The funds are focused on acquiring vacation properties in desirable locations at discounted prices. Investors can use the properties in their fund for personal vacations. The funds plan to have rental income covering all or most of the operating costs.
SherpaReport recently talked to two of the founding directors, John Long and Greg Salley, about their new residence funds (or equity destination club).
The two funds are the Villa Fund and Condo Fund. Each is scheduled to acquire a portfolio of 20 diverse properties in key vacation destinations – a mix of beach, ski and leisure. Current properties include a mid-century modern villa in Palm Springs, California with four bedrooms and bathrooms; an ocean-view villa in Maui, at the Ritz Carlton Kapalua Resort; and a condominium in Mammoth Lakes, California at the White Mountain Lodge in The Village.
The villa fund targets homes with a value around $1m, which have 3, 4 or 5 bedrooms. The condo fund is looking at homes in the $500,000 range which are more likely to have 2-3 bedrooms. The initial properties have a west coast focus, since the funds are head quartered in San Diego. The overall plan is to be bicoastal and the villa fund is already looking at a Florida home as the next acquisition.
"There's the opportunity to buy, in some places even below construction cost" noted Greg. "Now is the time to buy resort real estate. There may not be another buying environment like this in our lifetime," he added.
Pricing & Fees
Investors can currently buy a 1 unit investment in the villa fund for $91,800 which gives them 2 weeks of vacations a year. A larger 1.5 unit investment is currently $137,700 and provides 4 weeks of vacation at the fund homes.
Investment in the condo fund starts at $47,520 for 2 weeks a year or $71,280 for 4 weeks of annual vacations.
(Update: As of August 2013 the villa fund has filled its "preferred charter round" of initial investors, is buying two additional properties in Florida and is raising its prices to $96,000 and $144,000 for the 1 unit and 1.5 unit investments.)
How The Model Works
"Our model is, the partners have access 35% of the time and we rent the properties out 35% of time" said Greg. With this blend of owner usage compared to rental income, the funds expect that the rental revenue will cover the annual operating costs, and investors will not have to pay any annual fees. In other words the investors vacation time is essentially a free dividend each year.
The partner investors can also enjoy additional "space available" access, if the homes are not being used at short notice, and simply pay a per night fee to cover the cleaning and utilities.
From the initial investment, 90% goes into real estate. The fund management fees, which cover the overall management of the properties and the fund are paid out of the rental income. After 10 years, the properties are sold, and investors receive their money back, plus any positive returns.
The Management Team
There are four founding directors of Equity Residences, who together have more than 100 years of industry experience.
Steve Dering pioneered the country's first residence club in 1991 at Deer Valley Resort in Park City, Utah. His company DCP created the first residence clubs in Mexico, Bermuda and Florence, Italy. Greg is an experienced investor in real estate and foreclosures with multiple real estate holdings in the Western United States. John has almost 20 years experience in management, consulting, and private equity and holds an MBA from the Wharton School of Business. Ken Hamlet is currently a Senior Advisor at Crestview Partners, a New York City private equity firm with over $4billion under management. He most notably served as president and CEO of Holiday Inns Inc. Hotel Group, where he began his lifelong career in hospitality and real estate investments.
Summing up the whole idea Steve Dering said "It's an opportunistic real estate investment with vacation perks and a fixed liquidation event. The basic premise is to buy low, sell high, and enjoy the ride up."