By Evelyn Guadalupe Fajardo of Caribbean Business
Published in The Puerto Rico
Herald
July 5, 2001
The time has come for Puerto Rico to do more timesharing. While timeshares - also known as vacation ownership -
are a booming industry on the U.S. mainland and in the Caribbean, Puerto Rico's market is underserved. That means
the island is missing out on one of the fastest growing sectors of the hospitality industry.
Worldwide timeshare sales totaled $6.1 billion in 1998, representing a 20% hike since 1994. Timeshares allow participants
to share ownership of a unit--a room, apartment, house, or estate. Each person buys a set period of time to use
the unit, normally one or two weeks per year.
In interviews with CARIBBEAN BUSINESS, industry experts pointed to lack of interest on the part of the Puerto Rico
Tourism Co. as the reason why timeshare development is on the back burner of the island's tourism agenda. Lack
of aggressive financial incentives for their development and lack of awareness about stringent federal consumer
protection regulations have contributed to the problem.
"Puerto Rico's excellent timeshare law is comparable to Florida's--considered the strictest in the U.S. Both
focus on protecting consumers. Why not exploit that and look for investors?" wondered an industry expert.
Some believe the problem with the timeshare industry is that it is still plagued by recurring reports of fast-talking
salespeople and shaky investment promises in places like Florida.
There, for example, some companies sell vacation packages (a discounted Bahamas cruise or a trip to Florida) directly
to the consumer or through telemarketing efforts without telling consumers that they must view a 90-minute timeshare
sales presentation.
That's why the federal government has implemented strict consumer protection regulations. The Federal Trade Commission
(FTC) can take action on consumer complaints by suing the timeshare company for unlawful practices, and getting
the money back to consumers.
Puerto Rico doesn't seem to have been affected by the hard-sell reputation the timeshare industry may have earned
elsewhere in the past. There are four operating timeshare resorts on the island--El San Juan (ESJ) Towers in Isla
Verde (opened in 1969); Club Cala at Palmas del Mar in Humacao; and Hyatt Hacienda del Mar, along with newcomer
Aquarius Vacation Club at Embassy Suites Dorado del Mar. The four properties combined have 418 timeshare units,
amounting to about 21,318 weeks. They employ nearly 600 people. This is nearly twice the 240 units and 12,000 weeks
available in 1998. And more could be on the way.
Fifty percent of sales in timeshare properties in Puerto Rico are to local residents, according to Bryan Tenbroek,
assistant vice president for resort sales and services at exchange company Interval International.
David Lylis, director of sales and marketing for Cerromar Development Partners at Hyatt Hacienda del Mar, says
a timeshare market's existence in any destination means the developers are on their way.
"I expect that in the next couple of years, there will be more timeshare presence in Puerto Rico," Lylis
predicted. "We were in the planning process for three years before we started to show presence."
Hyatt Hacienda del Mar is still in its sales process, but Lylis said the property is on track for its 4.5-year
sellout schedule (the date when the last timeshare unit is sold), projected for the end of 2002.
Humacao's Plaza Resort at Palmas is a timeshare project in the works that will have 26 mostly two-bedroom units.
Two projects still in the early planning stages are a 250-unit Marriott Vacation Club at Dos Mares in Fajardo,
and a 150-unit resort in Luquillo.
Westgate Resorts, the largest company in the U.S. dealing strictly in timeshare development, has publicly stated
it would extend its portfolio to Puerto Rico immediately if it found the right property.
The importance of incentives
For years, tax incentives have made developing condo-hotels on the island more attractive to investors & developers
than timeshare development.
"It's true that people buy condos because of tax incentives, but the fact is it costs hundreds of thousands
of dollars to buy a condo and just thousands to purchase a timeshare," Tenbroek said.
An average price for a two-bedroom timeshare normally is about $15,000. Prices can fluctuate between $5,000 to
$100,000 depending on the season, the quality of the accommodations, and the location. There is an annual maintenance
fee assessed, usually about $400.
Like apples and oranges, condo-hotels and timeshares are two different markets.
"In Puerto Rico, developers feel comfortable purchasing a property and dedicating it to tourism in exchange
for tax incentives," said Samuel Rosado, deputy executive director of planning & development at the Puerto
Rico Tourism Co. "There is a benefit in purchasing real rights. A timeshare can be registered, which is good,
but in reality you aren't buying real estate."
There are two basic types of timeshare units sold: fee simple, where the buyer gets title to a fraction of the
unit; and right-to-use, where the purchaser is entitled to use the unit for a specified period of time, but doesn't
have an ownership interest.
Timeshare owners share both the use and the costs of upkeep of their unit and the common grounds of the resort
property.
With timeshares, consumers acquire a real property interest that can be registered in the registry of property
and mortgaged. Sometimes it may be difficult for a timeshare buyer to secure external financing, unless it's a
property attached to a branded resort that has its own source of financing and uses the unit as collateral.
Timeshare purchases are typically financed by consumer loans of five to 10 years, with terms dependent upon the
purchase price and the amount of the buyer's down payment.
Consumer loans play an integral role in the timeshare sales process. Most resorts indicate that the primary reason
they service their own paperwork is to facilitate their sales, although the servicing of accounts receivable can
be extremely profitable for developers. Most developers service receivables paperwork in-house.
For the timeshare developer, it is less complicated to secure financing through conventional lenders or local banks
than using the Puerto Rico Government Development Bank's (GDB) Afica financing, which grants tax exemption to eligible
private sector bond issues.
"Timeshare developers get construction loans or interim loans from local community banks and lenders,"
said the industry source. "When they sell 51 weeks (one or two weeks aren't sold to allow time for maintenance),
buyers of the timeshare unit are able to finance it with a permanent loan."
Puerto Rico's Timeshare and Vacation Club Act of 1995 doesn't prohibit using Afica financing for developers to
invest in timeshare projects, but it wasn't designed for it either.
Like hotels, timeshare developments are high-risk investments because tourism is known to be cyclical. To help
minimize risk, the local government created the 1993 Tourism Incentives Act delineating specific tax benefits for
developers, including those interested in timeshare operations.
The government also provided investors with another incentive. A GDB subsidiary--the Tourism Development Fund (TDF)--was
created in 1993 to jump-start hotel real-estate investment by guaranteeing principal and interest. However, in
March of this year, the GDB announced it was eliminating the TDF.
Now the GDB proposes to issue up to 10% in subordinated debt to prospective investors of tourism projects instead
of guaranteeing 60% of the total cost of a hotel project to be financed.
The remaining 90% will have to be split between private banks financing 50% of the project and private investors
putting up 40% in capital or equity.
Branded vs. unbranded
Despite more hotel brands entering the timeshare market, 85% of timeshare business worldwide is in unbranded properties.
Support from respected name brands such as Marriott, Hyatt, Hilton, Starwood, and Disney have done much to reassure
skeptical stateside customers, leading to the industry boom, the effects of which are slowly spilling over locally.
The aforementioned companies, although representing 15% of the total timeshare market, have pumped in capital and
made commitments that show their interest.
One of Orlando's oldest names in the timeshare business--Vistana--disappeared last year when Starwood bought it
and renamed it Starwood Vacation Club.
"There are more brands in the timeshare industry that are changing the way timeshares are sold and used and
providing product consistency," said Gilbert, of Interval. "Twenty years ago, most developers didn't
stick around the timeshare industry unless they put a brand name on it to legitimize it because the early entries
tarnished the reputation."
Timeshare sales are often the result of unit-owner referrals to companies, which conduct in-house promotion and
marketing of their products and destinations to owners.
"If we built a timeshare resort in Puerto Rico, we would sell thousands of vacation packages through our telemarketing
efforts," said David Siegel, president and CEO of Westgate Resorts. "We would sign contracts with several
local hotels and rent thousands of room nights to be used for our vacation packages."
Although Westgate has over 3,000 villas in Orlando, the company still rents hundreds of thousands of hotel rooms
to accommodate guests, who are brought in because they have an interest in buying a timeshare. Not counting the
employment timeshare resorts generate for the tourism industry, timeshare guests tend to spend 50% more than the
traditional tourists because they aren't paying for lodging.
"We [Westgate] keep a lot of smaller tourist attractions in business," Siegel said. "We spend millions
of dollars renting locations in malls, hotel lobbies, restaurants, gift shops, and convenience stores to lure tourists
into taking a 90-minute presentation of our timeshare properties."
Marriott was the first major hotel company to enter the timeshare business, and has become the largest hotel company
in timeshare. The largest of its timeshare properties is its 164-acre Grande Vista Resort in Orlando.
Marriott only has two of its 51 Marriott Vacation Club brands, considered its quality tier, in the Caribbean. The
company's first Caribbean timeshare property was on Paradise Island in Naussau, Bahamas (at which all the units
are already sold and now managed by Marriott) and the other is in Aruba.
"We are continuing to look for opportunities in the Caribbean," said Ed Kinney, senior director of brand
and public relations for Marriott Vacation Club International.
For Marriott to build a timeshare project the destination must have a great location, financial feasibility, marketability
and last but not least good air access.
"In 1990, Paradise Island was our first opportunity out of the country due to its accessibility," Kinney
said. "The location was determined by consumer demand."
Marriott Vacation Club doesn't have a timeshare property in Puerto Rico, but the company has a sales office in
Condado.
"We have looked at opportunities in Puerto Rico for years," Kinney said. "It's just a matter of
having the right opportunity."
Timesharing in the Caribbean
The Caribbean was ranked the No. 1 foreign timeshare travel destination by U.S. mainland respondents to a Vacation
Ownership 2000 study sponsored by exchange company Interval International and conducted by Yesawich Pepperdine
& Brown.
Because it is the most popular destination among current and potential buyers of vacation ownerships, demand for
timeshares in the Caribbean is said to be far greater than supply.
"The industry is bullish in the Caribbean and we're starting to see development in the marketplace,"
said David Gilbert, senior vice president of resort sales & service for Interval. "There is opportunity
for independent as well as brand developers."
According to a 1999 study sponsored by exchange company Resort Condominiums International (RCI) and conducted by
Ragatz Associates, there are 128 timeshare projects on 15 islands in the Caribbean.
Just two islands contain nearly one half (48.7%) of all timeshare units in the Caribbean--Aruba with 30.4% and
St. Martin with 18.3%. Other countries with more than 5% of the total are the Dominican Republic with 13.3%, the
Bahamas with 11.3%, and the U.S. Virgin Islands with 6.1%. The study was conducted among 5,000 randomly selected
RCI members who own Caribbean timeshares.
None of Puerto Rico's timeshare developers use RCI as exchange providers, instead they are affiliated with Interval
International. More than 99% of timeshares in the U.S. are affiliated with one of the two largest exchange companies,
Interval International or RCI.
These companies arrange exchange opportunities, one of the most popular features of timeshares. Exchange allows
the buyer of a timeshare at one resort to exchange it for another week owned by someone else at another place.
One industry leader stated, "Exchange and timeshare wouldn't exist without each other."
There are several primary methods for exchanging timeshare weeks. Direct exchange is the simplest approach, where
one timeshare owner finds another owner who is interested in exchanging his week for another. The other exchange
option occurs when timeshare ownership is part of an exchange program that includes multiple resorts in different
locations. In these arrangements, a timeshare owner can exchange their week for a week at another resort within
the group.
The most common exchange method is through a timeshare exchange company. To do this, a timeshare owner must deposit
their week with the exchange company. As other owners deposit their weeks (and as resorts deposit unsold weeks
with the exchange company), the exchange company builds up an inventory of weeks that are available for exchanges.
Unsuccessful attempts at exchanging have soured many owners on timesharing and timeshare exchanging. This usually
happens when the owners either don't understand how the exchanging system works, or have unrealistic expectations
about the type of timeshare exchanges they can make with the week they own.
A timeshare owner may also have the option of renting their week, depending on their contract, if they plan not
to use it. They can also bank their week, if they don't want to travel that year, and use two weeks the following
year. This option also will vary depending on the timeshare company.
Meanwhile, Interval International's most recent studies rank Puerto Rico as the No. 4 exchange destination in the
Caribbean, behind Aruba, Cancun, and St. Martin.
Last year, Interval International--who administers the exchange service for owners in the five timeshare resorts
on the island--sold 32,450 room nights in Puerto Rico (comprising 4,635 exchanges) and transported 13,900 visitors
to the island.
Aruba and St. Martin may be Puerto Rico's two strongest timeshare competitors, but Tenbroek says neither rival
has a local population that can buy into the product like Puerto Rico.
"It's pretty impressive that 50% of timeshare sales in Puerto Rico are to local residents."
Lylis, of Hyatt Hacienda del Mar in Dorado, says his company decided to develop timeshare in Puerto Rico because
they felt the security of being close to home.
"Developing timeshares in the Caribbean has its challenges," Lylis said. As examples, he mentioned small
population, small tourist counts, the ability to generate viable customers, and the costs of development on more
remote islands.
According to the RCI study, about $2.6 billion of timeshares in the Caribbean have been sold in 128 projects to
221,950 households. Average purchases vary by island, but overall are about 1.4 week intervals for 310,425 sold
weeks.
The average timeshare project in the Caribbean has 64 units, which is more than the average 54 units for projects
in the States. However, the average ranges widely among the islands, from 19 units on St. Lucia to 165 units on
Aruba. Seven islands contain projects with over 100 units: Aruba, St. Martin, Puerto Rico, Barbados, Curacao, the
Cayman Islands, and the Dominican Republic.
The RCI study also reveals that U.S. mainland residents made 75% of the timeshare purchases in the Caribbean. One-third
of these reside in four states--New York, New Jersey, Massachusetts, and Florida. Europeans and Canadians account
for 11.7% and 5.7% of timeshare purchases, respectively. The timeshare industry also contributes significantly
to the region's economy.
The RCI study claims that the average timeshare owner expects to return to the Caribbean 7.5 times in the next
decade. This number is reduced to 3.9 times for those not owning timeshares in the region. In 1998, the year-round
occupancy rate in resort timeshare projects in the Caribbean was 88.3% compared to 66.7% in the hotel industry.
The average timeshare-vacationing party spends 10.3 nights in the Caribbean while on a timeshare vacation, including
occupancy of a timeshare unit and other forms of overnight accommodation. The average visitor party size is 2.9
persons. Thus, the timeshare industry annually generates over 10 million visitor-days in the Caribbean.
On average, timeshare parties spend about $2,294 during their stay, excluding the timeshare purchase price. About
half (48.1%) of this is spent on restaurants and shopping. Direct consumer expenditure of timeshare vacationers
in the Caribbean is about $785 million. Another $485 million is spent annually on travel expenditures.
The timeshare industry is also responsible for producing about 11,000 direct and indirect jobs and about $200 million
in payroll in the Caribbean. While deed-in-perpetuity is the most common method of title conveyance among timeshare
projects in the U.S., this isn't the case in the Caribbean.
A deed-in-perpetuity keeps the property in a family on the condition of it being never-ending.
Only 27% of the timeshare projects in the Caribbean convey deeded ownership, and some of these may not be the traditional
type of deed seen in the States. The majority (68%) provides a right-to-use for a specific number of years, with
the term ranging from 15 to 99 years. Most fall between 25 and 75 years, for an average of 51. Puerto Rico's timeshare
projects provide right-to-use.
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