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From Clubs to Condos, Choosing the Right Vacation Home

There is no way to spoil a pristine Caribbean afternoon more completely than by thinking about real estate. As I sat with my wife contemplating an azure sea beneath a cerulean sky, I somehow felt we were missing our last best chance to own a piece of paradise. That angst led us away from the beach and to a tour of a beautiful resort development offering condominium hotel units and villas at prices equal to Park Avenue, Mayfair, or the Seventh Arrondissement. The fantasy of owning a vacation home is virtually irresistible—a reverie of peaceful nights spent dozing to the lapping of waves, a sound that mutes the cold reality of needing windows strong enough to meet the post-Katrina building code and withstand 150-mile-per-hour winds.

The decision to buy or not to buy a secondary home comes down to convenience and finance. Stressed-out urbanites need a nearby weekend country house escape, while third and fourth homes are generally the province of the ultrawealthy or a means of rental income. When we toured the 2,500-square-foot, three-bedroom beachfront villa on Anguilla, it captured all our wishes: room for the kids, a stunning resort and golf course, and free­dom from the hassles of ownership—something our country prop­erty in Bedford has made relentlessly clear. We could rent it out when we were not there, and a five-star hotel company would maintain and service it. All it required was money, a whole lot of money. We put down a deposit.

Back in the wintry chill of Manhattan, a far more sober process took over. An attorney was procured, paperwork exchanged, and the real research and soul-searching began. It seems I’m a slacker with a lot of free time and a single-digit handicap, likely to feel the call of the condo whenever it was not leased out. My wife, on the other hand, takes great joy in seeing new places on the tight schedule her work entails. She also understands the dam­age repeated sun exposure does to the skin at the microcellular level. The kids have circumscribed school vacations, which means we’d be eating up those premium holiday weeks ourselves. Tension began to emerge like a gypsy moth from its pupa. For the price of the unit to make any sense, it had to be rented more than 70 per­cent of the time that we weren’t visiting, after deducting the 50 percent of rental income we’d be required to pay the manager. Our dream started to fade. My investigation also discovered the possibility of thousands of additional rooms planned for our tiny, peaceful isle. Lights out.

It seemed there must be some better approach than a ruin­ously expensive and all too often disappointing suite at a luxu­rious but ultimately impersonal hotel. I dug deeper and uncovered more options than I expected. The old chestnut that they ain’t makin’ any more real estate is, landfills aside, true. But, as I soon dis­covered, they sure can slice up what’s already there. The concept of partial ownership has spread from jets to yachts to houses (are kids next?), and I decided to examine all the alter­natives.

Condo Hotels

The island project introduced me to the world of condo hotels. You buy a unit and the management rents it out when you don’t want to use it. Essentially, the buyer takes on the risks of home ownership together with the vagaries of the hospitality industry. As a commercial real estate finance veteran, I find that discussing the boring details such as Revpar or goppar is familiar but a real mood killer. Hotels sell a lot of food, beverages, activities, and services to guests—revenue that makes them profitable and which they do not share with condo-unit owners. Effectively, the hotel operator has you as the ideal financial partner: You’re on the hook for all the expenses but only share in roughly half the revenue from the room and none from the extras.

The numbers can sour fast with a bad season, a storm, or a soupçon of global financial crisis. Decor is also an issue. You generally have to take one of the hotel’s packaged looks, and wear and tear means more upkeep. You get the amenities and reservation system of a five-star resort or boutique chain (St. Regis, Raffles, Four Seasons, Man­darin Oriental, Kor, and even Canyon Ranch) along with its economy of scale in operating expenses.

Reselling condo hotel units is a largely untested mar­ket, and developers must be careful about discussing the investment and income aspects of their properties lest they run afoul of securities laws. One example: Prices of condo hotel units in Las Vegas, which have soared in recent years, are softening, with some units being offered at well below preconstruction highs. Several projects have even been cut back or canceled. But it’s hard to say how much of that is due to the nature of the product, worries about occupancy rates, or more stringent financing requirements in the middle of a real estate downturn and credit crunch.

Residence Clubs

Moving along, I investigated residence clubs, which fractionate everything. They subdivide both your use of the property and your exposure to operating costs and market risk. The Ritz-Carlton Club in Jupiter, Florida, for example, will give you several weeks of access to a comfortable golf villa, a great Nicklaus course, and a luxurious clubhouse. In some residences you can even pay a premium to reserve certain holiday weeks every year (whereas most clubs rotate holidays among the owners).

Clubs managed by large operators—such as the Ritz-Carlton, Mandarin Oriental, St. Regis, or Four Seasons—may offer an exchange program with their other locations or allow you to give your time to family or friends. Companies have even sprung up that trade and barter fractional time and other travel services (theregistrycollection.com is among the largest). If you are in love with a specific spot and its scheduling options work for you, fractionals make a lot of sense, provided you understand that selling your share can be a lengthy process. You may find your­self competing with the developer’s unsold inventory in a search for someone who had exactly the same dream you did, just a little later.

Destination Clubs

Finally, I looked into destination clubs, the option that best approximates "virtual" second-home owner­ship. You don’t actually own any real estate and you never have to hear a repairman say "The oil leak ran down the water supply pipe into the well." The club owns and runs every­thing and makes any one of hundreds of residences yours for a week or two at a time. The industry leaders are Exclusive Resorts, Quin­tess, Ultimate Resort and Private Escapes, and Solstice. I set out to visit various clubs’ residences wherever my travels took me.

In Miami and at resort, beach, golf, or ski destinations, the homes I saw were grander than even a top hotel suite, with cozier appointments, though the locations were often just a click off the premier spot. The clubs stress the entire "experience," and their host staffers were generally bright and energetic young people who could cover the basics, particularly within the more circumscribed options of a resort.

In more sophisticated and challenging settings, I was less impressed. For instance, the locations and accom­modations at the residences I saw in New York were not truly high-end—I would never recommend Times Square or the Midtown bus­iness district as a base for a friend’s family, and the hotel suites on Central Park are just that, suites. In Paris the apartments felt on the small side but were serviceable and in quieter spots. The hosts in both cities seemed an odd mix—in New York a former garment worker from the outer boroughs, in Paris an engaging Irish lad at one residence and, at another, a lovely young lady from the French countryside who could not point me to the nearest metro station. These were not worldly hotel concierges with deep connections but competent helpmeets eager to satisfy.

Understanding that urban environments are not the signature product for destination clubs, I examined their procedures. They operate like luxury golf clubs: The mostly refundable membership deposit gets you in, and your annual dues cover the basic costs. Depending on your membership level, you can generally get one major holiday each year on a rotating basis booked from six months to two years in advance and nonholiday reservations in less time. So don’t count on using a club to go to Aspen every spring break. More optimistically, as a Quintess spokesman put it, if a popular spot is fully booked, "we can usually reserve another ski destination like Beaver Creek or Steamboat." Time slots can generally be given as gifts to family members. Past issues in the industry have led to clubs’ opening their financial statements, instituting more conservative policies, and securing deposit refund guarantees with real assets and less debt. After taking a long, hard look at the key numbers—occupancy rates and total contract nights per home—I concluded that destination clubs make a lot of sense for people willing to be flexible as to where and when they go and for those drawn to sports or activity resorts. The larger accommodations also make them attractive and highly cost-effective for groups. For us, one of the high-end clubs could make a lot of sense once our kids are out of school.

These evolving real estate models ultimately offer reasonable alternatives to multiple home ownership. If one fits your space needs, dream destinations, and schedule—particularly one of the luxury hotel chain affiliates or the larger destination clubs—do some due diligence. While nothing is perfect, owning a slice of heaven might be better than the whole thing after all.

Mike Offit spent more than two decades on Wall Street, during which he was head commercial mortgage trader at Gold­man Sachs.

What It Costs: Membership Tiers at Four Top Destination Clubs

Highest Membership Deposit

Exclusive Resorts $459,000

Ultimate Resort and Private Escapes $375,000

Quintess $830,000

Solstice $1,750,000

Maximum Contract Days

Exclusive Resorts 45

Ultimate Resort and Private Escapes Unlimited

Quintess 60

Solstice 56+

Highest Annual Dues/Per Night

Exclusive Resorts $34,900/$775

Ultimate Resort and Private Escapes $32,500

Quintess $62,500/$1,041

Solstice $68,000

Total Members

Exclusive Resorts 3,000+

Ultimate Resort and Private Escapes 1,200

Quintess 400+

Solstice 80+

Properties/Destinations

Exclusive Resorts 350/40

Ultimate Resort and Private Escapes 140/42

Quintess 70/30

Solstice 13/9

2006 Total Occupancy

Exclusive Resorts 67%

Ultimate Resort and Private Escapes 48%

Quintess 69%

Solstice 42%

2006 Occupied Nights per Home

Exclusive Resorts n/a

Ultimate Resort and Private Escapes n/a

Quintess 190

Solstice 65

Deposit Refund

Exclusive Resorts 80%

Ultimate Resort and Private Escapes 80%–100%

Quintess 80%–100%

Solstice 80% of market or 100%

What Your $ Gets You

Condo Hotels

Use of one location as many nights as you want (subject to local zoning laws), when you want

The ability to rent out your unit and keep approximately 50 percent of the revenue

Luxury hotel services and amenities

Exposure to the real estate and hotel markets

Little or no say in decor if in rental pool

Units range from a hotel room to a three-plus-bedroom villa, with prices from $250,000 to up-wards of $5 million. Carrying costs are $10,000 to $20,000 per bedroom plus any mortgage.

Residence Clubs

A defined number of weeks each year at one location, with holidays allocated by lottery and/or rotation, though some clubs will sell specific weeks

You may be able to give your time to family or friends, but most upscale clubs limit renting.

Concierge-type services and clubhouse facilities (hotel services and amenities available at different locations)

Exposure to the real estate market and the costs of maintaining the facilities; little or no say in the decor

Purchase prices range from about $10,000 to over $100,000 per week. Carrying costs are roughly $500 to $2,000 a bedroom per week, plus any loan payments. (You may be able to trade time through the manager or independent Web sites.)

Destination Clubs

From 30 to 60 nights per year at any one of up to 300-plus properties in more than 40 locations

Holidays generally allocated by date rotation and destination lottery

In most cases your nights may be given to family or friends.

Travel and concierge services

No exposure to the real estate market

Members’ feedback is often taken into account when decor decisions are made.

Deposit prices for the highest membership tier range from $459,000 to $1.75 million. Carrying costs run $32,500 to $68,000 per year.