Destination clubs don't need regulating, auditor decides
By Andrew Gomes
Advertiser Staff Writer
By Andrew Gomes
A state effort to protect consumers by regulating the fast-growing "destination club" business is unwarranted, according to an audit that concludes the public isn't being harmed by the industry often confused with time-sharing.
Destination clubs, which typically offer use of luxury vacation homes and other benefits to dues-paying members, have been expanding rapidly in recent years. They are well represented in Hawai'i, with eight clubs operating or developing about 80 residences statewide, according to the report from State Auditor Marion Higa.
The state Department of Commerce and Consumer Affairs seeks to regulate the industry under an existing law regulating time-share sellers.
The agency, with support from a destination club industry coalition, helped produce Senate Bill 697 during last year's legislative session. By law, the Office of the Auditor had to analyze the measure and the need to regulate a previously unregulated industry.
But the auditor's report released yesterday said there is no apparent need for state regulation, and that doing so under Hawai'i's time-share law would be problematic.
Higa said the industry is primarily selling memberships to wealthy individuals well-equipped to assess the merits of destination clubs.
"You have to demonstrate that consumers would be harmed," she said in an interview. "There's not an unprotected public out there that could otherwise be duped into an unwise investment."
The audit report said destination club members typically pay initial deposits from $35,000 to $3 million plus annual dues from $6,000 to $100,000 to stay in multimillion-dollar homes around the world often with transportation, private chefs and other services.
Club operators typically allow members to recover 80 percent to 100 percent of their deposits if they decide to leave, as long as new members are added.
The Department of Commerce and Consumer Affairs began investigating the business in 2004 based on an advertisement by Denver-based Exclusive Resorts, a company established by Steve Case, the Hawai'i-born co-founder of AOL and majority shareholder of Maui Land & Pineapple Co.
The agency took the position that Exclusive Resorts needed to register as a time-share seller under state law, and in 2005 advised the company it intended to file a civil lawsuit over the issue.
Though a suit wasn't filed because the two sides opted to negotiate a resolution, a state judge in a private lawsuit later ruled that Exclusive Resorts wasn't a time-share business, in part because members lack ownership interest in any real estate.
Still, Exclusive Resorts and the DCCA agreed to develop model legislation with assistance from an industry coalition to provide consumer protections relating to destination clubs.
In 2006, interest and pressure to regulate the industry grew after a Connecticut-based firm that pioneered the destination club industry, Tanner & Haley Resorts, filed bankruptcy and couldn't refund deposits for its nearly 900 members.
The audit report noted that since the Tanner bankruptcy, destination club businesses have made many changes to ensure the industry's long-term success.
The industry trade group Destination Club Association in a statement said it was pleased that the auditor's report recognized industry efforts to promote responsible business practices and consumer protection, but that it still favors legislation that would make voluntary self-regulation practices mandatory.
"We do not share the report's recommendation that the proposed legislation, which was promoted by the DCA, is not warranted," the group said.
The Department of Commerce and Consumer Affairs also still believes some form of regulation is needed to protect consumers.
Reach Andrew Gomes at firstname.lastname@example.org.