An area often “glossed over” by timeshare sales staff during the purchase process is the maintenance fee obligation, which is included within the purchase contract and becomes, over time, arguably the most significant aspect of the purchase transaction, for a couple of reasons:
- The maintenance fees (which tend to trend upward annually), unlike the purchase note balance that is ultimately paid off over time, continue during the entire duration of the ownership which, given the absence of a viable resale market, may quite literally be for the owner’s lifetime.
- There is a fair possibility of also being assessed with an additional owner’s fee, a capital assessment fee, which can be assessed and charged at any time (although these are somewhat rare as they represent an association’s decision to add or improve a capital asset item for the betterment of the resort). A capital assessment may be a major repair not covered entirely by the reserve account, or a capital improvement, like an additional pool or expanded activity center. We have seen a large assessment when a resort building was badly damaged in a windstorm, for example, and the insurance company denied coverage.
Maintenance fees include all direct costs of operating the resort – anything from insurance policies to the laundering of bedsheets and pillow cases, as well as reserve contributions and management fees. A reserve account is money accounted for and included in the current budget, and set aside (reserved) to pay for costly but anticipated future maintenance items, such as a new roof, furniture replacement, parking lot repaving, etc.
As referenced above, annual maintenance fees tend to rise, and usually rise significantly in excess of the annual rate of inflation. This aspect of timeshare ownership represents a kind of “owner’s black hole,” as this expense will be assessed on an annual basis regardless of whether or not the interest is used by the respective owner, and also from the standpoint of recognizing that the owner has nearly a complete absence of control or power to impact budgetary issues.
This leads to the logical question: “Who does have the ability to impact maintenance fees?”
That answer is divided between two separate and distinct entities: the Association, as governed by their Board, and their delegated counterpart, the management company.
The Board of Directors of the Property Owner’s Association is the empowered entity that, in theory, governs and operates the resort as an ongoing business via assessing owners their proportionate share of the operating expenses as their maintenance fee assessment, and correspondingly, disbursing payments to the service providers who, in the aggregate, keep the resort operational on a daily basis. This responsibility of the Board is typically delegated via management contract to a management company that, with the larger resort chains, is typically developer-owned and -operated.
The Board of Directors governs the Association, and its composition and method of director selection is partially dependent upon in which stage of development the resort is. Newer resorts and their corresponding associations are developer-controlled, but as resort sales continue and increase over time, the Association is (theoretically) gradually turned over to the new owners, who then elect directors who are thereby owners themselves. Directors are elected, per their Association By-Laws, to serve a term of years.
However, with resorts operated by the larger chain developers, those developers tend to remain in control of the Association’s affairs via developer-controlled management companies that, by virtue of their management contract, provide complete operational management services to the resort. Even when a Board comprised of actual owners is ultimately elected, they will be essentially required to retain the existing initial, developer-provided management company. The management contract is typically of a three-year duration, but often automatically renews via a provision requiring a supermajority vote of all owners to displace the management company. Consequently, that managing entity is quite likely to remain as the existing management organization as long as the resort is in operation. These management companies are the actual operators of the resort.
A review of many of the management agreements involving management companies that are owned and operated by the original developer reveal that management fees are often not based upon the value of management services rendered, but instead computed as a percentage of association monies expended on maintenance and other budgetary expenses. In other words, rather than management fees being determined from a basis capable of measurement, such as services rendered on an hourly-rate basis, they are instead based upon the total amount of actual expenditures.
To paraphrase, the more money spent in operations, the more money earned by the management company. Query the wisdom of being rewarded for spending as much as possible on resort operations? As management fees constitute a significant portion of maintenance fees, there is little management incentive to curb the upward spiral of budgetary costs. Those owners who wonder why their maintenance fees tend to rise regularly may find their answer within this review.
As to the issue of who controls, oversees, or supervises the management company, it is painfully clear that the Board who contracts with the management company exerts little to no control over management company operations and indeed, by the terms of the management contract itself, may not take any action that could be interpreted as interfering with the management company’s operational control. Therefore, to suggest that the elected Board of Directors of a resort association set up by a major developer has any power to change anything within the resort or its operation is a vast exaggeration. The Board is essentially a puppet organization, window dressing, as it were, rubber stamping the developer’s continuing operation and control of the resort via their related management company.
In conclusion, several aspects of a timeshare resort’s attributes should be carefully reviewed and weighed before a decision is made to acquire a timeshare interest. One very material aspect, and one that doesn’t get a lot of attention during the purchase process, is the issue of rising maintenance fees, particularly since this annual obligation never goes away, even after the acquisition cost is completely retired.
Significant maintenance costs issues to consider include the longevity of such costs, their tendency to rise at rates greater than inflation, and the ability of the developer – via the control of the management company – to continue to operate the resort per its own directives without much interference from the resort’s “actual owners”.
Michael D. Finn, Esq.