Tuesday, September 23, 2014
   
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Equity Destination Clubs

The term equity destination club is used by a variety of clubs to describe their structure, but the use of the word "equity" means somewhat different things to different clubs. This article explains these different meanings and reviews some of the leading equity clubs.

Equity Estates Deer Valley
Equity Estates Deer Valley
This article includes coverage of some of the legal and technical structures of these clubs - since we feel that once you start throwing "equity" into the conversation it's good to know what this really means.

Overall the key things about equity clubs is that as a member of an equity destination club you have ownership of the company that owns the homes. In non-equity clubs you have the right to use the clubs homes, but you don't have any ownership stake in the homes.

Regardless of the club structure your main consideration in joining a club is to look at it as a "Lifestyle Investment". Membership should provide you with some truly memorable, relaxing and enjoyable family vacations. These vacations are easy for you the member to set up, because the club does all the work. The equity structure is the icing on the cake, which can provide potential upside from appreciation of the real estate portfolio.

Being member owned, equity clubs also tend to have high levels of financial transparency including sharing full financials with their members, having annual audits, performing regular valuations and having either no debt or having covenants on the maximum amount of debt that can be raised. They are also very often transparent on the uses of members initial membership fees and annual dues. The non-equity clubs may also provide a good degree of transparency and those that are members of the Destination Club Association (DCA) have to comply with the DCA Code of Conduct including disclosure requirements.

The major difference between various equity clubs is their legal structure, some are structured as for profit entities and some are non-profit. The for profit companies can market themselves as investments, but then come under Securities and Exchange Commission regulations which means that they can only talk to people who have confirmed they are accredited investors.

A common structure amongst equity clubs is to have two companies/partnerships or other legal entities. One company that owns the homes and which is the entity that members join and own. The second legal entity is the management company that runs the club, provides all the club services and maintains the homes, and is owned by the club founders.

Here is a run down on some of the leading equity destination clubs:

Equity Estates

This Atlanta run club has a strong investment angle since it plans to sell the club homes beginning in November 2021 and distribute the proceeds to members. In the meantime the members get to use these vacation homes that they have invested in. The overall idea is that the diversification of well chosen locations will produce a good return to members, and the longer term plan is to have follow on funds run by the same group.

The way the fund works, 80% of members capital contributions are placed into a real estate acquisition account and deployed into real estate. The remaining 20% of capital contributions establish an operating account at the fund level to pay for sales, marketing, legal and other fund-related expenses.

The owner members buy into Equity Estates Fund I, LLC which is a Georgia Limited Liability Corporation that owns all the club homes. Fund I launched at the end of 2006 and now has 55 members and 7 homes with an average value of about $3m. Members may have either a half or a full interest share.

At the fund liquidation each owner member is paid back first 100% of what they paid (their capital contribution rate) and then 80% of all appreciation thereafter. Members can also sell their membership interest on a 1 in 1 out basis after their first 24 months of membership.

The LLC company that owns all the homes has zero debt on the residences at this time. The clubs operating agreement allows for the company to have a maximum of up to 30% debt to equity ratio.

Abercrombie & Kent Residence Club

The members of A&K are also 100% owners of Abercrombie & Kent Residence Club, Inc. which is a Delaware non-stock, non profit corporation. The luxury travel company Abercrombie & Kent is the clubs manager through a sister company, the Abercrombie & Kent Management Company. This management company is responsible for expanding the Club and its property portfolio, providing services and support to Members and managing and maintaining the Club's assets. The Residence Club owns all its homes debt free.

While the club emphasizes that it is not a financial investment - there is the possibility of getting back more money than your initial membership fee. If you leave the club after more than 5 years of membership. you will receive 80% of the then current membership fee (within five years this is capped at 100% of your initial membership fee). As we reported last month, A and K Residence Club is also setting out to be very financially transparent to its members.

The club currently has 18 homes with an average value of $3m.

Botiga Private Retreats

Members in Botiga own shares in a Jersey (Channel Islands) registered company called Botiga Investments Limited. This company owns the clubs portfolio of homes.

The share price is set quarterly by the club, underpinned by demand and the net asset value of the property portfolio. When a member leaves the club the shares are sold at the then market value and the (ex-)member receives 90% of any capital appreciation on leaving the club. For example, if a member paid €550k when they joined and when they resigned their shares were worth‚ €950k they would take away €910k.

Botiga will typically carry debt of no more than 60% loan to value on purchase, reducing over the whole portfolio to approximately 15% over four years.

This European based club is currently in its launch phase and has about 30 members.

M Private Residences

The members of M Private Residences are also the owners of M Private Residences Inc, a Canadian non-profit corporation that owns all the M Private homes.

The club only uses debt funding to purchase new residences in advance of new Member sales, and is currently at a loan to asset value of about 15% overall, and by covenant in its member agreements, it cannot go higher than 25%.

Teger Resorts Inc. ("Teger") is the management company that provides all of the services required to operate the real estate company, including property selection, property development, sales, marketing and G & A.

M Private Residences Inc. has a Board of Directors comprised of five members. The Board consists of three designates from Teger Resorts Inc. and two Members from M Private Residences Inc. whom are elected at M's Annual Meeting.

The clubs 145 members can enjoy 17 residences in the US, Canada, France and the Caribbean.

The Hideaways Club

This European focused club launched in 2007 and now has 16 homes for its investor members.

These members hold shares in a Gibraltar based property company, which is the owner of the clubs homes. Should they resign from the club members receive their initial investment plus 80% of the increase in value of the share price between joining and leaving.

Rocksure Property Bravo Fund

The Bravo Fund follows on the successful launch and completion of the Alpha fund. Each fund buys 6 houses around the world for the fund members. The Alpha fund is fully operational and the Bravo fund has just achieved its initial closing amount (£3.8m , $6.6m) and is starting to buy its first two homes.

Each fund has an 8 year lifespan and at the end of this time the homes are sold and the proceeds distributed amongst the investor members.

Everlands Life

New club Everlands is owned entirely by its members, who own a pro rata equity interest in the club membership corporation. The club is recruiting its initial members and emphasizes "stewardship through ownership".

With a large focus on conservation, outdoors and nature, the club aims to own 40 estates around the world, with the principal accommodation being boutique lodges and hotels.

The 40+ current members enjoy 7 estates in New Zealand, England and the US.



With vacation home prices lower than they've been in some time, there's an argument to be made that now is a great time to join a club and the wide variation in destinations provides a good portfolio diversification.

If you're looking to join a brand new equity club, particularly one that is just getting going, make sure that any funds you contribute go into an escrow account and are held there until the club reaches a pre-determined critical mass of investor/members that will allow it to buy its first houses.

For a full list of destination clubs see the chart compare destination clubs.


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