Tanner & Haley Bankruptcy Incenses Timeshare Industry

When Tanner & Haley Resorts filed for bankruptcy protection earlier this summer, it put into question the business model in which the emerging timeshare club industry is based. Now the company is struggling to continue serving its 874 members even as it recently disclosed it suffered an operating loss of $64 million in 2005.

Just last week its founder and CEO Rob McGrath resigned and casting further down on the viability of Tanner & Haley, which enticed prospective members to join one of its three clubs with luxury vacations in such places such as Aspen and Cabo San Lucas.

To join destination clubs such as Tanner & Haley, new members provide the club with a deposit ranging from anywhere between $80,000 to more than $800,000 depending on the club. While consumers are promised they’ll receive the money back (less an administration fee that could be as high as 20 percent), this bankruptcy puts those deposits in peril for Tanner & Haley members. However, most clubs don’t actively market that members wanting to leave the club must wait for three new members to join. Additionally, members pay annual maintenance fees and daily use fees for access to each company’s luxury homes.

Many destination clubs base financial models on maintaining their timeshares with annual dues while member deposits are invested in real estate, which is then owned by the club rather than individual members. The club banks on the appreciation of real estate to make money.

Though the media and consumer market has lumped the destination club industry in with timeshare, it’s not an accurate assessment. Whereas timeshare has a real estate ownership component, destination clubs do not. So while timeshare or fractional owners actually own a portion of a deeded property, destination club member own nothing but the right to stay in their respective club’s homes.

And because destination clubs have been so closely linked with timeshare, the timeshare industry has been rallying for years to put into place consumer protections. At the American Resort Development Association’s (ARDA), President Howard C. Nusbaum has always feared that if and when one of these clubs went broke, the headline would read “Timeshare For Rich Fails,” casting a negative light on an industry that has worked diligently to foster a positive image. According to Nusbaum, when a destination club fails, the timeshare industry suffers.

“We believe this business model is fundamentally flawed,” Nusbaum told Hotel Interactive. “It is based on speculation [of real estate]. That scares us.”

Tanner & Haley got into financial hot water because of its guarantee to allow members to stay anytime, anyplace in one of its homes. If that home wasn’t available, the company would have to rent a suitable alternative, costing Tanner & Haley dearly as it scrambled to satisfy member demand by entering into costly short term leases.

Nusbaum is calling for the industry to be regulated like timeshare and have appropriate consumer protections. For example, he believes non-equity destination clubs should be required to have a third party insurance vehicle for membership reimbursements in case a club goes bust and also to be more transparent with their record keeping.

“We love entrepreneurship and we love new ideas, but we need to make sure promises that are made are promises kept. This model has no failsafe,” said Nusbaum.

Dr. Wayne Thorburn, CEO of the Texas Real Estate Commission and Commissioner of the Texas Appraiser Licensing and Certification Board agreed with Nusbaum’s assessment. His organization oversees and licenses all real estate transactions in the state, including any timeshare products that are to be sold or promoted directly to people in Texas.

He believes the destination club model does have its compelling side since it provides access to multi-million dollar homes and luxury hotel amenities, but insists regulation is necessary. He is calling for new rules to be put into place either under existing timeshare acts or separate legislation specifically written for non-equity clubs.

“It’s a little dangerous to be playing the real estate market and think appreciation of real estate is the way to make money,” said Thorburn “I am not surprised something like this happened.”

On its website, Tanner & Haley the company said it intends “to continue to meet substantially all travel commitments previously made to Members and to continue to provide Members with a wide range of destinations and services.”

The notice added they will use the Chapter 11 process to “stabilize the company’s finances, put the company on a sound financial footing and develop a more viable business model.”