Resort Financing for Re-Purposing Transactions
There’s been a lot of talks lately about legacy resorts and the need to re-purpose those projects that have reached the end of their useful lives as timeshare properties. It was the hot topic at the 2021 ARDA Conference, with several companies in the process of converting old timeshare projects into apartments, hotels, whole unit condominiums, or mixed-use properties. What makes re-purposing timeshare resorts different from new development projects is that nearly every conversion has its own nuances. Location, ownership format, legal structure, the condition of the Homeowners’ Association, and other variables make each process unique.
Most re-purposing projects are initiated because the HOA is struggling financially. That leads to a conundrum since that badly strapped organization must come up with the funds to cover ongoing operating costs, legal expenses, renovation costs, and all other expenses associated with the conversion.
Some conversions have been financed by special assessments and others by equity investors, who put up all the money in return for a sizable share of the end proceeds. To this point, there has been precious little interest in re-purposing projects from the lending community.
As an independent finance company, Colebrook can pivot more quickly than large institutions. We were an early lender to points-based clubs and timeshare travel clubs; we lend to HOAs and on the security of resort management contracts, and we’re always trying to keep up with changes in the timeshare industry. Re-purposing is the most significant new change, and we’ve started making loans to companies engaged in the process of transforming older resorts.
Financing Must Fit The Situation
Since no two transactions are alike, the financing varies to conform to the situation. The borrower is typically a company that has re-purposing experience and knows the drill. Underwriting involves measuring the degree of difficulty in creating the new product and the eventual marketability of that product. If there are no insurmountable title problems and we’re dealing with prime waterfront property, the odds of success are very good. Deficiencies in property conditions can be rectified, but location cannot. The ability to obtain a marketable, insurable title is usually a function of structure and the state laws governing the process.
If the project appears to be viable, the next step is to determine how much money is needed and what collateral is available. If the borrower has traditional collateral from another source, the process is relatively easy, and terms will probably be favorable. If the collateral is related to the conversion, it’s more complicated because the form of the collateral is in transition. While the end product may be individual condominiums, an apartment building, or a hotel, that’s usually not the form the collateral is in when the initial funds are advanced; at that point, the collateral probably consists of a lot of timeshare intervals owned by the HOA, individuals, or a developer. A lender can take a security interest in the individual intervals, but in that fragmented state, they probably aren’t worth much. The decision, and it’s very subjective, is how much money should be advanced and how long can one wait before the collateral assumes marketable form? When will the checkerboard of intervals begin to morph into whole units?
Title Companies Play a Key Role in Timeshare Industry Trends
The title company is a key player in any re-purposing project. If the ultimate goal is to sell the property, either in total or as individual condominium units, title to the eventual purchaser must be insurable. The borrower, lender, and title company should have a good advanced understanding as to what will be required to make the title insurable. Virtually every legacy property has title issues buried somewhere, and the requirements to clean them up must be identified, along with the timeframe and cost to do so.
Then comes the time-consuming, detail-oriented process of acquiring title from hundreds or thousands of timeshare owners, some of whom are dead, missing in action, suspicious, or sense a reward if they hold out. The carrot and stick that often motivate owners to sign are the promises of a share of the ultimate sales proceeds if the process is successful and the threat of a large special assessment if nothing is done.
There isn’t usually any mortgage debt associated with legacy timeshare properties, and the upside of most re-purposing projects is that the ultimate sales proceeds, less the costs associated with the process, should be sufficient to pay the lender, compensate the facilitator for its efforts, and provide a distribution to timeshare owners in good standing. Since the costs of the transaction are nowhere near the cost of constructing a new project, the loan to the “as-completed” value ratio should be relatively low, generally less than 50% and sometimes much lower. The conservative loan to value is what makes this type of financing viable since it allows for blips in the process—and there will be blips in such a complex, detail-laden process. The lender’s risk is that they won’t wind up with the end product that gives them that low loan-to-value ratio but with a hodgepodge of timeshare intervals plagued with title problems.
Re-purposing Timeshare Resorts… a Risky Proposition
If you think direct lending for a re-purposing project is a risky proposition, you’re correct, which is why it’s priced higher than mainstream product types, often with an equity kicker of some type.
Every product has a life cycle. During the initial, experimental stage, lending is risky, the structure is cautious, and yields are higher than for proven loan types. Over time, people learn how to smooth some of the risk-off the process, and lenders become more comfortable making loans. With each re-purpose loan, we learn something new, refine the lending process a bit, and get a little more excited about the potential of this emerging market.
Bill Ryczek is a principal of Colebrook Financial Company, based in Middletown, CT.
