Timeshares: History, Project Structuring and Types of Plans

By Arthur O. Spaulding Jr., Karen D. Dennison, and Robert S. Freedman

Arthur O. Spaulding Jr. is a partner at Cox Castle Nicholson in San Francisco, California. Karen D. Dennison is a former partner at Holland & Hart LLP, now retired, residing in Incline Village, Nevada. Robert S. Freedman is a partner at Carlton Fields, P.A. in Tampa, Florida, and is the Section’s Real Property Division vice chair.

This article provides a brief history of timeshares, discusses considerations in timeshare project structuring, and identifies various types of timeshare plans.

History

Timesharing, as a concept, was conceived in Europe in the 1960s. There, it was originally presented as a contractual lodging arrangement featuring the right to make reservations in multiple properties owned by the offeror or even by third parties. Ironically, viewed with hindsight, that lodging concept looks surprisingly like vacation clubs, the new poster-child of the timeshare industry.

Timesharing first appeared in the United States in the mid to late 1970s. In its early iterations, many timeshare projects were failed condominiums. Developers of such projects saw timesharing as a panacea for their woes. These timeshare offerings involved a fixed-unit, fixed-time format, whereby undivided fractional interests in a condominium were offered to multiple owners at a fraction of the cost of whole ownership and provided an owner the right to occupy his or her unit each year (or every other year), on a recurring basis, during the same time period. In the late 1970s, a Seattle-based company, Vacation Internationale, adopted the European model and created the first US vacation club, selling memberships in the club that carried rights of use and occupancy for lodging accommodations that the company owned or leased. At that time, Vacation Internationale was essentially alone in the use of this model, and its scope was generally confined regionally to the Pacific Northwest.

The first of the two approaches just described is called “deeded ownership” (timeshare estates, where the timeshare interest is coupled with an interest in real estate) and the second is “right to use” (timeshare interests not coupled with an interest in real estate). Historically, in the deeded ownership model, developers and their lawyers relied on traditional notions of real property development and sale, founded on the principle that buyers in this country were more accepting of a product that was, essentially, an interest in land. This deeded ownership was one that:

• could be conveyed by real estate purchase and sales documents,

• could be transferred by deed, and

• could be seller-financed like conventional real estate.

By the early 1980s, transient lodging facilities such as small hotels and motels, and apartment buildings, were being sold on a deeded ownership basis; but, in lieu of undivided 1/51st interests in specified condominiums, the offering might also involve undivided interests in the entirety of a building (known as UDIs). As an example, if a hotel property containing 50 rooms were to be converted to a timeshare on a deeded interest basis using 51 weeks per room, the interests sold would be undivided 1/2550th interests in the whole building, rather than an undivided 1/51st interest in a particular unit, given the potential difficulty of converting a hotel building into a condominium project.

To the extent that there were regulatory issues or concerns, they were issues and concerns with which real estate developers were familiar. As sales of these products took off in the early 1980s, regulators took a significant interest in adapting their real estate laws and regulations to include timeshares as a regulated product. During the 1980s, many states enacted laws specifically addressing the timeshare industry.

For example, in California, timesharing became covered by the Subdivided Lands Law, section 11000 et seq., by passage of chapter 601 of the Statutes of 1980, filed with the Secretary of State on July 17, 1980, effective on January 1, 1981 (the original California Time Share Law), and was implemented by the adoption of regulations of the Real Estate Commissioner.

The Florida legislature enacted the Florida Real Estate Time-Sharing Act, chapter 721 of the Florida Statutes (FS), which became effective as of July 1, 1981, and regulated timeshare plans based in real property. It was substantially amended and expanded as of June 24, 1983, and the Division of Florida Land Sales and Condominiums (now known as the Division of Florida Condominiums, Timeshares and Mobile Homes) (the Florida Division) was granted rule-making authority at that time. Chapter 721 was subsequently amended in 1991 to include timeshare plans based in personal property, such as houseboats or motorhomes, and was renamed the Florida Vacation Plan and Timesharing Act (the Florida Time Share Act).

In 1983, the Nevada legislature enacted chapter 119A of the Nevada Revised Statutes (NRS) governing timeshares (the Nevada Time Share Act), and in the same year the Nevada Real Estate Division enacted regulations implementing the new law.

In the early days of the timeshare industry in the United States, most of the developers of timeshare projects were independent entrepreneurs. It was not until later, in the 1980s, that the success of the product caught the attention of the hotel companies. When those hospitality companies perceived that they could enhance their balance sheets by selling the equivalent of hotel suites “in advance” to up to 50 buyers (or more) per room, the economics of the business persuaded companies like Marriott, Hilton, Hyatt, Wyndham, and Disney to jump into the fray in a major way.

The entry of the hotel companies into the timeshare business coincided with a movement towards the offering of timeshares with more and more flexible features. The fixed-unit, fixed-week product morphed into “floating-unit,” “floating-week” interests.

Another feature of the early time share programs was the inherent limitation of owners having to take a one-week vacation at the same project year after year. The owners were locked into the property in which they owned their deeded interest. To address the potential desire of timeshare owners to vacation in a variety of locations, two companies formed to channel these desires into a business. These were the so-called timeshare exchange companies Resort Condominiums International (RCI) and Interval International (II).

As the timeshare industry matured in the United States during the 1990s, the business began to see consolidation. The major hotel companies came to dominate the landscape, and their products were coupled with their loyalty programs in ways that were unimaginable in the early 1980s. The independent, single-site timeshare developer became the exception rather than the norm. The very presence of the hotel companies as the leaders of the industry lent credence to the timeshare industry like never before. The industry’s trade association, the American Resort Development Association, became a vocal and effective lobbying advocate for the business. The industry had evolved into a three-tiered industry, with the major hotel companies occupying the top tier, timeshare companies unassociated with hotel products but offering multiple resorts occupying the second tier, and “one-off” developers occupying the bottom tier. The resort products involved not only conventional timeshare projects, but also ultra-luxury products, such as the Ritz Carlton Club.

By the end of the 1990s, the perceived demand by the marketplace for more and more flexible products ushered in the “vacation club” era. Companies whose offerings were previously of the deeded ownership variety sought to shift into the offering of non-deeded, right-to-use club memberships, where either the owners’ association owned the real estate used and enjoyed by the members or title to the real estate was held in a trust for the benefit of the owners’ association and the members. Although vacation clubs could be “single site” projects, most of the vacation club programs consisted of multiple locations, and internal exchange mechanisms to allow “members” of the vacation club to reserve units in different locations within the club. Thus, the vacation clubs took on the image of the exchange companies, at least as far as their own resorts were concerned, while still maintaining the affiliation arrangements with an exchange company to allow the members to “exchange” out of their club and into properties operated by another developer or organization. In addition, the hotel companies operating in the timeshare business also made it possible for their club members to “exchange” their timeshare use rights (usually expressed as “points”) into their branded loyalty programs, enabling a member to vacation at a hotel operating within the brand’s system.

Although it is beyond the scope of this article to discuss the monetization of points, this aspect of the timeshare business became significant. Similarly, it is beyond the scope of this article to delve into the complex world of vacation ownership finance. One of the economic lynchpins of the timeshare business model, however, was the extremely profitable nature of the timeshare sale financing. A developer often made more money from the hypothecation of the timeshare notes and purchase contracts than the developer made from the sale of the timeshare interests themselves. In addition, the major timeshare development companies, including both first-tier companies such as the hotel companies, and the larger second-tier companies, found a ready market for the securitization of timeshare paper in the late 1990s and the 2000s up until the Great Recession. The arbitrage involved between the consumer paper interest rates (in the mid-teens) and the end-buyer rates (in the stabilized upper single digits) made for attractive returns to the developer hypothecators.

In recent years, the timeshare industry has continued its path to consolidation. The oversupply of inventory built through the 2000s into the Great Recession, coupled with the limited availability of securitization financing during the Great Recession, caused the major timeshare players to retrench and precipitated the spinoffs of the timeshare divisions of the hotel companies into free-standing entities no longer a part of the operating hotel companies. This was in part the result of the continued demand being made by shareholders in the publicly-traded hotel company sector for earnings and the drag on earnings posed by the continued need by the timeshare companies to invest new capital to create new inventory. To avoid the overcommitment of capital for inventory acquisition, the timeshare companies now prefer arrangements denominated as “fee for services” programs, whereby the timeshare company agrees to license the use of its name to an independent third-party developer or property owner, and to conduct a sales and marketing program for the developer or property owner using inventory owned or built by the third-party developer or owner without ever acquiring that inventory itself. Further, as financing for some timeshare companies dried up after 2008, a number of the second-tier companies were acquired and absorbed by the first-tier companies, leaving the industry dominated by first-tier companies.

Timeshares vs. Fractionals

In the early years of timeshare offerings in the United States, the sales and marketing tactics employed by timeshare sales organizations were consistently condemned as “hard sell.” In truth, there were many sales made by sales representatives that distorted the descriptions of the product through use of misrepresentations and promises that were not performed. These sales abuses led to the regulatory responses in the various states. The state legislatures attempted to rein in the manner in which the product was offered, to insure consumer protections on certain fundamental program components such as completion of construction and release from blanket encumbrances. The timeshare programs most likely to involve hardsell tactics were those involving large numbers of units and, thus, the need to sell thousands of timeshare interests in a single site. For example, if a project contained 100 timeshare units and the timeshare program was designed to create 51 one-week timeshare interests per unit, then the project, if sold out, would have 5,100 timeshare interests. A rule of thumb often quoted during the 1980s was that for every 1,000 pieces of direct mail sent out, the answer rate would be 100 responses. For every 100 responses, there would be 10 project tours; and for every 10 project tours, there would be but a single sale. In a project having 5,100 timeshare interests to be sold, that would translate into 5,100,000 pieces of direct mail. The sales and marketing costs associated with such a program were quite high. In fact, overall sales and marketing costs for a timeshare program might range from a low of 35–40% of gross sales costs for the large branded hotel companies, to upwards of 60% for second- and third-tier companies. Hence, the pressure to close sales on a percentage basis higher than the average drove sales and marketing programs to the higher-pressure tactics. The old adage was that no one awoke in the morning and said: “Today’s the day I’m buying a timeshare!” The sale of a timeshare was, therefore, something that had to be “sold” to a buyer by convincing the buyer that this was a product that the buyer really “had to have,” and more often than not, convincing that buyer to sign a contract became a bit heavy-handed.

One way to reduce the extraordinarily high cost of sales and marketing was to reduce the number of timeshare interests sold and increase the amount of time a timeshare owner could use the units. This involved increasing the size of the fractional interest associated with the timeshare, for example, from a 1/51st interest in a unit to, say, a 1/8th interest, with the 1/8th interest entitling its owner to use six weeks per year instead of a single week. Projects in which the larger fractions were offered came to be known as “fractional” programs. The sale of fractional interests involved sales and marketing costs that were considerably lower than conventional programs, more in the range of 15–20% of gross sales proceeds; however, the cost of the product was commensurately higher, as the size of the units and the luxury levels of the improvements and amenities were generally greater. Accommodations in fractional projects were often two- or three-bedroom units in excess of 1,200 square feet (compared to the standard timeshare unit’s 400–500 square feet), and the price was generally in excess of $500 per square foot. In fact, in the ultra-luxury products, such as those offered for the Ritz Carlton Club, the price might exceed $1,000 per square foot, and those types of fractional interest programs came to be known as “private residence clubs.”

Among the determinative factors in making the decision to structure a project as a fractional program were the existence of high barriers to ownership (extremely high pricing for single-family second homes, for example) and high demand. Studies conducted by Dick Ragatz of Ragatz and Associates showed that most second-home owners actually used their properties relatively few times per year. Therefore, the cost of ownership (both purchase price and annual maintenance costs) was prohibitively expensive relative to the actual use patterns of the owners. There appeared to be a market niche for the more-wealthy vacationers, for whom purchasing a 1/12th fractional interest in a $2,500,000 vacation home for, say, $275,000, with annual dues of $12,000 and four weeks of use, made more sense than buying the whole home. Note that there is a developer mark-up of nearly $70,000 per fraction when the sales prices of the 12 fractional interests are aggregated.

Because the sale of fractional interests might involve pricing of up to $300,000 per fraction (or higher), versus pricing for conventional timeshare interests of about $15,000–$30,000 per week, the sales approach taken by the sales and marketing teams for fractional interests was to attempt to differentiate between timeshares and fractional interests by asserting that fractional interests were somehow not timeshares. But, from a legal perspective, the two products are not different, and except for certain exemptions from registration under some state laws for fractional interests consisting of 1/6th interests or larger, the offering of fractional interests is governed by the same set of statutory and regulatory provisions as those governing timeshares.

Fee vs. Right-to-Use Projects

As mentioned above, in the early days of timeshare in the United States, almost all timeshare projects involved the sale of “timeshare estates,” or timeshare interests coupled with an interest in real property, whether an undivided fee interest in an individual condominium or an undivided interest in a multi-unit property as a whole. The sale of right-to-use timeshare interests was viewed as harder to sell (the sales and marketing emphasis being placed on the tie-back to ownership of real estate, no matter how small the actual deeded interest) versus the sale of a mere contractual right to reserve the use of a unit without owning an interest in the property.

This dichotomy was also further reinforced by the existence of a Technical Advice Memorandum issued by the Internal Revenue Service (TAM 7803005, dated September 30, 1977), which came to be known simply as “Windrifter,” coupled with limitations on the ability to use the installment sale rules under section 453 of the Internal Revenue Code. In essence, the IRS might determine that a right-touse structure constitutes a lease for a term rather than determining that an actual sale of the timeshare interest has occurred, thus adversely affecting the deductibility of project development expenses and the availability of reporting income under the installment sale method. A detailed analysis of these two tax issues is beyond the scope of this article, but it should be pointed out that if a timeshare right-to-use program is not structured initially to address the issues raised in the Windrifter ruling and by I.R.C. section 453, significant negative tax treatment could result.

Fixed-Week and Fixed-Unit Plans. As mentioned above, the early timeshare plans involved relatively inflexible structures, in which a buyer of a timeshare interest acquired a specific week (fixed-week) for use each and every year in a specific unit (fixed-unit). There was no need for a complicated reservation system designed to match inventory to requests for use. When it became clear that the market for the product was increasingly demanding greater flexibility, the next challenge presented was how to sell specified increments of time in specified units while allowing for greater choice of use periods.

Floating-Week, Floating-Unit Plans

1. Deeded Plans. The legal structure used to implement the “float” features often involves using a creative conveyancing technique. The timeshare interest, as a creature of real estate, is conveyed by deed. Instead of conveying an undivided fractional interest (say, an undivided 1/51st tenancy-in-common interest) in a specified condominium for a specified one-week period (say, the seven-day period commencing on a Friday and containing the Fourth of July), the deed for a “floating-week,” “floating-unit” timeshare interest grants a specific fractional interest in a specific condominium as Parcel 1, and then excepts and reserves to the grantor all of the use rights associated with that particular condominium unit. The deed then contains a grant of a Parcel 2, consisting of a right to use and occupy any unit of a certain unit type for a one-week period each year, to be reserved by the timeshare owner in the manner prescribed in rules and regulations adopted by a timeshare owners’ association.

2. Right-to-Use Plans. Generally speaking, right-to-use programs do not contain grants of use rights in specified units (this is not to say that creating specified unit rights is impossible in right-to-use programs). Indeed, deeds are not used for conveyancing at all. The use rights and privileges in rightto-use plans are all creatures of contract, sold as memberships in a nonprofit corporation or as vacation licenses. In the typical right-to-use plan seen in today’s timeshare industry, the real estate is owned by one of three parties: (i) the developer, who grants vacation licenses to timeshare owners; (ii) the association, which issues memberships initially owned and then sold by the developer; or (iii) an institutional trustee for the benefit of the association, the developer, and the timeshare owners as members of the association.

3. Features Found in Both Deeded and Right-to-Use Plans. Both deeded and right-to-use timeshare plans include some or all of the following:

• Seasonality. Use rights may be limited to a specific calendar season, say, ski or summer in a mountain resort, or perhaps a holiday season (including the weeks in which the major holidays occur), or even a racing season (when there is an annual event, such as thoroughbred horse racing or a NASCAR event).

• Annual vs. biennial. Use rights may occur annually or every other year.

• Split weeks. Use rights in a use week may be used in increments at different times, for example, a three-night weekend use period and a four-night mid-week use period.

• Reservation of weeks. In most timeshare plans that have floating use features, there will be a tiered reservation priority procedure, where regular use reservations may be made, for example, during the window commencing one year from the date sought to be reserved and ending 30–45 days out. This window is designed to ensure that each owner has an equal chance to reserve a week of use each year. The next tier is referred to as “space-available use” and allows an owner who has otherwise not made a reservation during the regular use window to reserve a week during a shorter window, starting when the regular use window ends and ending, for example, a week before the first night of the week sought to be reserved.

• Bonus use. “Bonus use” is the ability of an owner to reserve additional use periods in excess of that owner’s annual entitlement of one week per timeshare interest owned, to the extent that there is excess availability (known as “breakage”). Bonus use is typically allowed only on a first-come, first reserved basis within seven days of the starting date. Bonus use, as a concept, works only to the extent that fewer than all owners of timeshare interests book their use weeks.

• Association rentals. The use plan will ordinarily allow the owner’s association to rent use periods that are otherwise unreserved through regular or space-available use, and such rentals will be in competition with bonus use reservation rights. Also, the governing documents may authorize the association to rent units during periods when an owner’s right to reserve is otherwise suspended by reason of a default in payment of dues or other violation of the governing documents.

• Developer rentals. The governing documents should always provide the developer with the right to rent the developer’s unsold inventory. There may be issues on a state-by-state basis if the developer has inventory that is not committed to the timeshare plan (this occurs when a project is phased), as well as inventory committed to the timeshare plan but not yet sold. To the extent that the developer reserves committed but unsold units for rental, that reservation will be in direct competition with reservation requests by non-developer owners. States may limit the developer’s reservation rights to a percentage of total reservations outstanding at any time. Some states allow the developer to rent use weeks that have been sold when the reservation window for timeshare owners to book the weeks has expired.

Leasehold Projects

A timeshare plan may be established on the basis of a leasehold interest in real estate. Leasehold plans may be sold as either a timeshare estate or a right-touse interest, depending on how state law treats leasehold interests (either as real or personal property). One of the major timeshare companies, The Walt Disney Company, has created its Disney Vacation Club using a leasehold model, in which a Disney entity, as lessee under the terms of a ground lease, is the timeshare developer. The developer “sells” timeshare interests that consist of a fractional sublease, coupled with use rights similar to other timeshare programs. The business theory is that at the end of the normal useful life of the improvements committed to the timeshare plan, the timeshare plan will terminate concurrently with the end of the term of the ground lease, and the lessor-owner simply retains title to the property unencumbered by the timeshare plan.

Trust Projects

In certain cases, the subdivision of property inherent in the creation of most timeshare projects may be prohibited. For example, in the early 1980s, under the terms of the bi-state compact between California and Nevada, the subdivision of property within the Lake Tahoe Basin was prohibited under the rules adopted by the Tahoe Regional Planning Agency. In order to convert a hotel to timeshare use, title to the entire property was conveyed to an institutional trustee and, under the terms of the trust agreement, the developer was allowed to sell timeshare interests consisting of (a) memberships in an association and (b) beneficial interests in the trust. Title companies were able to insure the interests of the trustee in the property held in trust, and financing was available with respect to the timeshare interests (as personal property interests) with the purchase money debt secured by UCC article 9 security interests.

Trust structures are also the primary vehicles for timeshare projects developed in coastal Mexico where, under the Mexican Constitution, foreigners may not own real property within 50 kilometers of the coast or 100 kilometers from an international border. Mexican law limits the term of the Mexican trusts (called fideicomisos) to 50 years, subject to a single renewal of another 50 years.

Vacation Clubs and Points-Based Timeshare Plans

The term “vacation clubs” as used in this article describes timeshare plans that are designed to allow the members of a single association (or sometimes multiple separate but affiliated associations) to make reservations in accommodations in multiple properties developed by the same developer or otherwise acquired by such developer for inclusion in the vacation club. The connections between properties are sometimes created by having those properties owned by the association, or sometimes by having what is known as “internal exchange” programs where members in one project can “exchange” a reserved week in their project for a reserved week committed to the internal exchange by another owner in another project (but developed, indirectly owned, or controlled by a single developer). There are, of course, hybrids that marry these different types of access to multiple properties under one association. Some of the major companies use the “Vacation Club” label to operate their timeshare businesses (i.e., Marriott Vacation Club and Disney Vacation Club). Other vacation club programs are operated under such names as Hilton Grand Vacations and Wyndham Destinations.

The types of timeshare interests offered in vacation clubs may be traditional deeded timeshare estates, or they may be right-to-use plans where the core product involves the purchase of a membership to which a number of “points” are assigned. The so-called points programs use points as the currency for making reservations. The number of points assigned to a membership is based on the number of use nights, season of use, and the type of unit purchased. A buyer is typically required to purchase a minimum total number of points, based upon the number that would be required to reserve the smallest unit in the program for seven nights per year. Most regulatory schemes require that the total number of points sold be monitored to prevent the potential for overselling. It is critically important in the design of points-based systems to ensure that it is possible to identify which points are associated with which units, from both an inventory control and financing perspective. If a regulator were to audit a points-based vacation club for compliance with the 1:1 purchaser to accommodation ratio, the tie-back of points to inventory of units becomes critical. This is not a legal issue in terms of the governing documents provisions but a practical administrative and operations issue for the developer creating the points-based timeshare plan.

Points-based timeshare plans came into vogue in the timeshare industry around the turn of the millennium. These are the most flexible (and complex) of the timeshare programs. The ability to use points to reserve accommodations can allow for nightly reservations, as well as the expenditure of points for other program benefits (such as trades into reservation of hotel rooms, for example). The monetization of points for such trading purposes is of critical importance, especially where the points are expended to access goods and services that are not provided by the timeshare plan; however, the monetization of points is beyond the scope of this article. It simply needs to be acknowledged as an issue.

Other specific aspects relevant to vacation clubs are the following:

Home resort preference. In vacation clubs, a buyer may actually purchase a timeshare estate interest in a specific resort (say, a property in Hawaii) with the expectation of always being able to reserve a week in that property, notwithstanding that it is a part of a vacation club. To accommodate this expectation, reservation platforms may provide a period (say, the one-year period commencing two years ahead of the date sought to be reserved and ending one year out) within which the member may make a reservation request for a unit in the Hawaii property, and during which time other vacation club members are not yet allowed to book a reservation.

Banking and borrowing. Banking and borrowing were first developed by the exchange companies as tools for member satisfaction. The term “banking and borrowing” describes reservation procedures that allow a timeshare owner to “bank” that owner’s timeshare week in a year in which the owner decides not to reserve an accommodation in the timeshare program but to reserve the right to use it in another year. In other words, the owner may choose not to reserve a week in the current year in order to reserve, say, two weeks together the following year; or to “borrow” a week from a future year for use in a current year, to allow for back-to-back weeks in the current year (by agreeing to forgo such owner’s reservation rights in the year from which the use week is borrowed). Again, this requires sophisticated inventory control procedures at the administrative level.

Short-Term Products

In most jurisdictions, the definition of the term “timeshare interest,” whether timeshare estate or timeshare right-touse, includes use products that have a term longer than three to four years or a value in excess of a dollar amount ($3,000 in most cases). This allows the offer and sale of short-term products that might be useful as trial memberships, which may be leveraged into full timeshare sales. A developer may offer a short-term product to a buyer who has otherwise gone through the sales process and declined to buy the developer’s regular timeshare interest but might be willing to try out the product for a smaller amount of money and for a shorter period. The benefit to the developer is that it keeps the buyer in the developer’s program and enhances the likelihood of an ultimate purchase without incurring significant marketing costs for the potential timeshare interest sale at a later date.

Exchange Programs

As mentioned above, the two major exchange companies are RCI and II. Of the two, RCI became the largest timeshare exchange company. In the early days of timesharing, exchange companies would enter into affiliation agreements with the developers of single-site timeshare projects, whereby the owners of timeshare interests in such projects were invited to opt to exchange their timeshare week for a weeklong stay in another affiliated project. To effect this, the developers would prime the pump by committing a certain number of developer weeks to the exchange company, and the exchange company in turn would match the donor owner with a week donated by another owner in a different and unrelated project, in exchange for a fee paid by the timeshare owners opting to exchange. The exchange company operation was a crucial piece of the business in the early days, when most properties were subject to timeshare plans using a fixed-unit/fixed-week program. The exchange companies provided the flexibility lacking in the early programs.

With the advent of floating use programs, and their more flexible use plans, the exchange companies enhanced their attractiveness to developers (and associations) by offering the potential for the exchange company to operate the reservation systems of the participating projects as a backof-the-house exercise on behalf of the association. By the end of the 1980s, the exchange companies were an integral component of the timeshare business. As such, they were a significant lobbying force whenever a change in regulatory approach occurred, ensuring that the exchange business was not regulated as a separate timeshare offering when the need for registration and permitting was involved. Exchange companies continue to be major participants in the timeshare business, by reason of their ability to allow members of even the largest vacation clubs to reserve use in projects that are not connected to or a part of such vacation clubs. Exchange companies also operate their own internal third-party rental programs for the excess weeks they manage within their systems.

Termination of Timeshare Plan to Permit Sale of Project

There are several recent developments in the timeshare business to note here. Many of the original timeshare projects brought to market in the early 1980s were created as one-off projects whose location and size were not generally of interest to the major timeshare companies.

In some cases, independent vacation clubs were created to assemble timeshare interests by purchasing multiple timeshare interests in some of these projects (usually from an association that had taken those interests either by foreclosing on assessment liens or deeds in lieu of such foreclosures) and combined them with interests in other smaller geographically or seasonally similar projects to offer their members multiple use and enjoyment options.

In other situations, associations that had taken back multiple timeshare interests have attempted to terminate the timeshare regimes because the projects have become economically unfeasible because of assessment delinquencies. In these cases, the associations face a number of legal dilemmas, among them are the following:

(a) Restrictions in a project’s declaration limiting terminations to time periods after a definite term (usually 60 years). These types of restrictions require the association to hold a meeting of the timeshare owners to vote on the issue of amending the declaration to permit early termination. Voting issues such as quorum requirements, majority or supermajority voting requirements often make this amendment vote difficult. And, notwithstanding the economic justifications for terminating a timeshare regime, there will always be timeshare owners who oppose the idea of losing something for which they may have paid a significant amount of money, even if it was 40 years earlier.

(b) Once the requisite vote to amend the declaration has been conducted successfully, the association then faces the challenge of finding a buyer and structuring a sale of the project, as a whole, with the ability to deliver clean and marketable title to the buyer. Notwithstanding the existence of provisions in the declaration that usually grant the association not only the authority but also powers of attorney to convey the project, with the net proceeds to be divided among the timeshare owners of record as of the date of any sale, most title companies refuse to provide a clean owners policy of title insurance to the buyer unless 100 percent of the owners of timeshare interests have either executed a written agreement to convey their interests or the association has acquired clear title to 100 percent of the timeshare interests in that property.

It is almost a certainty that the association will not be able to provide the kind of title assurances to the title company necessary to cause the title company to issue a policy to a buyer. Hence, it is often necessary for the association to bring a quiet title action in an appropriate court to obtain a court order to convey any straggler timeshare interest inventory not otherwise covered by the association’s efforts. This process can involve lengthy delays and significant legal and court costs that will have to be borne by the association. How a buyer might be persuaded to assist in the termination and title clearance process is a matter for the business negotiations between the buyer and the association attempting to sell. If the number of straggler timeshare interests is small enough, and the economic benefits to the buyer large enough, a buyer might be persuaded to issue a guarantee to the title company to insure against its economic exposure for not clearing all of the timeshare interest titles.

Conclusion

This article is the authors’ attempt to provide a brief overview of the past and present timeshare industry, the wide range of timeshare products that are available today, and the legal concerns that arise in connection with structuring and documenting a timeshare program. Timeshare has evolved and adapted remarkably to changing legal and economic demands, and it is likely that it will continue to do so in the years ahead. Whether some form of timeshare will work for a client’s existing project or a new development will depend largely on whether one of its many available legal structures will fit into the client’s business plan and whether any of its various products will appeal to the target customer demographic. In other words, a fractional interest may be best if the project is marketed to high-end consumers, but a traditional timeshare plan sold in increments of 51–52 weeks a year coupled with a points system can be sold to customers having a wide range of disposable income.

In addition, one must consider the client’s tolerance for a higher level of governmental regulation not typically required for whole ownership condominium or hotel-condominium projects, as timeshare offerings are thoroughly regulated by almost all states. It also must be noted that, even if the state in which the client’s project is located has a very reasonable level of regulation, it is likely that the client will want to market the project in other states, and the lawyer then will need to review and consider the regulatory requirements of multiple states, including those that may not be so reasonable. From a planning perspective, it is critical to assess where the developer’s target markets lie and to structure the program to meet the most rigorous of the regulatory schemes applicable in the target jurisdictions.

Other factors to consider are marketing the timeshares and financing the timeshare paper. An experienced timeshare sales and marketing team (separate and apart from the local real estate broker) is critical to the success of the project. Traditional timeshare sales are either cash purchases or financed by the developer. For those that the developer finances, the down payment will range from 10 percent to 20 percent of the price and, as noted above, marketing costs average 60 percent of gross sales. To cover this gap, a lender that will finance the timeshare receivables will need to be on board.