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The Future of the Industry Depends on It: The dreaded maintenance fee
by Dennis DiTinno
Our Industry, in the short time of two decades, continues to change reputations through the good, the bad and the ugly. The sales thought processes and federal and state regulations have changed dramatically over the years as well, and we have recently been regulated at our most critical asset - personal contact with a potential client. Yesterday’s reputation is yesterday’s news. Today’s “reputation” rests solely on the curb appeal of the pioneer projects of yesteryear.
With this in mind, we come to the question of maintenance fees, perhaps one of the biggest complaints of owners (and potential buyers) around the world. The sales staff, on the one hand, despises the maintenance fee as another hurdle to get over in the sales process. The management staff, on the other hand, relies on the income from the fees to properly maintain the resort property and its amenities.
By taking a look at how to properly set (and sell) maintenance fees, we can see that the fee can actually be a sales tool that guarantees the longevity of the resort property for years to come.
The Maintenance Fee
In Florida, as in many states that have recently adopted similar laws, the Developer must provide a factual operating budget for the resort and its amenities. The budget must also include reserves for the future replacement of major items. This factual operations fee must (or should) be included in the sales prospective and documents that the buyer will review and agree to.
The sales force must be able to understand and sell the need of the fees necessary to maintain the resort and to positively ensure the future of the resort as well as explain the possibility of future increases. This is a positive, not a negative, to today’s buyer.
With access to the Internet, real estate laws and government agencies, the buyer can now access information concerning the creditability of the resort operations and maintenance fees. They can compare them to other resorts, examine current rental rates and explore possible exchange opportunities before making their educated and informed decisions on the belief that these fees are honest and adequate and with the understanding that they will increase. They can even assess the management firm’s credibility by reviewing other resorts they have managed for the past 10 or more years.
Just like always, buyers still purchase on the dream of future vacations, but they now look to see if the building and all the amenities will actually be there under the financial plan implemented into the future. The importance of the “curb appeal” will either increase or decrease exchange opportunities, and being properly funded with competent management is the only way that this will happen.
From the beginning, the fees are normally compiled by an independent management company or consultant that must know the goals of the resort. Simple items like the replenishment of cookware and dishes are important decisions for style and use that will be easily matched in the future instead of purchasing an entire set for replacements. With all the information provided, the current developer must still approve the fee, the sales force must be able to sell the fee, and the management company must be able to live with the fee.
A realistic budget should include a minimum of the following items;
A simple formula to determine the amount of reserves to be billed each year to the owners would be to list the item (ex: roof), insert the current cost to replace (ex. $100,000), expected lifetime (ex. 20 years), estimated remaining life of the item (ex. 10 years), balance in account for the replacement ($50,000.00). With the remaining life of 10 years the $50,000 will be divided by the 10-year remaining life and divided again by the number of timeshare weeks. A projected cost increase should be added each year to compensate for material and labor increases. Yearly inflation must also be considered when establishing the annual budget, the same as would be expected at any owner’s home.
Income to show how this maintenance fees will be offset is also important. Items such as;
a) Late fees for delinquent payments should be written into the prospectus as well
b) Bad Dept is the anticipated number of owners management will end up foreclosing on for not paying their fees. This number must be worked back into the maintenance fee of all owners
c) Interest income from safe investments
d) Other miscellaneous income
1) Telephone
2) Vending
3) Merchandise
4) Rental items
5) Interest
e) Leased items
From these figures, the maintenance fee can be calculated by taking all expenses less all income generated from other sources (a through e) and dividing out to all owners either by percentage of ownership or by a straight line fee.
Today, we are working with owners that understand more about timesharing than many sales professionals. With the information that is readily available concerning resort complaints, financial statutes and resale markets to the never ending barrage of media about the economy, to how to negotiate the best rates for anything being sold or rented today has spurred a whole new range of questions our sales people must be prepared to answer. Properly funded maintenance fees and expenses must be one of them.
As timeshare sales continues to grow by more than 4% to 7% each year, we are finding ourselves in the middle of the largest group of individuals and families to market to - the baby boomers - and they demand honesty, a long term plan and an amenities package that fits every need for now and in the future.
With over 26 years in the Resort and multi-family industry, we have continuously found the difference between a community that maintains its value and one that eventually requires a special assessment is a strong budget, a perceivable written 3 and 5 year management plan and a well established reserve account. The biggest injustice a manager can do to its developer or owners is to submit an inadequate budget without proper planning. The value of the resort drops, the exchange company stops making exchanges and the owners either sell, deed back the unit or go into foreclosure. The resort, the owners and the industry lose.