By Bill Ryczek, Colebrook Financial Company

A loan closing should be a happy event. The developer gets the capital it needs to construct a building or finance consumer receivables. The lender gets an earning asset, a rate of return and generally a fee. The attorney for each side receives a fee for services rendered. Too often, however, despite the benefits received by each party, the closing process becomes acrimonious and costly and the principals leave the table upset and angry.

As a finance company, Colebrook is both a borrower and a lender and therefore in a unique position to evaluate the closing process. We’ve been on both sides of the table and have seen a lot of good closings as well as some very painful ones. Most of the latter experiences could have been avoided with a little planning and a greater appreciation for the other parties’ situation, needs and expectations.

In most aspects of life, happiness is a function of expectations, and so it is with loan closings. In order to have a harmonious process, all parties must have similar and realistic expectations about timing, cost and the content and scope of the documentation. The key to synchronizing expectations is communication—the more the better.

Timing is frequently a divisive issue. If there are deadlines, make sure everyone is aware of them well in advance. Also be cognizant of the fact that delivering draft documents for comment on the 29th day of a 30 day window does not constitute holding up your end of the bargain. Chart the process in advance and determine the necessary timing for each step. When will draft documents be available? When must the due diligence information arrive at the lender’s counsel’s office for review? When must comments be received and when must negotiations conclude? If you find you can’t meet a deadline, be sure to let the other parties know as soon as possible.

Legal fees are another potential land mine. To avoid an explosion when the bill is laid on the closing table, consider the following steps borrowers can take to minimize their pain:

• Obtain an estimate of legal fees in advance, and ask for updates during the course of the transaction. You can request a cap on fees, but most lenders are reluctant to do so, for fees are primarily a function of time spent on a transaction, and a borrower with a cap can spend endless time negotiating documents, or delay the process, without risk.
• Discuss with your counsel, prior to document review, the need to limit lengthy discussions to substantive items. “Boiler plate” is generally not negotiable, and extensive arguments over detail are expensive, since in many cases the borrower is paying for both their counsel and the lender’s counsel. Add the hourly rates together and decide whether changing “whereas” to “heretofore” is worth the combined tariff. Limit negotiation to making certain the business terms agree with the commitment, there are no events of default that can be triggered inadvertently or that are beyond your control, and there are no terms in the agreement that materially inhibit you from operating your business. Remember the words of those estimable legal mavens, the Rolling Stones, who reminded us, “You can’t always get what you want…but you get what you need.”
• Make certain you use counsel appropriate to the transaction. Documentation for timeshare loans is vastly different from that used for commercial real estate and general commercial transactions, and using counsel unfamiliar with timeshare documentation will prolong the process and add to the cost.
• Don’t be a stop-and-go driver. It’s expensive to start and stop the process, for as time goes on information turns stale and every time people have to re-acquaint themselves with the transaction there’s an additional cost. Once you’ve started the documentation process, proceed as quickly as possible.
• Make sure due diligence information submitted to the lender’s counsel is complete and current. Too often, for example, borrowers don’t look at their organization documents until someone asks for them, and then discover they’ve been in violation of their bylaws, or their operating agreement is hopelessly obsolete.

There are a number of key considerations for the lender as well:

• Try to keep the policies and procedures of your institution flexible enough to deal with a variety of loan types. If timeshare loans are serviced in a general loan servicing department, make sure the overall procedures work for timeshare loans. The proliferation of policies and procedures is a function of increasing regulation, but trying to force an octagonal shape into a square hole will only lead to frustration for all.
• All parties must be cognizant of the business needs of the borrower. Payrolls must be met, bills must be paid and the needs of employees, customers and regulators must be served. Placing the borrower in a difficult situation because of a timing delay or overly restrictive covenants, may jeopardize its ability to repay the loan. Understand the customer’s cash flow needs. How are income taxes paid? How much do the owners need to withdraw to meet personal obligations? Make sure the process will work and does not hinder the business operation. Don’t insist on unworkable covenants just because your policy says you should have them.
• Lenders should control the legal process and take an active role. As the loan officer, you are in charge of the transaction and the attorneys work for you. Don’t let them set the parameters. If you think they’re heading down the wrong trail, let them know. Consistent with the advice given to the borrowers above, lenders should decide, in concert with their attorneys, the tone of the documentation. Some attorneys believe in throwing everything into the initial draft, including the proverbial kitchen sink, under the premise that the borrower can negotiate it out, and might agree to half a kitchen sink. This approach leads to increased costs, ill will, and frustration. Fairness is a subjective concept; strive to generate an initial document that is protective yet not over-reaching.

The final bit of advice is for attorneys, and involves the one document that generally produces the most angst for lawyers: the opinion letter. Most timeshare transactions involve different state statutes, and lenders, in order to minimize costs, are often willing to rely upon borrower’s counsel to provide assurances that the transaction complies with local laws. The opining lawyer is not “guaranteeing” the transaction, as we have frequently heard, but is expected to have the knowledge and perform the research necessary to provide opinions on relevant legal issues. It is understood that there will be limiting assumptions on opinions. Unfortunately, negotiations over the opinion letter often focus on the insertion of numerous disclaimers and assumptions that render the opinion meaningless. Failure to issue an unqualified opinion for documents drafted by the opining attorney is a large ‘red flag.’ A reluctance to make any definitive statement regarding the law can prevent a transaction from closing, or create additional expense if the lender is forced to hire its own local counsel.

If this article is, as intended, honest, fair and balanced, it’s possible I have offended every lender, borrower and attorney in the timeshare industry. If so, remember that I am one of you and each of us who has been involved in a lending transaction is guilty of at least one of the sins listed above. We must strive mightily to avoid these pitfalls in order to make a loan closing the happy, rewarding event that it should be.

The following appeared in the December 2009 issue of The Resort Trades:

ARDA Fall Conference: Resort Industry on the Path to Renewal

In his letter to over 300 ARDA Fall Conference attendees, Howard C. Nusbaum, RRP, the association’s President and CEO, set the positive tone. He began by noting that the past year “has been a challenging and humbling period” for all types of shared ownership. Yet he wrote that it has also “been a year when we came together as an industry with a new spirit of resolve.”

That resolve, forged on the anvil of many years of experience, adaptability and innovation, shared with spirit by a larger group of attendees than at last year’s fall program, provided stimulation and renewal for all who traveled to Washington, DC.

Mr. Nusbaum stated that the ARDA Annual Convention Think Tank and its Trustee Retreat had identified five major topics for the industry’s focus:

• Access to capital
• Social networking incorporated in the technology initiatives in sales & marketing
• Resales (see VacationBetter.org, under “Why Timeshare”)
• New business models
• Nurturing the existing owner, exchanger & renter

The Fall Conference agenda spent time on each of these areas, as well as the usual and vital attention to inside – and outside – the Beltway
legislative and regulatory developments.

Invigorating forums open to all for these and other topics included 30 well-attended committee meetings, general and keynote sessions, networking receptions sponsored by Interval International and Group RCI, and numerous breaks during each day.

Thanks to the generous support of Well Fargo Foothill, Trustees and AIF Foundation supporters dined at the dramatic House of Sweden, home of the Swedish Embassy, an award-winning modern building on the Potomac waterfront in Georgetown.

Notwithstanding the tough economic challenges facing the American economy and the resort industry, sponsorship support continued to play a major role in the Fall Conference. The highest level, Presenting Sponsors, included Interval International, RCI, ICE, Market Leverage, and Wells Fargo Foothill. Other support also came from four Contributing Sponsors, 13 Friends of Fall Conference (including Trades Publishing), and four event sponsors.

Howard Nusbaum concluded the event by commenting, “2009 is almost over. Although it has been a year of important learning in the shared ownership industry, it has not been a pleasant year. As we welcome a more hopeful 2010, we say good riddance to 2009!”

Leaders Discuss Lessons Learned from the Money Chase

For many attendees, this General Session topic was the substantive highlight of the Fall Conference. In discussion with Howard Nusbaum, ARDA’s President and CEO, a panel of five top executives discussed key strategies and actions they have taken to survive in the current economy.

Challenges have come from the economic downtown in the U.S. and globally, triggered by a housing bust, especially in formerly thriving areas such as Orlando and Las Vegas. That led to a sharp reduction in consumer and business credit, together with mushrooming unemployment, bank failures, and home foreclosures.

Members of the panel focused many of their comments on what they have done to lower expenses, keep sales flowing, and obtain needed access to capital.

The geographically diverse group who discussed the new lending environment included:

Jon Fredericks, President, Welk Resorts, San Marcos, CA
Rip Gellein, Chairman Emeritus, Starwood Vacation Ownership, Orlando
Don Harrill, President & CEO, Holiday Inn Club Vacations, Orlando
Bill Ryczek, Principal. Colebrook Financial Co., LLC, Middletown, CT
Bruce Thompson, CEO, Gold Key Resorts, Virginia Beach, VA
At the outset, Bill Ryczek noted that REITS – Real Estate Investment Trusts – have raised $2 billion in the last nine months because they need cash to be able to re-equitize their companies. He said, “I don’t think this industry is any different” than others that are real estate-based.

He continued that in 30 years of dealing with lenders and borrowers, the lesson this situation has confirmed is the volatility of financial markets. “There is an overreaction in many cases in both directions.”

Another lesson is in “the resiliency of the timeshare business. Very few developers have gone out of business. Sales are lower, but the industry has survived.”

Need for Lenders to Understand the Industry – and Your Business

Malcolm Forbes, the legendary founder and publisher of Forbes magazine, had as a motto in every issue, “With all thy getting, get thee understanding.”

A corollary of that applies to shared ownership, and indeed every business. Holiday’s Don Harrill remarked that “very few lenders know our business. They thought they did, but only a handful do. What has to happen now is to get them to understand our business.”

A similar need for understanding applies to everyone in the business, as Bruce Thompson, who started his company in 1989, stressed. He felt that lenders originally had no idea of what timeshare involves. Today when you have problems with lenders, “working with community banks can help.”

Beyond banks, he said that for years, his company tried to get salespeople to obtain at least 10% down at the point of sale. “Now it’s not an issue any more” because of the need for more selectivity and more creditworthy buyers.

Bill Ryczek and others stressed the need to “show your banker you have a good solid business. The ‘rating’ for your business involves a new team of people. Lenders have hired MBAs to get into ‘weeds’ of our business. They are taking a deep dive, to get engaged in our business.”

Promises vs. Realities

What this means is very basic, as he puts it, and as others agreed, “You’ve promised buyers a lifetime of vacation experiences. Has the current economy caused you to change that goal?” Also, do you realistically have the ability to fulfill your promises?

Jon Fredericks confirmed, “Loan underwriting is much more thorough than it’s ever been. Even the HOAs (home owner associations) are reviewed.”

Bill Ryczek says that in looking at the closing rates on sales, portfolio performance, and other signs, the results have been pretty good. In comparing the loan experience on shared ownership to other consumer sales, such as cars and home loans, “Timeshare has been more stable.”

Even though he noted a spike in delinquency in December 2007, the situation has improved: 93% of all timeshare paper is now current.

Don Harrell cited another aspect of this situation as it related to his company and its ability to deal effectively with lenders. “Prospective lenders looked at quality of our communications, servicing efforts, customer service. What do we do and how do we do it? The ability to keep financing relates to relationships and good customer service.”

Jon Fredericks said it is important to use your “best practice for sales presentations. What is best, most compelling story about our industry, whether it’s a lender or Wall Street? If it’s not a good story, they’ll assume the worst.”

Another aspect, Howard Nusbaum says, is that ARDA is “now getting many calls from the financial press. The lending community finally believes that our paper performs better than other consumer paper.”

More Security in Securitization

For those developers, including the larger ones, who depend on securitization, recent improvement has been dramatic. Of the $1.9 billion in timeshare paper securitized in 2009, one-third occurred in the month preceding the Fall Conference.

Don Harrell said, “The fact that the securitization market is coming back gives validation to our (industry’s) business model.” Now lenders and investment banks involved in this process “really do want to understand the drivers and learn about the company” involved in this process.

“Patience is important,” he said, “in watching the securitization process. The markets have convinced themselves that we’re okay.”

Howard Nusbaum noted that at a securitization conference he recently attended in Miami, “deals now have more participants. Not being involved in ‘TALF’ [the Treasury’s Asset-backed Lending Facility program] was viewed as a positive factor, because there’s so much red tape involved in it.”

Bill Ryczek agreed that some industry members have found the government processes too cumbersome.

Changing Terms

He said that the biggest change is that interest rates are higher. “They were too low, and advance rates were too high 18 months ago.”

He said that unless you’ve been in the banking industry, “it’s hard to appreciate how they’re driven by policies and procedures, including regulations. You need to find out from banks what their needs are.”

This includes their policies and rules, because “they’re not looking for timeshare per se.” Timing has to be right, and you should try to keep in touch with those you contact.

Find – and Maintain Contact – with Banks’ Decision-Makers

Bill Ryczek and other panelists stressed the need to communicate with the right person, the decision-maker, in the small banks. Panelists agreed that it is easier to do this with small banks than with large ones.

Don Harrill said his company probably had 30 bankers visit their resort in recent months. “Nothing gets approved without the credit manager, the decision-maker.” Before these visits, Holiday had been facing a situation where securitization markets “just stopped.”

Now, he says, “Money is out there. But you have to engage, educate and sell your concept to these bankers.”

He added that those who have had experience with timeshare said “timeshare receivables were their best-performing product. This proves our owners love the product and have an affinity for it. While rates in September were 8 to 9 points over LIBOR [London Inter-Bank Overnight Rate], they are coming down to 7 points above.”

In referring to the formerly higher volume era that ended when the economy declined, “It eats up a lot of cash when you’re making sales at cost, with high marketing costs. It’s hard when you’re in an expensive marketing business.”

Rip Gellein agreed with that perspective. “For 28 years, we told lenders we were recession-proof, other than right after 9/11, when sales fell apart during the fourth quarter of 2001. Now we know the lesson from that business cycles sometimes get tough. We can’t live at the edge with the leverage we had. We can’t use unsustainable business models any more.”

Bill Ryczek pointed out the funding distinction between experienced developers and new ones. “Virtually no financing is available for startups. So many experienced developers are looking for money that lenders have no need to go to startups.”

Ramifications of Negative American Economic Trends

During the question and answer period, panelists commented on implications of America’s current economic challenges. Bill Ryczek said, “Lenders are concerned that if unemployment remains high, there will be more defaults on timeshare paper.”

Rip Gellein said, “Lots of commercial property will be under water in some markets.”

Jon Fredericks opined on the impact if this happens. “If the net operating income is down too much for a shopping center, it will impact the lender’s ability to lend to timeshare buyers.”

Opportunities in the Present Economic Environment

Bill Ryczek said that “B” quality paper “is not being financed. It has extremely high default rates, so high that developers really haven’t lost much in net sales by not being able to sell” to these lower quality prospects.

“We’ve become more efficient in marketing,” said Bruce Thompson. “We are saving 5-10 points in product acquisition, which means it is less expensive to build than at this time last year. We had been paying ridiculous prices for land.”

He says, “Now, margins are a lot better. One tower we’re building now is costing 25% less than a similar tower 24 months ago.”

Don Harrell added, “Lenders now understand that the company behind the marketing is very important. We now have a good quality dialogue with them.”

“Those lenders who have stayed with us,” he said, “have become more educated. Lenders who are involved like what they see, and terms are getting longer.”

The current result, said Starwood’s Rip Gellein, is that “developers are generating more cash at lower cost. When the business gets better, it will be like coming out of boot camp: tighter and leaner.”

Jon Fredericks cautioned, “Some lenders are trying to shorten the lengths of contracts because of concerns about longer term inflation prospects” in the U.S. economy.

Legislatively Speaking

As befits the inside-the-Beltway location of ARDA’s Fall Conference, this was a prime element of the Fall Conference. The large State Legislative Committee met for two hours on the opening day of the conference.

Later that day, Len Lubart, a partner at Greenspoon & Marder, Ft. Lauderdale, reports that the Federal Issues Committee also had a substantial number of attendees and covered many issues. He said a representative from the U.S. Chamber had said that the financial services reform bill in the House had been “like a freight train” that could not be stopped. Efforts to change and slow down efforts down in the Senate could still result in a standalone agency to deal with consumer loans.

Mr. Lubart also said that there were three political speakers. One represented a coalition of 68 moderate Democrats, and a second who consults for ARDA and is Virginia’s former attorney general. The third was a Republican who thought that a result of the Republican gubernatorial victories in New Jersey and Virginia might be a Democratic pullback from current aggressive positions, such as on healthcare reform.

Efforts to exempt timeshare from potential legislative overkill were proceeding, Mr. Lubart said. The sentiment seemed to be, he noted, that while these efforts were justified, timeshare might be too small an industry to benefit from this position.

Congressional Representation

As it does annually, ARDA also invited an insider, this time a Member of Congress, to address attendees at the Legislative Luncheon.

This year’s honored guest was Cong. Scott Murphy (D-NY), whose district, New York’s 20th, includes resort areas such as the Catskills, Lake George and Lake Placid. In a special election earlier this year, Murphy, a relative newcomer originally from Missouri, beat Republican Jim Tedisco, the former State Assembly Minority Leader.

After indicating his interest in having more resorts in his area because of their huge positive economic impact, Cong. Murphy, himself a timeshare owner, covered other topics. Indicating that he had created jobs in his former work in venture capital, he supported ARDA’s help in educating him and other Members of Congress about issues critical to ARDA members. Cong. Murphy said that, given the wide ranges of issues he and others he and others deal with, they “have to rely on industry experts,” such as those from ARDA.

As to specific issues, his overview was that “the focus on heath care concerns has eaten up all the oxygen in the room” this year. While the House bill did pass shortly after his remarks at the luncheon, the margin was only 220-215 after a major push by President Obama.

Sen. Lindsay Graham (R-SC) said shortly afterward that the huge 1,990 page health care bill was “dead on arrival” in the Senate. The weekend following the Fall Conference, Sen. Lindsay Graham (R-SC) said the $1 trillion estimated cost over the next decade, understated by several hundred billion dollars by questionable accounting and legislative practices, may prove him correct. At the least, observers from both parties, including the keynote the following day, former New Hampshire Sen. John Sununu (R-NH), predict a rough road ahead.

Candid comments on the financial realities of ObamaCare came from the liberal New Yorker’s John Cassidy. In a recent blog, he wrote, “The U.S. government is making a costly and open-ended commitment to help provide health coverage for the vast majority of its citizens. …{L]et’s not pretend that it isn’t a big deal, or that it will be self-financing, or that it will work out exactly as planned. It won’t…The Obama Administration. is creating a new entitlement program, which, once established, will be virtually impossible to rescind. … Putting on my amateur historian’s cap, I might even claim that some subterfuge is historically necessary to get great reforms enacted.”

Immigration Reform, Card Check

Cong. Murphy predicted that Congress would tackle immigration reform next year. He wants to “get people on the path to citizenship and paying taxes.” This issue died last year, despite a major bipartisan push from Sen. John McCain (R-AZ) and others.

Given the time that has passed, and the desire next year to deal with issues beyond health care, we will follow developments in this arena. They have important implications for companies in the shared ownership and travel industries in view of their impact on employment and other issues.

A separate but related labor topic is that of the euphemistically, but inaccurately, named “Employee Free Choice Act.” Also known as “card check,” ARDA has opposed the legislation, as it would strip the secrecy from ballots as to whether unions should be given authority to represent employees.

Cong. Murphy believes this bill will pass in the House. In the Senate, however, he concedes that it is now “off the radar screen.” The core issue he believes is “how to approach elections fairly, and the need to find balance.” He supports binding arbitration to avoid management’s potential use of delaying tactics.

Another Perspective on the Economy & Legislation

John Sununu, the former Senator from New Hampshire, was Thursday afternoon’s keynote speaker. Known as a strong fiscal conservative, he was author of legislation reforming the regulation of financial institutions. He currently serves as one of five panel members responsible for the oversight of TARP (Troubled Assets Relief Program) funds and has developed numerous proposals for regulatory reform, mortgage issuance, and national insurance oversight.

Described in his introduction as having been labeled “the smartest person in the Senate” and with degrees from MIT and the Harvard Business School, he quipped that it he had been, “it would have been like being the best surfer in Kansas.”

He remarked that it was frustrating for him in the Senate, especially because he “had worked in private sector, in technology and finance, a perspective we need more of in the Senate. The more people in Government who have actually made payroll, done hiring, and had similar experience, the better they will be at understanding the consequences of the laws they pass.”

“Frequently,” he said, “you write legislation that has unintended consequences, and 80% of the debates today are about the unintended consequences of bills passed 20 to 30 years ago.”

Turning to the economy, he said it has been bad, “but is leveling out somewhat.” Even though there was 3.5% GDP growth in the last quarter, “you need to be more cautious in your optimism. Half of that growth was from ‘Cash for Clunkers,’ and part of it was in an inventory run-up. He believes it is likely we will see some pullback on inventories and consumer spending in the current quarter.

Sen. Sununu cautions, “We shouldn’t look at just one figure and assume the recession is over and recovery has begun. We want to do the best we can without being dishonest about future prospects. Growth will resume as employment and consumer spending rise.”

TARP

He labeled this initiative “moderately successful, like many government programs. Some parts worked well, others did not.”

He said the additional capital, sometimes as little as $100,000, and government guarantees, were its most effective parts.

Yet, access to capital isn’t what it was early in 2007-08. He predicted that it would take a long time for that to occur, because there was “too much borrowing by too many people who didn’t have the capacity to repay their loans.”

He believes “access to credit needs to be provided to solid, creditworthy businesses, and that isn’t the case in many instances. The real drivers of sustainable econ growth are investment, consumption, wage growth and exports, at least in the foreseeable future.”

Recent Elections

Sen. Sununu pointed to differences between this fall and a year ago. In New Jersey, Republicans lost by 15% in 2008, and this year won the gubernatorial seat by 5%. Virginia’s Republican candidate for governor won by 20%, after the state went to Democrats last year by 5%.

He said the economy has to create 100,000 jobs per month for the unemployment rate to be stable. He views this as good news for President Obama, because unemployment will probable be higher next Spring, then go lower in 2011-2012, when the President may start running for re-election.

His view of Capitol Hill is that he can’t remember when there were so many major pieces of legislation before Congress, such as healthcare reform, cap and trade “carbon” emissions bills, and financial services reform. As to the last topic, he noted that the House is moving more aggressively than the Senate on legislative controls and a new consumer finance protection agency because House rules allow them to do so.

Sununu said one could argue that democracy is functioning the way the Framers of the Constitution envisioned it: “They wanted to make it difficult to make dramatic changes in the role of government, such as intervention in personal prerogatives, income taxes, carbon taxes and more.”

But he does believe we are going to see changes over the next year. Then he quoted Bette Davis in one of her films, “Fasten your seat belts. It’s going to be a bumpy ride.”

Written by Alan N. Schlaifer, Principal, Law Offices of Alan N. Schlaifer, P.C.

The following appeared in the July, 2008 issue of Developments, The Voice of the Vacation Ownership Industry:

An Active Plan to Increase the Odds of Your Success

Anyone who reads the newspaper, watches TV, or surfs the Internet is aware that there has been a serious disruption to our financial markets over the past several months. What began as a crisis in the sub-prime mortgage market has impacted nearly every facet of our economy. Companies that provide financing to the timeshare industry get their money through a long chain of conduits, and the chances are good that at least one link has been affected in some way.

The timeshare industry is extremely capital-intensive, with requirements for acquisition and development financing, as well as a substantial need for consumer end loan financing. With all the pitfalls out there, here are a few proactive tips for developers to ensure success.

Action Tip List

First, if you have any hesitations about your lender’s commitment to your company, diversify your sources immediately. Don’t wait to get the phone call telling you there will be no funding this month, which will force you to scramble and perhaps accept unfavorable terms.

Secondly, if you want to finance a new project, don’t wait until the last minute. Some lenders with problems have become less aggressive in pursuing new loans, which, combined with the tightening of the securitization market, has created significant demand for those lenders that are entertaining new proposals. Given the volume of applications, expect that it might take a bit longer to have a new transaction approved and closed.

Third, learn about the non-timeshare activities of your lender. Problems in other areas may create difficulties for the timeshare lending operation. Institutions that experienced problems with sub-prime loans frequently had liquidity issues that impacted their ability to service their other lines of business. Furthermore, in times of trouble, lenders with limited commitments to the timeshare industry may decide to stick to their core businesses and exit the timeshare market as quickly as they entered it.

Then, monitor your receivable portfolios with greater vigilance than usual. The focus of the financial difficulty’ is the sub-prime market, which also comprises 10-20% of timeshare purchasers. If you have a “B” credit portfolio, your customers may be under pressure from higher mortgage payments and have difficulty honoring their timeshare obligations. The general softness in the economy will also affect your `A’ portfolio. You may want to consider hiring additional loan collectors and making earlier, more frequent contact with your past-due customers. If you now call customers when they’re 30 days delinquent, think about calling at 15 days. Since a substantial portion of most developers’ profit comes from the equity in their portfolios, now is the time to make a concerted effort to maximize its value.

Lastly, the purchase of vacation ownership products is discretionary, and if consumer confidence lags, it will become increasingly difficult and expensive to generate tours. Developers will need to become more creative and cost-conscious to market effectively Money, like any other commodity, is priced based upon supply and demand. With the supply of funds constricted, prices can be expected to be somewhat higher. ‘The recent reduction in interest rates will probably result in lower overall borrowing costs, but the margin over the index (usually the prime rate or LIBOR) may be slightly higher than it has been in recent years.

The Big Picture

But, not all the news is bad! Interest rates are at the lowest levels in years. If you have variable rate debt, consider executing an interest rate swap to lock in the effect of’ a fixed rate. Since nearly all consumer receivables bear interest at a fixed rate, developers can generate arbitrage income without interest rate risk.

Over the past year, the U.S. dollar has taken a beating versus other currencies. This makes your product more attractive to purchasers whose income is generated in foreign countries. Since cost-effective American tours may be more difficult to generate during the next year, it may be advantageous to look to international tourists as prospective purchasers. Before doing so, however, be certain you have a financing source for foreign receivables.

Attempting to predict economic trends is a risky undertaking. The investors who purchased packages of sub-prime mortgages during the past few years were looking at crystal balls with a few cracks in them. Someone once said that anyone who claims to know the financial future is either a billionaire or a charlatan or one about to become the other.

To improve your chances of becoming the former rather than the latter, don’t panic, but don’t procrastinate. Think about and act upon the points I address. There are no guaranties of prosperity, but anticipating potential problems and taking action to prevent them from occurring will significantly increase your odds of success.

William J. Ryczek, RRP, works with Colebrook Financial Company, LLC and is active in ARDA-New England. His E-Mail.

The following appeared in the March, 2007 issue of Developments, The Voice of the Vacation Ownership Industry:

Timeshare Owners Associations: A Guide to Borrowing Money

Timeshare owners associations need money to manage their finances just like any other business. Some needs may be anticipated, others cannot. For example, funds may be needed for working capital to accommodate cyclical cash flow requirements or to make scheduled physical improvements. These needs are known and can be anticipated with a plan.

But others, such as the devastating storms of 2004 and 2005, wreaked havoc on resorts and left in their wake a great number of uninhabitable units and millions of dollars of uninsured damages. Deductibles and uninsured construction costs had to be paid to restore the resorts to operating condition, and in some cases, it made sense to perform renovations that were scheduled for future years while properties were closed and the structure torn apart.

Even without natural intervention, associations may face unanticipated major failures of resort facilities, have reserve accounts that have not been adequately funded, or have an opportunity to acquire assets such as amenities from the developer.

Assessments

One option in these circumstances is to require a large, one-time special assessment from all owners. Another is to spread the special assessment over a period of years. As funds become available, a project can be completed in stages.

These options avoid interest expense but may result in other problems. Such assessments, even if spread over several years, can strain the finances of individual owners. Delinquencies are a predictable outcome, and the income stream becomes uncertain. Further, completing a project in stages may be more costly and result in owner dissatisfaction if some units are renovated before others. And, in some cases, assessments must be tendered years before many of the improvements are seen and experienced by the owners.

Loans

Borrowing can eliminate many of these problems. Funds are advanced by the association as necessary to cover the cost of the work or transaction, and the financial burden on owners is spread over a period of years. They can swim in the new pool, sit on the new couches, and watch the new televisions without having to wait for the special assessment to be collected. The work can be completed in one phase, so benefits are delivered at approximately the same time to all owners. Finally, the flow of funds is predictable, so contracts can be signed and payments made to contractors without worrying about the timing of assessment payments.

Loans are typically made for a term of three to five years, with annual principal payments coinciding with the receipt of annual maintenance fees. The debt service can be built into the annual fee or structured as an assessment split into several payments. The lender will file a lien against the amounts due the association-both annual maintenance fees and special assessments-as collateral for the loan. In the event of a default, the lender would have the right to use those payments to satisfy the association’s obligations under the loan.

Many financial institutions may be reluctant to deal with associations because they are unfamiliar with resort operations and cautious about the viability of the security offered by the lien on assessments. However, there are specialty lenders in the timeshare industry that are comfortable with the risks posed by this type of borrowing. To qualify, an association must demonstrate that it employs good management. The board of directors should meet regularly, have thorough minutes, and provide sound direction to its management team. The resort must be well run with little dissent among its membership, and the collection of assessments should meet or exceed industry averages (with evidence that enforcement is taken when owners are delinquent).

The board will also have to produce a business plan and show that the assessments will be sufficient to service the debt. The plan should be based on conservative assumptions and anticipate the impact of delinquencies. If construction is involved, these contracts should be provided as part of the application to show that projects are meeting industry standards.

From a legal perspective, the board must provide evidence that it has obtained all required approvals under the organizational instruments of the association and the governing state law. It is not uncommon for the association’s legal counsel to give its opinion that all legal requirements have been met.

To Borrow or Not to Borrow?

Borrowing money is like any other business decision. It requires serious attention and thoughtful, deliberate analysis by boards of directors. Interest and closing expenses may increase the total cost of the project, but the benefits may more than compensate for the increase. Borrowing is a viable option and should be considered among the tools available to manage resorts in the best interests of members.

W. John Funk Esq., RRP is an attorney with Gallagher, Callahan & Gartrell, and William Ryczek is principal of Colebrook Financial Company, LLC. This article was developed from their session at ARDA -New England in December 2006. They may be reached at these e-mails:

John Funk | Bill Ryczek
Reprinted with permission from ARDA, 2007.