You readers who have followed my intrepid writings about the timeshare industry will quickly identify some redundancies between this effort and an earlier one, “The Unconscionable Suppression of the Timeshare Resale Market.” For this I extend my apologies, but must quickly add that this article is intended as an extension and, hopefully, a more thorough analysis of this very complex issue of “valuation” as it applies to the timeshare industry.
So although you’ll have to wade once more through the Securities and Exchange Commission filings by the larger publicly traded timeshare developers, you’ll quickly see the significance of this repeat visit made more significant, as the phrases you’ll see repeated come directly from the horses’ own mouths, so to speak.
New data on valuation abounds as well, in the form of a new court decision per a recent ruling in a 2012 case filed in Osceola County; case # 2012-CA-1293-OC (9th Judicial Circuit) entitled Cypress Palms Condominium Association V Scarborough (tax assessor), wherein Wyndham Vacations lost at the trial court level on their bid for a $2.3m property tax refund based on what they claimed was a major over-evaluation of the value of its resort property. The resort argued that the proper standard which measures ‘value’ should be based upon individual arm’s length sales transactions, a “market analysis,” if you will. The case is now under appeal, but for our analysis in this writing, what is remarkable is the nearly total absence of these types of transactions (e.g., private owner to private owner transactions, arm’s length, meaning a knowledgeable and willing buyer and seller). In fact, the number in the cited study was so small compared to the total number of transactions that the court essentially disregarded the few that did exist as statistically insignificant. The concept of value and its many dimensions must be well understood in order to effectively appreciate and evaluate the existing state of the timeshare market.
“Valuation:” A Definitional and Dimensional Dilemma
With the exception of products and goods intended for immediate consumption, a resale market exists for essentially any and all durable products. Even certain clothing gets a fresh start in haute resale boutiques. Indeed, the very essence of the concept of “value” must incorporate the concept of the future resale market. The more durable the product or good, the more it holds its value in anticipation of ultimately being remarketed to a new consumer when the present consumer moves on.
To gauge this value, ask yourself if a present consumer would pay as much for the product initially if he or she knew going in that no recoupment of the purchase price was possible. Using residential real estate as a prime example, a used residence typically not only holds its purchased price cost value, but in many cases actually appreciates in value (even taking inflation into consideration). Imagine the value of your home if you couldn’t inherently count on recouping a significant portion of its cost at resale. What if you couldn’t move to another state or neighborhood when you wanted or needed to? What about needing to downsize from a four bedroom, three bath home to a two-bedroom condo when your immediate family has moved on to their own separate life experiences? Would you, or could you, pay a comparable price for your house if you knew that in five or ten years you would be abandoning your home and essentially starting over? What about your car? Did you buy it with the intention of driving it until it falls apart, or were you inherently counting on its resale value even as you acquired it? Would you pay as much for a vehicle if you knew you couldn’t dispose of it and recoup a significant portion of its cost?
The point of these examples, whether it be houses, cars, or clothing, is precisely the same: Whether or not you’re aware of it, you are automatically, if unconsciously, factoring in the trade-in value of what you are acquiring because you subconsciously know that this isn’t the last home, car or dress you’ll need. Therefore, when you make your intended purchase, you’re in a sense putting money back in the bank to fund your purchase’s future replacement via its estimated future resale market value.
So when you visit the developer of the timeshare of your choice, and determine that you have an interest in the product, and perhaps then go online to see if you can acquire a similar unit on the resale market, you expect to maybe pay a little more with the developer, but essentially you would assume that the two prices would be fairly close, right? Wrong! The reality will shock you and will fail to make any economic sense initially, and if you’re on the buying end of this example, your knowledge of this counterintuitive marketplace can make the difference between spending $25,000-$35,000 or $2,500 or less!
The ‘underlying value’ of a timeshare purchase, in theory, shouldn’t be any different conceptually than buying a home, car, or dress. For many consumers purchasing one, there is a subconscious, underlying belief that when you are ready to move on beyond this immediate acquisition to your next one, there will be an underlying intrinsic value that you can, in a sense, “cash out” for your next purchase. Perhaps you may want to purchase an upgrade, or maybe acquire additional weeks as you gain the ability to use more vacation time; maybe you’ll even want to upgrade to a vacation home. There are also less positive, but just as realistic reasons, for needing to “cash out:” These may include job loss, divorce, or a long term illness. Again, whether or not you’re even aware of it, the inherent sense you have acquired over the years that you’re funding a future purchase when making your current acquisition is a significant factor in determining the value of this transaction, defined by just how much you’re willing to pay for this new acquisition.
As consumers, we also understand that costs of most consumer items are relatively consistent; a 3-bedroom 2-bath home in a certain neighborhood or a 2012 Chrysler family van both have an established “market value” determined by condition, as well as economic factors like supply and demand. So, logically, it must stand to reason that a timeshare possesses the same general criteria, correct? The complete opposite is actually true; examining the reasons for this seeming incongruity is a main topic of this article.
To help understand this truly counterintuitive aberration, we need to analyze the timeshare developers’ clear intent, which, to date, has been to do all they can to actively suppress any structured resale market so that the industry can continue to market its products at very high prices without significant competition from secondary markets ,who measure their sales at prices that are small percentages of the developers’ selling prices. Keep in mind that when we are discussing the secondary market, we are not comparing a used car to a new car. We are comparing exactly the same identical product. A timeshare unit next door to the one the developer is marketing in the same exact maintained condition. Some of these developer-originated methods of suppression, in my opinion, border a fine line between sound business practices and deceptive (and arguably unsound) practices. These methods cause damage to the developers’ consumer customer base (and thereby, presumably, to themselves), as the price differential is ultimately simply unsustainable in the longer term. This is what I’m referencing in the title; the timeshare industry is engaging in a sort of cannibalism, eating its own young!
In the Developers’ Own Words
Let’s continue our analysis by reviewing some developers’ actions along with their own expressed intent, and then conclude our factual presentation with the recent court case discussed above, wherein the Court discounted the probative value of Wyndham’s expert witnesses called to testify on the value of the timeshare resort and concluded that there were insufficient arm’s length timeshare transactions (i.e., owner-to-owner non-resort based transactions) to be able to draw any meaningful determination of value. From a statistical sampling perspective, the Court properly, in my opinion, concluded that fewer than 100 private transactions out of 700,000 recorded transactions was statistically insufficient to draw any meaningful conclusions. Although the court transcript didn’t specify any of the sales prices that this handful of transaction amounts averaged, it’s my educated guess that these interests changed hands for around twenty five hundred dollars ($2,500), or less.
Several of the developers’ own statements in their 2015 public Securities and Exchange Commission filings confirm the inescapable conclusion that the developers regard a stable secondary resale market as a serious threat to their profit model.
The major developers who operate as publicly held companies have all stated nearly identical positions when describing risks to their business model. Quotes from the SEC filings referenced above, all of which are extracted from these companies’ own 2015 Annual Reports, include:
- “…the resale market for VOI’s (vacation ownership interests) could adversely affect our business” (Bluegreen)
- “the sale of vacation ownership interests in the secondary market could negatively impact our sales”. (Wyndham)
- “The sale of vacation ownership interests in the secondary market by existing owners could cause our sales revenues and profits to decline“ (Starwood)
Then there’s Marriott, which not only similarly condemns an active secondary market as a threat to its operations, but has actively taken strong affirmative steps to combat this threat by limiting and curtailing what an existing owner can and cannot resell in the secondary market. In other words, as a Marriott timeshare owner, a consumer may well be restricted and contractually prevented from reselling aspects of a resort purchase to his or her next buyer! This quote from Marriott’s 2015 SEC filing is illuminating in its detail:
“Owners generally can offer their vacation ownership interests for resale on the secondary market, which can create pricing pressure on the sale of developer inventory. However, owners who purchase vacation ownership interests on the secondary market typically do not receive all the benefits that owners who purchase products directly from us receive. When an owner purchases a vacation ownership interest directly from us, the owner receives certain entitlements that are tied to the underlying vacation ownership interest, such as the right to reserve a resort unit that underlies their vacation ownership interest in order to occupy that unit or exchange its use for use of a unit at another resort through an outside exchange service provider, as well as benefits that are incidental to the purchase of the vacation ownership interest. While a purchaser on the secondary market will receive all of the entitlements that are tied to the underlying vacation ownership interest, the purchaser is not entitled to receive certain incidental benefits. For example, owners who purchase our products on the secondary market have restricted access to our internal exchange program and are not entitled to trade their usage rights for Marriott Rewards Points. Therefore, those owners are only entitled to use the inventory that underlies the vacation ownership interests they purchased. Additionally, most of our vacation ownership interests provide us with a right of first refusal on the secondary market sales. We monitor sales that occur in the secondary market and exercise our right of first refusal when it is advantageous for us to do so, whether due to pricing, desire for the particular inventory, or other factors. All owners, whether they purchased directly from us or on the secondary market, are responsible for the annual maintenance fees, property taxes and any assessments that are levied by the relevant property owners’ association, as well as any exchange service membership dues or service fees.” (emphasis added, quoted material taken directly from Marriott Vacations Worldwide Corporation (2016) 2015 Annual Report)
The upshot of these admissions, as filed with the SEC, amount to clear statements from some of the major publicly traded timeshare developers that they regard timeshare resales as a meaningful threat to their business models. Further, particularly in Marriott’s case, the developers’ actions go much further than mere statements, as they have intentionally parsed out perks initially acquired by new Marriott timeshare purchasers by virtue of their purchase agreements, and transformed these bought and paid for attributes into non-transferable items that will not, by design, accrue to the next owner’s interest.
As an attorney I confess to being troubled by what I regard as an overreaction to combat secondary marketing for a couple reasons. One, I believe a strong secondary resale market to be in everyone’s long term best interests, including the developers’, for all the reasons as stated within this article (as well as my earlier and previously referenced “Unconscionable” article). Secondly, it’s simply disturbing to see a large publicly traded company like Marriott intentionally strip away incidental contractual benefits to apparently serve no end other than its own short term goal of increasing profits by suppressing resales. What about the new Marriott timeshare owner who has to resell his interest because of a job loss or transfer, divorce, or the death of a family member? Stripping that owner, who paid the full retail price at purchase, of even minor incidental benefits, of the ability to maximize his or her resale price, seems downright punitive, a steep price to pay only to punish an unsuspecting owner, merely for the sake of keeping its own short term profits higher!
The concept of “value” is complex and multidimensional. For our purposes, we are focused on the resale aspect of the term from an economic viewpoint. “Resale value” creates a monetary yardstick where the “staying power” of a purchase can be precisely measured over the long term.
In this writing, we’ve compared the timeshare purchase to a car, a residence, and even clothing to make the respective points that resale is not only an important factor in an asset’s economic life, it’s an integral and very vital part, not easily separable from any others. While it’s accurate to state that the concept of value includes a broader definition than resale value only, when push comes to shove and an interest needs to be disposed of, only the resale value is truly relevant if we’re speaking to the issue of recoupment of initial cost for the purpose of financing a replacement product.
For contrast, the timeshare industry speaks to the intrinsic value of timeshare ownership, and it probably is fair to state that there is such a thing as ‘value’ that is not and cannot be measured in dollars; these factors include convenience, comfort, and other noneconomic factors that are not easily quantified. While I concede this measure should be considered in any discussion of value analysis, it is solely the economic definition – as in, ‘what am I left with after the experience is over and I need to dispose of the interest’ – that should be properly considered when measuring value! Just like any other economic transaction, the only way to obtain a comparative measurement of value is to use a common yardstick that measures all similar transactions equally. That common yardstick is the money one pockets when they walk away, leaving behind the other noneconomic aspects of the word “value.”
In coming back to some of the issues I attempted to raise in the preceding “Unconscionable” article, I reluctantly came to grips with the realization that the timeshare industry is in no hurry to embrace what I maintain is the formula for economic health for the entire industry, from consumer all the way to developer: That a healthy resale market is part and parcel of the full economic cycle that is essential for the long term survival of the entire industry.
Sadly, in the short term, the forces of “supply side” economics are still working overtime, while the regulatory community seems to be barely working at all. It’s abundantly clear that at least for now, the operative phrase in the timeshare world remains “caveat emptor” – let the buyer beware!
Michael D. Finn, Esq.