| On the brink of a boom? Four timeshare resorts in Puerto Rico have 444 units—an almost 100% increase over 1998—and, if the road is cleared, more developments are on the way.
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 disinterest 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 some 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 does not 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 444 timeshare units, amounting to about 22,644 weeks. They employ nearly 800 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 are not 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 does not 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 are not sold to provide 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 does not 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 are not 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 does not 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 would not 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 one-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 is not the case in the Caribbean.
A deed-in-perpetuity keeps the property in a family on the condition of 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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Westgate Is Eager To Build In Puerto Rico
What is Westgate Resorts?
The answer is simple. Orlando-based Westgate is none other than the largest company dealing strictly in timeshare development.
Westgate’s portfolio includes seven luxury timeshare resorts—Westgate Vacation Villas, Westgate Lakes, Westgate Town Center, Westgate Towers, Westgate Miami Beach, Westgate Daytona Beach, and its newest resort, Westgate Smoky Mountain Resort in Gatlinburg, Tenn.
Plans for an eighth resort, Westgate at the Canyons in Park City, Utah, are under way. And the timeshare giant has chosen Puerto Rico as its ideal location for its expansion outside the U.S. mainland.
"I love Puerto Rico. I think it’s a beautiful country that offers visitors so much; history, culture, a rainforest, beaches, mountains, and friendly people," said David Siegel, president and CEO of Westgate in an exclusive interview with CARIBBEAN BUSINESS.
Westgate has some 6,000 employees throughout Florida, of which 1,000 are Puerto Rican or of Puerto Rican origin.
Siegel is seeking to build 500 to 1,000 timeshare villas, measuring 1,600 square feet, on the shore between San Juan and Fajardo. A project of this magnitude would require investing between $100 million and $500 million and would create 1,500 to 2,000 jobs in sales, marketing, housekeeping, and maintenance.
"I would like to buy 25 to 50 acres of land, depending on whether we decide to build a high-rise or mid-rise project," Siegel added. "We’ve been looking at the former Crowne Plaza in Isla Verde, which is up for sale. However, we’ve been unable to come to terms with the price."
Westgate has also eyed two other sites: one in Luquillo and another at Coco Beach in Rio Grande.
"The 30 acres at Coco Beach would have been perfect for us because they were right on the ocean with a golf course, but again, we’ve been unable to come to a compromise on developing," Siegel said. "The problem is that people show us land and say it will be ready for development in six months. We come back a year later, and nothing has happened. We are ready to build in Puerto Rico tomorrow if the opportunity presents itself."
For Westgate, key elements that make Puerto Rico a more attractive location for potential development than other Caribbean and Latin American destinations include its effective timeshare law, the fact that 5,000 Puerto Ricans already own Westgate timeshare units, 1,000 of Westgate’s 6,000 employees are from Puerto Rico, and the company’s sales office in New York caters to the city’s large Hispanic population.
Adding those components up, Westgate believes Puerto Rico could showcase its flagship resort in the Caribbean.
Siegel has been in the real estate development business since the 1970s around the Walt Disney World area. He owned an 80-acre orange grove next to Disney’s main entrance and for five years he was growing oranges and grapefruits.
"One day a man came up to me and said he would like to buy 10 acres from me to develop timeshares," Siegel said. "I asked him what that was and he took me to a timeshare resort in St. Augustine, where there was an old closed-up hotel on the shore that they had fixed up one room and people were lined up buying a week at a time."
Siegel was so impressed by the fact that people would buy a week, instead of a condominium, that he decided that was a good business for him to start.
"I started with 16 timeshare villas (2 buildings of eight units each) and decided to build them on the worst piece of my land, just in case the business failed and I wouldn’t ruin the remainder of the property," Siegel said. "I put up a tent on one of the coldest days in December of 1982 and surrounded it with some heaters I took from the orange groves."
The site had no swimming pool or clubhouse, but it did have a hand-painted sign that said "future site of swimming pool" stuck in some sand next to the tent. To Siegel’s surprise, 19 years later, those 16 units have blossomed into more than 3,500 units sold. |
