Financing, Then & Now

While the subject of this article is “Financing, Then and Now,” the underlying reasons this topic is so important to timeshare companies that remain the same today as they did 40 years ago. Those reasons are 1) the need to facilitate sales, and (2) the need for positive cash flow. However, the types, availability, and complexities of the financing involved have changed over the years.

As an aside, I am surprised it has been almost forty (40!?) years since I initially became involved in financing timeshare organizations, but I am fortunate to have experienced a great ride – so far.

Axiom #1: “Getting old is like climbing a mountain; you get a little out of breath, but the view is much better!” Ingrid Bergman

I will start with a brief discussion of the financings offered to the consumer at the point of sale (“Purchase Money Financings”). As with any product that involves thousands of dollars in purchase money, addressing a monthly payment to close a sale/purchase presents a more affordable option than requiring payment-in-full at the point of sale.

Axiom #2: “A rich man is one who isn’t afraid to ask the salesperson to show him something cheaper.” Jack Benny

Forty years ago, there were not a lot of options available, if any, either to a timeshare consumer or seller, for Purchase Money Financing. Hence, the developer of the timeshare offered “carry back” financing to the consumer, pursuant to which the developer “carried back” either title (via a Contract for Deed), or a legal encumbrance against title (via a note and mortgage). These financings tend to call for a relatively high rate of interest, which can and do generate a profit stream for the seller. Also, forty years ago, the product sold generally was a legal interest in real estate, whereas today the product sold/purchased is likely to be a right to use real estate, which adds considerable nuance, but is beyond the scope of this article.

Related: The 2024 World of Finance

Side story:

I remember debating, with the Chief Credit Officer of the lender I worked for in the late 1980’s and 1990’s, the creditworthiness of a “right-to-use” product and its developer. I lost that debate, and the lender turned down the transaction primarily because it deemed this “right to use” concept too risky. Ironically, years later a company I worked for had acquired that same brand, and my teams and I successfully originated, sold into the capital markets, serviced, and fully repaid billions of dollars of debt on that very product and brand!

Axiom #3: “One man’s trash is another man’s treasure!” Author unknown but attributed to Ferdinand August Bebel.

Today, there are consumer lenders who will offer Purchase Money Financing to well-qualified consumers purchasing products from a timeshare developer. In fact, when I was leading a captive finance business for a major brand, we often competed against the very lenders we brought into the process to provide Purchase Money Financings to these consumers!

Axiom #4: “Be careful what you wish for, lest it come true! Aesop’s Fables

That prompts the question, “why would you bring into the buying process a third-party that could disrupt your own profitable lending offerings?” The answer to that has to do with cash flow.

Axiom #5: “Revenue is vanity, profit is sanity, but cash is king.”

Author Unknown but attributed to former Volvo CEO Pehr G. Gyllenhammar

Perhaps you were aware of this axiom before the capital markets meltdown of 2008. If so, kudos to you! Regardless, assuming you then were working in a chosen profession, I am willing to bet you have a story or three about how this “cash is king” principle applied to your business in 2008 (and beyond).

To bring this concept to life, I have regularly facilitated audience-participation “monopoly money” sessions that highlight the importance of the alignment between (1) cash flows, revenue, and “profit” and (2) Purchase Money Financings for timeshare companies. The purpose of these sessions is to help the participants see, in a fun and interactive session, the importance of a timeshare company’s ability to monetize standard Purchase Money Financings. This monetization is necessary to cover upfront expenses associated with the timeshare product and its sale.

Expenses spent at or before the sale of a timeshare to a consumer include costs related to product development (typically ~20% of revenue) and sales & marketing (collectively, typically ~50% of revenue). Excluding other up-front expenses (e.g., general & administrative operational costs), a timeshare company, therefore, typically spends ~70% of the revenue it recognizes on the sale of its product at or before it receives cash from the sale. If that sale is facilitated by the origination of a standard Purchase Money Financing offered from the developer (e.g., 10% down on a 15-year fixed rate fully amortizing loan), only 10% of the revenue recognized from the sale is received in cash at the point of sale. Hence, the developer is “out-of-pocket” a net of negative sixty cents on the dollar. By way of example, $20,000 in revenue recognized on a developer-financed sale would result in negative cash flow of $12,000 ($14,000 of “up front” expense for product cost and sales & marketing expense, less a $2000 down payment received at the point of sale).

As a result, the ability to monetize these financings was – and remains – critical to generating positive cash flow.

Forty years ago, this monetization was achieved primarily through hypothecation loans to the developer, most of which were provided by one or two niche commercial lenders. Today, that market is more disparate and, with the consolidation occurring in timeshare, much more of the industry’s commercial financing is done via asset backed securitizations, rather than traditional hypothecation lending programs. In addition to off-balance sheet benefits associated with these transactions, the interest rate paid to investors in such transactions typically is quite a bit less than the rate a developer would need to pay a traditional hypothecation lender.

While today’s investors in the esoteric asset backed securitization market are very receptive to timeshare developer-originated Purchase Money Financings, the cost of originating a securitization backed by Purchase Money Financings is considerable and necessitate scale to offset the upfront expense. In my experience, that scale needs to be north of $100Million.

Axiom #6: “Money often costs too much.” Ralph Waldo Emerson

Regardless of the methods by which these Purchase Money Financings are originated, the need to monetize them remains critical to cash flow and, to many developers, the origination of these Purchase Money Financings remains a preferred means to facilitate sales that drive revenue and generate profits (via interest income).

However, the options available to successful developers today are more robust than those available 40 years ago, both with respect to the origination of Purchase Money Financings and with respect to the monetization of them.

In sum, I close with Axiom #7 from the leader of a former employer:

“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” Jack Welch, Former General Electric CEO, author, and chemical engineer.

Arguably, today’s “best” organizations continue to successfully focus on these three things!

EmJay Advisors Principal Mark A. Johnson is available at mark@emjayadvisors.com and welcomes the opportunity to discuss his services, which include coaching, team development, process improvement, execution, strategy, and planning.

Author

Before serving clients as a business consultant, coach, and Trusted Advisors affiliate, Mark served top-tier public and private institutions as CEO, President, EVP, Chief Customer Officer, and Attorney. He has led and served global operations in various sectors, including tech-enabled services, hospitality, sustainability, leisure travel, captive finance, credit & collections, niche finance, real estate, and legal services. He also serves several organizations as a board member.

Mark began his career practicing law in Phoenix, AZ before moving into leadership roles with FINOVA Capital, GE Capital, Wyndham Worldwide, and Concord Servicing. He holds a Bachelor of Science Degree from the University of Nebraska – Kearney, a Juris Doctorate Degree from the University of Nebraska – Lincoln, has completed Select Executive Education Programs at the Wharton School of Business (University of Pennsylvania), the Columbia University Graduate School of Business, the GE Crotonville (New York) Executive Learning Center, and the University of Arizona – Karl Eller School of Business. Mark is trained in both Six Sigma & Lean, and is certified as an Executive Blackbelt in these process improvement skills.

In addition to their current home state of Arizona (Scottsdale and Flagstaff), Mark and his wife of over 40 years feel fortunate to have called Lincoln, NE, Phoenix, AZ, Las Vegas, NV, and Orlando, FL “home.”