Most of the clubs in the industry are “non-equity” meaning that, as a member, you have a membership but not a secured financial interest in the club. We think that will be enough for most consumers provided that the club is operating well and delivering on its member hospitality commitments. Of course, in the event of a club failure or restructuring, members will face a great deal of uncertainty as to where they stand in terms of getting back their membership deposits. No doubt Tanner & Haley members are anxiously waiting to hear how they will be affected by the very recent developments at that club.

There are also a small number of firms that will not be invited to join the “non-equity” club association as they are offering some sort of equity component. One such clubs is Crescendo, and we got some perspective from CEO Michael Burns on his approach:

What is the profile of a typical investor in Crescendo? How are they similar and different to a typical destination club member?

The demographic and geographic profile of a typical Crescendo investor probably mirrors traditional destination club members. On average, our investors are 47 years old, have two-to-three kids, enjoy active lifestyles, and live primarily in North America. While I can’t speak to other destination clubs’ membership profiles, our investors have two unique, we believe, psychographic characteristics: first, close to half (44%) of our owners have invested — and are sharing use of their properties — with non family members or through a corporation, which is an increasingly popular way to own and enjoy Crescendo; second, a great number of our investors come from the financial services or real estate investment professions, or they run companies. As such, they understand and value our ownership structure.

What do your members say about your ability to execute on the hospitality side of the business – to provide consistent access to great homes – the basic value proposition of the non-equity clubs?

Great question, and it’s quite timely. The primary lure, or magnet, to Crescendo is our unique equity ownership structure. But the ante for our investors is their ability to vacation in extraordinary, custom vacation homes in premier destinations. We are not in the investment nor real estate business. We’re in the experience business. I’ve had the fortune of working with several of the industry’s leading and pioneering companies — including Disney and Marriott—all acutely focused on service delivery. At Crescendo, it’s the core of our operation, and the post-trip satisfaction numbers are extraordinary: With several hundred vacations in the books, our owners report a 97% “extremely satisfied” level, unheard of in this industry.

In short, we do not view the industry in binary terms; it should not be a, “you can have lifestyle, but no ownership,” or, “you can have ownership, but no lifestyle” proposition. Our owners make a significant financial commitment, and therefore should be rewarded for their risk through true ownership AND enjoyment of the portfolio.

What do you to say to prospects when they ask about their potential returns as investors in the club?

Though luxury vacation homes have, of recent, been one of the better performing segments of real estate, we conservatively peg 7.5% annual appreciation in our financial model. However, we provide five prospective ROI scenarios, quantifying returns – ranging from 5 to 15% – based on the projected increase in the company’s adjusted book value. It would be fiscally irresponsible to galvanize or trumpet a specific number, which we do not. However, we have great confidence in our structure based on five key factors:

1. Our model is extremely conservative. We do not acquire assets (homes) ahead of having the requisite number of investors. We have strict loan-to-value covenants. And, we guarantee that, at all times, a minimum of 80% of our owners’ capital contributions are invested in real estate or cash.
2. Since our offering is a fully compliant, Regulation D securities offering, we cannot advertise nor generally solicit new investors. Hence, we have no advertising expenses, and our sales and marketing expenses are minimal. Rather than spending 15-20% (or more) on SM&E, which is typical in the industry, we spend a fraction and can therefore invest more money in assets.
3. Our owners’ investments are tied to, and secured by, the assets of the company. They own the company (and therefore the portfolio). In the long-term, this security is paramount.
4. Our operating and reporting philosophy is fully transparent. Our owners know as much, or little, as they desire about the operating and financial condition of the company. There are no surprises, and everything is open book.
5. Our executive team and founders have deep financial industry experience, including careers in investment banking, private equity, venture capital, mortgage banking, corporate finance, public accounting, and management of public companies.

How will any softness in any of the vacation real estate markets affect your plans?

We believe it’s a sound time to be a buyer of luxury vacation residences. Several of our future markets are softening and, given the fact that we are acquiring about 75% of our portfolio over the next two-to-three years, we believe market conditions are prime for acquisitions. Furthermore, an investment in Crescendo is not a speculative play. As we look out over the next ten years, we’re quite bullish given the aforementioned softening, the scarcity of the asset we’re acquiring, and the pent up and increasing demand — particularly from a segment of the 75 million-plus baby boomers who, generationally, have a propensity to spend, versus passing wealth down — all factors that we believe create a healthy market for our portfolio.

Helium Report’s take:

We think that Crescendo bears the heavier burden of convincing prospects that they offer a good investment opportunity and a good vacation option – which, combined with the fact that they cannot market like other clubs, would mean slower growth. That may be the case, but it might be a burden worth bearing, as consumers dig even deeper into understanding the financial underpinning of the club they are thinking about joining, since firms like Crescendo offer their investors clear financial interest in the real estate.