The Legacy Conundrum: Fiduciary Responsibility And Alternatives For Distressed Resort Owners

For the past decade the timeshare industry has experienced mounting financial pressure stemming from alternative vacation options, underfunded reserves, poor management and ever increasing delinquency rates. The result has been higher assessments to offset the non-payers, which have effectively priced intervals out of the marketplace. This, combined with the coinciding economic depression, has created a veritable vortex of financial misery for many timeshare resorts, and consequently, their members.

While the majority of timeshare resorts may be fiscally solvent and perhaps even thriving, what about those that are not? Who is capable of providing the solution? To address these issues, it is critical to examine a central key to a resort timeshare program – the vitality of the owner base. An engaged and interested membership creates demand, which in turn creates value. Value is demonstrated by the willingness to pay assessments that in turn support continued maintenance, upkeep, aesthetic appeal, salability and the sustainability of the resort.

Conversely, a disinterested membership often times results in the diminishment of value, demonstrated by the unwillingness to pay assessments, which in turn results in abbreviated maintenance, shoddy upkeep, aesthetic deterioration, unsalabilty, and ultimately, extinction.

The simple fact is that despite best efforts, some business models are destined for sustained success while others fail: Dodge is in its 100th year of production while Pontiac is but a nostalgic footnote to motorcar lore; Monopoly continues to be the best selling board game while The Game of Life is passe; and when was the last time anyone purchased Vicks Vapo Rub? The inexorable truth is that in many cases, today’s “must haves” become tomorrow’s yawn. So too with the various interval options in the timeshare realm.

This does not insinuate that timesharing is passe, but rather that the timeshare model is composed of various classes and sub-species. As Mr. Darwin pointed out in The Origin of Species, in nature certain species within a class are destined to prevail while others are destined to fail. So too within the timeshare industry. The deciding factors appear to be the basis upon which the resort was predicated and marketed. For example, if a resort was established and espoused in conjunction with a “timeless” geographical feature chances are it will continue to curry favor, i.e., an oceanfront resort. Conversely, if a resort was established and marketed upon a “timely” concept or dynamic such as Atlantic City casinos, its fortunes will invariably rise or fall based upon the longevity of the concept or novelty, and as all novelties tend to fade, so too does the resort upon which it was founded. Clearly then, as interest fades, so does demand and as demand fades, so goes value. For owners, an erstwhile asset falls out of luster, demand decreases and value is lost. After all, isn’t “value” what drove the owner to purchase in the first place? Value in terms of return on investment? Value in terms of memories shared and the conviviality of family and friends? Value in terms of a “legacy” to be left to the next generation? Simply put, the idea was investment and preservation of value, whatever that might mean to any given owner.

The timeshare business model created upon sustainable features will invariably continue to foster and maintain value. But what is to become of the less fit models, those created upon a concept or dynamic not suited to maintain demand and hence value into the future? What of the model that, although created upon sound principles and fundamental precepts of demand, has been mismanaged into virtual oblivion? What recourse do those owners have to maintain value and who is vested with the responsibility and fiduciary obligation to address their need? Even more importantly, is there a viable alternative for failing timeshare resorts which will enable owners to harvest value and preserve a true legacy? The answers are relatively simple and straightforward. The essential fortitude to recognize them and to follow through with their mandates are quite the opposite.

First, the answer is not to euphemistically brand a doomed resort as “legacy”. While on its face the terms sounds benevolent and somewhat comforting, in actuality it may be nothing more than the rebranding of a doomed species. By definition a legacy is “something transmitted by or received from an ancestor or predecessor or from the past”. It certainly does not denote value, as evidenced by the fact that your will may provide for a legacy to your children of a failing timeshare interval, which will obligate them to pay hundreds of dollars a month in maintenance fees versus an assortment of stocks and bonds. The somewhat rhetorical question becomes “what would you rather have?”

But here is the rub, while you can direct your financial advisor to buy, sell or hold an investment in order to provide meaningful value for yourself, or a meaningful legacy for your heirs, what can you do to maintain the value of your timeshare investment? As one of perhaps thousands of interval owners within a failing resort, your chances of individually and effectively controlling your investment destiny is minimal. But if not you, then who?

Simply put, the answer and the future direction of any timeshare resort lies within the fiduciary jurisdiction of its board of directors. Whether you are dealing with a developer-controlled board or a fully transitioned owner filled board- the board of directors has a fiduciary responsibility to each of its owners to maintain, if not increase, investment value.

Currently, and as part of that fiduciary responsibility, each board is charged with objectively evaluating the business model over which it presides. The board needs to evaluate the resort’s strengths, weaknesses and long term viability. Was it conceived and marketed based upon timeless features and managed efficiently and effectively so as to curry favor for generations to come? Or was it based upon concepts and fads destined to fade over time? Is the current aesthetic environ such that it can be maintained and rehabilitated? Is the assessment delinquency rate so high as to make capital infusion prohibitive, if not impossible? Do the members have a viable resale market that realizes true value and if so, how long will that market last? Is the resort confronted with “pump and dump” companies, who, for a fee, are taking title to your owners’ intervals so they can avoid the albatross of ongoing assessments?

If the majority of these questions result in answers that negatively affect the ownership base, then the board has a fiduciary responsibility to seek a better course. But what exactly are the options?

Clearly the first option is to ensure that a proper system of management and fiscal oversight is in place, including an efficient collection team. But with the advent of deeded interests and out of state owners, the costs of collection and foreclosure are exceedingly high, and very time consuming. Moreover, if the association does foreclose on an interval and take title, the issues belying the original default will clearly make resale most difficult and therefore, simply remove the interval from income productivity. Furthermore, if the resort is of the concept or dynamic model with little or no interval value, the current owner base will continue to erode and value will not be maintained, and certainly not increased.

In some cases, a board may determine that the useful life of its resort has come to an end. To preserve value for their constituents, it may be necessary to reposition the resort to realize the highest and best use of the real estate and maximize return of value for the owners.

One method to accomplish this is through bankruptcy, where units are sold, debt paid and net dollars distributed to the owners. The real world problem with this is some forward thinking boards may not have resorts which are eligible for bankruptcy, notwithstanding the fact that it may become inevitable in the future. More importantly, filing bankruptcy relieves the board of any further control and places all decision making powers with the bankruptcy trustee, who is legally charged with the duty to pay creditors and not to maximize value for the owners.

A second option, which has been successful in a number of scenarios, is the consolidation of units into whole ownership. Here the familiar maxim, the whole is greater than the sum of its parts, may ring true. The parts, being the timeshare intervals, have historically experienced a very limited resale market with little to no resale value. While in the alternative, the whole, a consolidated wholly-owned condominium or townhouse, may enjoy high demand at market prices, for use as a vacation home, investment property or starter home. Consolidations are effectuated through local and or state courts, which are in most cases best suited to deal with the local and state laws under which the timeshare resort was created. Furthermore, the local constabulary in most cases is well aware of the local plight and has a sincere desire to aid in the situational remedy, as opposed to federal bankruptcy courts, which are often times geographically removed and therefore unfamiliar with the resort in question.

Consolidation and resale, completed under board supervision and control, can result in efficient liquidation of the units with significant return of value to the owners. A judicially supervised process provides due process for all the owners and helps ensure the maximization of return on investment. In many cases it is the best alternative to fulfill the board’s fiduciary obligations and maximize the true legacy to its owners.