioned at either end of the membership-equity axis. A membership based club has a well-defined charter and makes no claim about potential investment appreciation. These clubs are a cost-effective alternative to luxury resorts or villa rentals. Equity based clubs are comparable to a REIT and screen for accredited investors before sending any marketing materials. The clubs in the middle have the highest chance of fall-out and sit in an awkward “no-man’s land” between membership and equity.

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