Man of Leisure

If anyone needed a good vacation during the past few years, it was Steve Case. In early 2000, the celebrated founder of America Online engineered AOL's merger with Time Warner, which turned into the dot-com era's most disastrous deal. But whenever Case, who stayed on as chairman, wanted a break from the postmerger bickering and falling stock price, planning a respite seemed only to lead to more stress. Like any bona fide mogul, he owned his share of vacation homes--in Florida, New Mexico and San Francisco. When he took time off, he felt obligated to visit these places, even if he really wanted to explore someplace new. "You feel guilty--you might as well go there because you're paying for it," he says. "It's an odd dynamic." When he did venture further afield, the destinations didn't always live up to their billing--like the Hawaiian villa he rented on the Internet that turned out to be oddly configured, leaving two of his five children to sleep on couches. True, having too many travel options is a nice problem to have, but when it came to vacations, Case says, "I had enough experience to know there had to be a better way."

At about the same moment, Brent Handler was trying to create one. In 2002 Handler, a 33-year-old Denver-based entrepreneur, launched a vacation club called Exclusive Resorts. The start-up offered wealthy folks the chance to forgo buying a vacation home, and instead pay an initiation fee and annual dues for the right to use luxury residences at a wide variety of properties. But luring customers proved challenging: by the spring of 2003, Exclusive Resorts had just 25 members and four homes. Then Handler noticed Case's name on the list of people who'd requested information from his Web site. "I wonder if that's the Steve Case," Handler mused, dialing the number. It was. Case, who had just resigned from AOL Time Warner, was instantly intrigued by Handler's business model. The two met for breakfast. "I agreed on the spot to buy half the company," says Case, who has since invested more in Exclusive Resorts--and has begun selling off his vacation homes. "It was a great concept--it was only a matter of time before it became more mainstream."

Today, Exclusive Resorts is the leading player in the burgeoning "destination club" industry, but it's competing in a marketplace that's experiencing some growing pains. In July, the industry's oldest player, Tanner & Haley, filed for bankruptcy, raising questions about whether the economics of these home-rental clubs may be too good to be true. Case's team won't reveal much about Exclusive Resorts' finances but insists the 2,400 customers are happy and profitability is only a year or two away. The start-up is typical of the ventures Case is investing in at Revolution LLC, his Washington, D.C.-based holding company. "The goal is to find early-stage companies with an idea we think has the potential to be a multibillion-dollar business ... built around the idea that there's a better way," he says.

Outsiders have compared destination clubs to time shares or "fractional ownership" resorts, but in truth they operate much differently. Exclusive Resorts offers three membership plans, with clients paying an upfront fee (ranging from $225,000 to $425,000) and annual dues (from $10,500 to $27,500). Unlike time shares or fractionals, which give owners a limited ownership interest in a specific property, destination-club members don't own anything--instead, they get the right to use the club's 300 vacation homes, located at 35 hot destinations (from Manhattan and Beaver Creek, Colo., to Costa Rica) for up to 45 nights a year. Each member gets an allotment of prime-time weeks, advance reservations and last-minute choices. If an Exclusive Resorts member resigns, they receive a refund of 80 percent of their upfront deposit.

The homes, worth an average of $3 million, include sprawling oceanfront and slope-side residences. Many have four bedrooms (each with private bath), gourmet kitchens (fully stocked with chef-quality cookware, spices and staples like coffee) and private pools. At the Carnegie Abbey golf club just south of Newport, R.I., member-services director Carrianne Shanks drives a golf cart to the front of one of the homes. Inside, its centerpiece is a magnificent stone fireplace that climbs the wall of the two-story living room. Outside, you can see the ocean from the wraparound screen porches. At each resort, a concierge stands ready to arrange tee times, spa treatments or boat outings; hire private chefs; or order groceries. At Carnegie Abbey, recent entertainment options included a cocktail party with Prince Albert of Monaco, who was visiting for the weekend.

The destination-club concept was launched in the late 1990s by Rob McGrath, who founded the company that was later renamed Tanner & Haley. Handler got the idea for Exclusive Resorts by reading about McGrath's outfit in the newspaper. The Helium Report, a Web guide covering the sector, reports that there are roughly two dozen companies offering destination-club plans today, but some have fewer than 100 members. By some estimates, the entire industry has only slightly more than 4,000 members, so with 2,400 members, Exclusive Resorts controls more than half the market (graphic, page E10). "They are so dominant that it's going to be really difficult for anybody else to catch up to them," says Dick Ragatz of Ragatz Associaties, a market-research firm specializing in the resort industry.

The clubs' appeal is based on a simple premise: the reality of owning a vacation home is far less satisfying, both emotionally and economically, than it sounds. Atlanta physician Mark Feeman used to own a beach house and a mountain retreat, but he grew tired of the expense and maintenance hassles. "While the kids went hiking and my in-laws got to stay for free, I was waiting for Billy Bob the gravel guy to show up," says Feeman, who sold both places when he joined Exclusive Resorts. Many second-home owners share Case's complaint: that they feel a nagging obligation to visit their vacation residence to justify the cost, even if that means skipping other trips that might be more fun. The average vacation-home owner spends just 39 nights a year there, according to the National Association of Realtors, and when you prorate the costs--property taxes, utilities and upkeep--over such short stays, the per-night cost may exceed a stay at the Ritz Carlton.

Selling prospective members on that math has grown easier as the housing boom has faded. Three years ago, Case says, "people felt any idiot could buy resort real estate and make money--and for a brief period of time, it was true." Today people aren't as sure a second home will appreciate in value, causing more to view it as an expense rather than an investment. Viewed in that light, Exclusive Resorts' proposition can be compelling.

In July the company added 250 members, its best month ever--a momentum it attributes to its snowballing size. Case says destination clubs enjoy a "network effect," just like AOL or eBay: the more people that join, the more enjoyable it is, because the company can use their initiation fees to buy more homes in more destinations. Handler, the company founder, says Case recognized this dynamic early on and urged his team to scale the business quickly. "What Steve really provided us more than anything else was confidence," Handler says. Soon after Case bought in, a developer offered to sell the company its first home at Telluride. Instead, Case urged his team to buy nine--a deal that exceeded $30 million. Today the company buys 20 or more at a time, allowing it to get discounts from builders and to spread the costs of housekeeping, maintenance and concierges over multiple properties. Better inventory also limits complaints from members who can't always get a house they want at a specific destination during, say, school-vacation week.

Despite Exclusive Resorts' apparent momentum, its rival's bankruptcy filing--which followed months of rumors about its deteriorating finances--has raised questions about the entire industry's economics. According to industry observers and Tanner & Haley's own court filings, the company erred by offering its members overly generous financial terms (including 100 percent refunds when they resigned), leasing too many homes instead of buying them, and spending too much on short-term rentals to accommodate customers who insisted on booking trips during peak vacation times. Says Case: "I personally never understood their model."

In contrast, Exclusive Resorts managers say they're charging members more in dues for fewer nights of lodging--a key reason, they say, their business is viable. Members' dues already cover the costs of operating the homes, execs say, and within a couple of years Case's team expects revenue will also cover overhead and new-home costs, turning the bottom line from red to black. "We've never been stronger, our members have never been happier and our company has never been more stable and sound," says Donn Davis, the company's CEO and Case's longtime lieutenant. To reassure members, Exclusive Resorts now undergoes an annual independent audit and has promised members it holds sufficient assets to pay their 80 percent refund if the club were to liquidate. Some observers see this transparency as the upside of Tanner's woes. "It's a good shakeout--it's almost a relief that it's happened," says Adele Cygelman, editor of Robb Report Vacation Homes. "Now the top players can rethink their priorities and hopefully they'll just get stronger."

Eventually, Case and his team envision Exclusive Resorts serving tens of thousands of members. As the concept catches on, they wouldn't be surprised if luxury-hotel players like the Four Seasons or Ritz Carlton enter the fray, and Case suggests it's an industry that's likely to become segmented, with individual clubs geared toward skiers or golfers. Some clubs may even move down-market, providing access to people who lack the $3 million-and-up net worth that constitutes Exclusive Resorts' target demographic. For now, though, the company's clients seem content to enjoy themselves. Bill Finnegan, a Texas attorney whose family became Exclusive Resorts' 2,000th member in June, says he's thrilled to avoid the huge hotel bills he used to face when checking out of luxury resorts. "At the end of the trip, that kind of ruins it for me--it's a lot easier to make a dues payment at the start of the year, then it's done," he says. It's yet another reason why when it comes to vacations, membership does have its privileges.