Merger Helps Out Members
Of Bankrupt Destination Club

The 874 well-heeled people who put up deposits of as much as $1.3 million to join the Tanner & Haley Resorts destination club, which filed for bankruptcy protection this summer, are being offered a consolation prize.

Ultimate Resort -- an Orlando, Fla., rival -- has agreed to buy the club's real-estate assets for $98 million, and is extending new memberships to Tanner & Haley members.

Under the asset purchase agreement, which was announced yesterday, Tanner & Haley members will be able to join Ultimate Resort without having to pay the club's upfront deposit -- which ranges from $120,000 to $215,000. But they will face a number of restrictions on how often they can travel to Ultimate's properties.

Unlike most other destination clubs, Tanner & Haley had very few restrictions on when members could travel. Its business model ultimately proved unsustainable, as the company was forced to rent out homes at high costs to keep up with their members' demands. All Tanner & Haley members -- whether they chose to join Ultimate or not -- will remain unsecured creditors in the bankruptcy case. But they aren't expected to recoup much of their original deposits.

"I think most members are realistic," says Joel Lawson III, chairman of the unsecured creditors committee, which represents many Tanner & Haley club members in the bankruptcy proceedings. "This is an outstanding opportunity for members of Tanner & Haley to continue to do what they wanted to do when they joined, which is to travel."

The deal needs to be approved by a bankruptcy judge, who is expected to review the agreement on Dec. 19.

Destination clubs are a twist on the time-share concept for high-net-worth travelers. The clubs buy homes in desirable locations around the world, then charge membership fees for access to them. The model is more akin to a country club than a time-share. In most cases, members own no property at all; they just have the right to use an array of homes for a set amount of time each year. There are now more than 20 such destination clubs; the largest is the Denver-based Exclusive Resorts LLC.

Tanner & Haley, whose founder, Rob McGrath, pioneered the destination-club concept in 1998, filed for Chapter 11 bankruptcy protection on July 23, sending shock waves through the loosely regulated industry about the financial transparency and viability of some of the other clubs.

The problems at Tanner & Haley sparked calls for tighter regulation of the industry after it was revealed that many of the club's members could lose most of their deposits -- which started at about $85,000 for early members and went up to about $1.3 million for more recent ones.

Holly Etlin, Tanner & Haley's chief restructuring officer, says only about $10 million to $15 million will be available to pay back the membership and other creditor claims, which total roughly $350 million. Membership claims alone are estimated at $308 million. The bulk of the sale's proceeds will cover loans that allowed Tanner & Haley to operate under bankruptcy protection, and to pay for administrative and legal fees.

Ms. Etlin says the company is also setting aside some of the money to pursue possible litigation against "certain former officers and directors" and other parties. She says the company and the creditors committee are continuing a forensic investigation of the company's books "to see whether some money paid to those parties might be recovered."

While acknowledging that members may be frustrated with having to swallow lost deposit money, Ms. Etlin says the deal with Ultimate Resort is the best outcome for members who wish to continue using the company's homes. The details were still being finalized late yesterday, but under one proposal, Tanner & Haley members would be able to join Ultimate without having to pay a deposit, but would pay annual dues between $11,000 and $16,000, Ms. Etlin says.

That would entitle them to travel for two to three weeks a year. Members would have the option of staying at the homes for more time, depending on what package they choose.

It's unclear what would happen if a Tanner & Haley member chooses to join Ultimate and then cancel his membership. "There is no refund available if they join Ultimate," Ms. Etlin says. "There might be one in the future under certain circumstances."

Selling Tanner & Haley members on joining Ultimate is critical to the deal. The purchase agreement requires that at least 400 Tanner & Haley members join Ultimate, Ms. Etlin says.

"I'm relatively sure I'd opt to stay in the new club," says John Harvey of Oklahoma City, who's listed in the Tanner & Haley bankruptcy filing as having a $1.3 million claim. "For a lot of us, we don't relish the thought of joining a new club and coming up with new dues. It's either this or liquidate the club for pennies on the dollar."

The purchase of Tanner & Haley's homes greatly expands Ultimate's current portfolio of 10 properties, located in 10 destinations, including Lake Tahoe, Nev.; Steamboat Springs, Colo.; and New York City. The club currently has 90 members.

Under the agreement, Ultimate will purchase roughly 60 of the properties that Tanner & Haley owns world-wide. That represents the bulk of Tanner & Haley's properties, which were appraised at about $130 million. Ms. Etlin says Ultimate would also agree to take over many of Tanner & Haley's 80 long-term leases.

Ultimate Chief Executive Officer Jim Tousignant says that unlike Tanner & Haley, his club will not have to lease properties in order to keep up with demand. He says Ultimate plans on "taking on some additional properties" as a transition strategy over the first four to six months. Ultimately, the new Ultimate will have over 100 properties in 24 destinations, Mr. Tousignant says.

The destination-club industry has been consolidating rapidly. Also this week, two small clubs -- called Solstice and Parallel -- announced that they are merging. The new club will have 80 members and 10 properties in places such as Aspen, Colo.; St. Barth's; and Napa Valley, Calif. The new club will operate under the name Solstice.

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