THE TIMESHARE INDUSTRY – A STUDY IN DECEPTIVE TRADE PRACTICES
I. The Culture of the Timeshare Industry
In a perfect, Platonian realm, the archetypical timeshare is not a bad thing. Not by a long shot. For example, you can vacation there only as often as you want. You share the cost of it with others, so it’s surely less expensive to maintain than say, a condo that you own outright. It’s already furnished and all decked out, so staying there is a turn-key proposition. And if it’s part of a resort network, you don’t have to go to the same old place year after year. No, you can go to any number of exotic resort destinations within this exclusive club, each one more luxurious than the one before.
To prove this point – i.e., that a timeshare can actually be a reasonable option for resort vacationing, there’s one major developer with whom we’ve never been asked to take issue legally. We’re not naming names, but its mascot is an anthropomorphic mouse, whose name rhymes with Vicky.
Regardless, we don’t live in a Platonian realm. At best, our world is penumbral in nature – consisting of shadowy replicas. At worst, the things we see and experience are poorly constituted and highly corrupted versions of what Plato would have for us. Or Socrates. Aristotle too. Heck, even Yogi Berra could do better.
Along these lines, timeshares in general are often disparaged as an investment option, or even as a vacationing alternative. Dave Ramsey, among other financial advisers, is particularly virulent in his criticism of timeshare ownership. In fact, the very word ‘timeshare’ has over the years acquired such a negative connotation that industry marketing types have euphemized it with other nomenclature such as ‘vacation ownership’, ‘fractional ownership’, and the like.
So how is it that something so attractive in theory is so unattractive in fact? The answer is simple – the people involved. In our humble opinion, the timeshare industry has become permeated with a kind of institutionalized culture of deception perpetrated by a handful of unscrupulous principals. After all, the fish doesn’t rot from the tail up.
Diamond Resorts International, for example, was recently acquired by an outfit known as the Apollo Global Management, spearheaded by some of the former executives of Drexel Burnham Lambert. You may recall them as the investment group primarily responsible for creating and propagating the market for junk bonds, before it imploded and lost billions for its investors amid convictions for securities fraud.
Westgate Resorts’ President and CEO was featured on a less-than-flattering movie/documentary called The Queen of Versailles. Notably, whereas the filming of the movie was initially performed with the approval and consent of this businessman, the finished product was so slanderous, at least to Mr. Siegel himself, that he filed a defamation lawsuit against its producers. Tellingly, the suit was thrown out of court before it could go to trial.
II. Problems with Timeshare ‘Exit’ Companies
There are a number of fly-by-night outfits holding themselves out as timeshare ‘exit consultants’, ‘consumer advocates’, and the like. Invariably, these people are masquerading as white nights, vowing deliverance from oppressive timeshare obligations. They are very adept at creating an image of seasoned counselors, in many instances even promising ‘money-back’ guarantees. In reality, with a few notable exceptions, these people are not attorneys. In fact, many of these reprobates have been in the timeshare industry for years as salesman, plying their trade by preying upon elderly and otherwise vulnerable people.
Inevitably, the advice that you’ll receive from these shysters is to just stop paying for the timeshare, wait for it to be foreclosed, and live happily ever after. This advice is a recipe for poison, for a number of reasons: 1. You’re still personally liable on the sales documentation that you signed, including any contractually binding purchase and sale agreements, by whatever name, which in some instances include a promissory note. You may be sued by the timeshare developer, with no claims or defenses to protect yourself; 2. In any case, you will likely receive brow-beating phone calls demanding payment, collection letters, emails, and other harassment. Collection agents will hound you for the money unremittingly; and 3. Your credit will be assaulted with negative reporting, making it difficult or impossible to finance transportation and residential needs in the future.
In case you don’t already understand, the timeshare closing documents that you signed bind you legally. Simply put, they create an obligation that cannot be ignored without ramifications. The task involved in challenging an otherwise binding legal indenture is squarely within the definition of practicing law. It goes without saying, then, that to do so you must have licensed legal representation.
You would not hire a heart ‘consultant’ to treat hypertension. Nor would you hire an anti-diabetes ‘advocate’ to deal with this debilitating conduction. And if you pay good money to someone professing expertise in contract law – so much so that he or she even can even extract you from binding legal consequences – you better make absolutely sure they at least have a license to practice law. If not, you’re simply wasting your time and money.
III. Misleading sales tactics in general:
Vacation ownership buyers generally don’t plan their purchase. Typically, the poor purchaser has been unknowingly baited into the trap through some enticement, such as discounted theme park tickets. He is already a tourist on vacation, relaxed, and vulnerable.
Empirical studies have shown that those on vacation are more likely to buy things that they would not ordinarily pay for. Indeed, tourists will even pay more for the same products or services relative to what they pay at home.
From a psychological standpoint, vacation time, after all, properly involves a relaxed, stress-free trip away from it all. And so the natural psychological defenses are diminished, we become more vulnerable, and that much more likely to say yes to that nice sales lady who has spent all those hours trying to improve our quality of life:
“You’re making an investment in your future… and not just your qualify of life, but financially as well… this baby is a can’t miss… It appreciates in value year after year…you’re gonna‘ love it! And if, for absolutely any reason whatsoever, you’re not 100% satisfied, our resale department will buy it back, guaranteed… So you’ve got absolutely nothing to lose… But the chances of this are nil, and rest assured there are people waiting in the wings to jump on this thing as we speak. …so if you don’t act now, it’s gonna‘ be way to late… imagine, some of the most exclusive resorts on the face of the planet, all yours, any time of year….”
Mind you, as a tourist having accepted the enticement, you are already beholden to the provider of hospitality. After all, you’re on your way to Disney on their nickel. At least show a little gratitude, for crying out loud...
Sometimes, things may turn ugly. Especially if you’re several hours into the sales pitch, with no closure in sight. In these cases, a ‘closer’ is sometimes brought in specifically to bring a more confrontational approach. Then, you become more likely to say ‘yes’, if for no other reason than to get physically out of the room. This is your holiday, after all. You’re supposed to be at the beach, the bar, the pool, or the golf course. Anywhere but there, stuck in a little sales room with some timeshare sales hatchet man brow beating you to sign on the dotted line.
Besides, you’re so far from home. It may be Vegas, Orlando, or even Cancun. Wherever it is, it’s not your hometown. So even if there turns out to be some problem, it somehow seems less likely to follow you back to a place like Chicago. So this is why and how intelligent people fall into timeshare traps. Doctors, lawyers, anchormen, and even politicians are among the ranks of people that we’ve dealt with.
IV. Specific Abuses:
A. Preying upon vulnerable people.
Increasingly, our firm sees abusive marketing practices targeting people who tend to be vulnerable to deception. We believe that there are several reasons for this:
Elderly people, in particular, tend to be more trusting: At one time in the not-too-distant past, before the age of the internet and social media, a lot more commerce was conducted through face-to-face communications. There wasn’t nearly the degree of anonymity that exists now. Particularly in rural areas, smaller towns, and cities, if you engaged in a flim-flam, word would inevitably get out, and you would be shunned like the plague by all. Thus, your word was your bond, things often got done on a handshake, and the world continued to turn.
Generations of people lived this way until as recently as about two decades ago, when more and more commerce became the subject to digital communications done remotely. Now, the general mentality among unscrupulous business-types seems to involve the notion that you’re unlikely to rub shoulders again with whomever you hoodwink from afar, there’s a quick buck to be made, so go for it.
Elderly and infirm people are sometimes of diminished capacity. Let’s face it, at 58, your humble writer is hard-pressed to remember what he had for breakfast. In a decade or two, if even still around, he’ll be lucky to remember whether he ate breakfast at all. There are scores of examples that we encounter involving timeshare sales to elderly people who aren’t even capable of traveling without difficulty. Worse yet, the cost of financing these timeshare interests often jeopardizes their ability to meet life’s essential needs. In legal parlance, if an individual is unable to appreciate the nature and extent of his obligations under the terms of a contract, he is said to lack capacity.
B. Churning points of access:
At one time a timeshare interest was typically a deeded right of title and access for a specified interval at a single location once annually. It was very much akin to ownership in a condominium, but only on a fractional basis. Over time, however, even the word ‘timeshare’ has taken on a decidedly pejorative connotation. Thus, in a marketing epiphany, developers have implemented a ‘points-of-access’ based arrangement. This effectively did two things:
1. The timeshare could now be touted as a ‘vacation ownership interest’, or VOI. One wasn’t buying a ‘timeshare’ at all, no, it was going to be a vacation club – ownership in an exclusive network of resorts – each one more opulent than the one before – in exotic location worldwide.
2. The unscrupulous timeshare developer was no longer constrained by factors inherently restricting the overbooking of resort accommodations – like the pesky little problem of having to record deeds corresponding to weekly intervals in the public property records. To this day, there are very few if any effective legal constraints on their ability to these points-of-access, with impunity.
So it should come as no surprise that the points you bought five years ago won’t get you nearly the access this year that you had then. One publicly traded developer event trumpets this initiative to its equity investors in its SEC filings, (not to be confused with its patrons or ‘members’), calling it an ‘inventory light’ approach. There’s no need to actually build or develop new accommodations to sell these points – not at all. No, indeed, it only takes a points reclamation process whereby the developer continually ‘churns’ the sale and reclamation of points upon default on payments, only to resell them to the next unwitting consumer(s).
The foregoing process, in conjunction with a unilateral (and probably unlawful) prohibition against commercial resale or rental of these points, prevents them from every taking on any intrinsic value. Otherwise, this would be very bad for the developer’s retail operations, which would then have to compete against a secondary resale market.
This is all done intentionally, and even disclosed by the developer to its stock investors – but not to the ‘members’. It goes without saying that these practices have a demoralizing effect on the membership once it’s learned that the number of points that got you to Hawaii a few years ago won’t even get you to Hackensack this season.
C. Dilution of Owner’s Access and Deceptive Nature of “Points” sold
In recent years many or most timeshare developers have initiated a points-of-access based system of doing business. It makes all the sense in the world from a marketing standpoint – the timeshare developer can sell you on vacation ‘ownership’ – as opposed to the purchase of a single unit in one location to which you must return to year after year with no degree of flexibility. No, you’re buying into an opulent network of resorts the world over – and the more points you buy, the more places you can visit, with greater frequency. Never mind that these points of access become less and less valuable as the developer continues to sell them without adding new resort accommodations.
An interesting aspect of selling ‘points’ as opposed to deeded interest has to do with the taxes that get paid. Real estate is generally subject to a transfer tax at the point of sale. When booking a hotel, the innkeeper must collect a ‘sales and use’ tax. At the very least, you would think that the purchase of a timeshare would fall into one category or another. Au contraire. We are aware of at least one points-purveying timeshare developer who pays no tax whatsoever at the point of sale.
This developer seems to be of the opinion that timeshare points are a legal abstraction so ethereal that they constitute ‘intangible’ property – utterly exempt from taxation. But here’s the kicker: This same developer will not hesitate to make its vacation network ‘members’ pay dearly for real property tax assessed each year. It seems that these ‘points’ are intangible only when it’s convenient for them – but when they’re being touted to an unwitting buyer, they’re very real – real estate.
Consistent with this version of their narrative, unwitting consumers are often regaled with promises of capital appreciation in association with their ‘real estate’ investment. This, of course, is inimical to economic reality in every conceivable way.
We have filed a class action law suit, properly a qui tam action, pending against developer that we believe is perpetrating this unscrupulous practice. It remains under seal pending intervention by the attorney general of the state in which it’s pending.
D. Maintenance Fee Abuses
The Definition of a “Conflict of Interest”: A situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. This includes when an individual’s personal interests or concerns are inconsistent with the best for a customer, or when a public official’s personal interests are contrary to his/her loyalty to public business.
Simply put, a conflict of interest exists when one’s duty to act in your best interest is compromised by some other factor, typically money. In the case of many timeshare developers, such a conflict is evident in every aspect of what they do, particularly in the management of their resorts.
Here’s what we mean: You, as an owner of a timeshare, have certain rights, particularly voting rights, in association with the election of condominium association board members, which in turn make decisions concerning the management of the timeshare. Of these decisions, the most significant is the appointment of a professional ‘management’ company to maintain the facilities.
Generally, a homeowners association or condo association has a fiduciary duty to its constituents. This means that it must, to the extent reasonable, minimize the maintenance expenses without compromising the value rendered for those expenses. In this regard, the association will typically take bids from competing management companies, and select the best value.
But with many timeshare developers, that’s not exactly how it works. Rather, developer will generally install itself as the management company running its resorts, even though it lacks a majority ownership interest in any given resort that would legally qualify it to do so. How can this be, you ask? If they don’t own most of the units, they can’t even control the vote. By what legal authority can they do anything at all to control the management of the resort?
Here is their rationale, taken from language contained in a recent annual report of filed with the S.E.C. by a prominent timeshare developer:
HOAs. Each of the developer’s managed resorts, other than certain resorts in the European Collection, is typically operated through an HOA, which is administered by a board of directors. Directors are elected by the owners of intervals at the resort… The board of directors of each HOA hires a management company to provide the services described above, which in the case of all developer’s managed resorts, is the developer. (Emphasis added).
In practice, what happens is this: the timeshare developer will endeavor to circulate a number of ‘proxy’ proposals binding your vote as an owner to elect one of their insiders to the board. This they can do, even with ownership of a single interval. Invariably the developer’s stooges will then appoint developer’s captive management arm to manage the resort.
Unlike the developer, you the owner of a resort interval are ‘out of the loop’. You don’t have a roster of other owners, and thus no way to communicate with them. Thus, there is now way to galvanize opposition to the status quo. And the cycle repeats itself year after year.
Bottom line: Although this may all sound of legal technicality, the practical effect is that the developer can, in essence, write itself a blank check to manage its on resorts indefinitely. Hence the average maintenance fees, in the example cited, equate to roughly $1,500 per year for one weekly interval – which projects to a staggering $78,000 annually – putatively to maintain a single timeshare unit and its common elements! See DRI form 10k, February 2016, p. 19.
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