Timing New York’s timeshares

While some say the tiny market for shared apartments will expand, others say they’re too costly to develop and have high foreclosure rates

New York /
Aug.August 01, 2011 02:52 PM

For all the unconventional housing arrangements people devise to afford living in New York City, the timeshare, historically, has not been one of them. There are just two timeshare-only buildings in all of Manhattan.

And, at first blush, the owners of those timeshares — at the 161-unit Hilton Grand Vacations Club On West 57th Street and the 300-unit Manhattan Club On West 56th Street — appear to be struggling.

Since opening in 2009, the Hilton Grand has seen 52 lis pendens, or pre-foreclosure filings, and six foreclosures among its timeshare owners. Meanwhile, the Manhattan Club has witnessed 17 lis pendens and 22 foreclosures since 2007, according to real estate data website PropertyShark.

If you include data from Manhattan’s other big block of timeshares — 72 units on the top two floors of 1335 Sixth Avenue, which share the building with the Hilton Club hotel — the totals balloon to 285 total lis pendens and 108 total foreclosures spread over a pool of 533 units. (There are other scattered timeshare units throughout the city, but no comprehensive list of those units is publicly available).

With all of that distress, it might appear obvious why no developer has swooped in to expand Manhattan’s very small timeshare market. But those first-glance numbers don’t tell the whole story.

Firstly, timeshares can be expensive, meaning they may only appeal to a small group of buyers. The average cost of a week at the Hilton Grand is between $40,000 and $60,000, according to Michael Brown, executive vice president of sales and marketing for Hilton’s U.S. Division; he noted that the price can climb to $165,000 for a high-demand week such as Christmas in New York.

Also, the sponsors often act as lenders to buyers in need of financing , and the money doesn’t come cheap. Buyers often put 20 percent down, just as many apartment buyers do, although they face higher interest rates. According to Mark Eble, a senior vice president at hospitality advisory firm PKF Consulting, a 15 percent interest rate is standard nationally for such loans.

And buyers are limited in when they can use units. Owners pay for the right to a week in a specific unit type (most commonly a studio or a one-bedroom) — during a specified season, but they’re not guaranteed the same unit each time. So, each unit can be sold to upward of 50 shareholders. (Generally, one to two weeks are left unbooked, so that the unit can undergo maintenance.)

Under this structure, if one of a unit’s owners defaults, it’s not necessarily bad news for the building owner. The building owner simply puts the unit back on the market, and ultimately generates even more revenue because another buyer means another down payment.

One obstacle developers face is marketing costs, especially in an economic environment like this. Unlike typical condo sales, where just one buyer is needed per unit, it can take years to completely sell out even a single timeshare unit.

“Twenty to 30 percent of the cost of timeshares is derived from marketing and sales,” Eble estimated.

Given that lengthy sell-out process, it’s easy to see why timeshares have been far less popular with developers than hotels. (There’s also the fact that as far as consumers are concerned, hotels have more brand recognition, and that timeshares haven’t fully shaken off the idea that they’re somehow fraudulent — a reputation they earned when they first became popular in the 1950s, Eble said.)

The two most recently developed timeshare properties in Manhattan are owned by Hilton Worldwide. In 2002, the company converted the top two floors of 1335 Sixth from hotel rooms into timeshares. Those timeshares sold out, and in the wake of its success, Hilton introduced the 57th Street ground-up timeshare in 2009.

Brown said the former has 3,100 owners (some owners take more than one week), while the latter is “ahead of projections,” as nearly 75 percent of its inventory is sold. According to Brown, less than 4 percent of the owners of the New York properties are in some stage of foreclosure (though that is much higher than Manhattan’s overall residential foreclosure rate).

There are those who doubt whether Manhattan will see more timeshare development in the future. Skeptics include Bruce Eichner, who developed the Manhattan Club, which debuted as the first New York timeshare in 1997.

“I don’t believe the Manhattan timeshares have made any money for Hilton whatsoever,” said Eichner, chairman of Continuum Construction, which still manages the Manhattan Club. “It has to be a loser.”

But Brown called the project a “success,” noting that owner occupancy has been high, and said Hilton is interested in “future projects in Manhattan.” 

“Since sales of West 57th Street began, we’ve been attracting owners who return to New York City several times a year,” he said.

Eichner said he believes Hilton converted part of 1335 Sixth, and eventually built the second Hilton Club, for the benefit of its internal timeshare exchange program, which allows owners to trade their week in, say, Disney World, for a corresponding week sightseeing in the Big Apple.

“New York has the highest ‘trading power’ of any timeshare market in our system,” said Gordon Gurnik, president of Resort Condominiums International, which first developed the exchange concept in the 1970s and currently has 3.5 million members.

According to RCI — which is not affiliated with any Manhattan timeshares, but has a system that allows customers to find timeshares here — New York is the most coveted destination. “There’s more demand than our system can handle, so we book hotels to accommodate some of our customers,” Gurnik added.

Brown agreed that New York “is in high demand,” and said that one aspect of Hilton’s decision to build in New York was its internal exchange program. While he wouldn’t comment on the building’s financials, he argued that if the converted part of 1335 Sixth wasn’t successful, “we wouldn’t Have Built The 57th Street timeshare.”

But according to Eichner, “you simply cannot make any money under the current market conditions in New York.”

But Eichner claimed he earned four to five times his investment in the Manhattan Club back in the 1990s. When he bought the building at 200 West 56th Street in 1997, he paid $100,000 per room in acquisition and renovation costs. Now the building has 15,000 owners, some of whom bought the most coveted weeks for as much as $50,000.

Eichner said today an investor couldn’t develop a timeshare for $100,000 a room. He estimated, on the low end, that rooms in Midtown would cost seven to eight times what they did when he bought them. “I can’t charge seven to eight times what I do now, though,” he said.

According to Crain’s, Eichner and the other owners and operators of the Manhattan Club were sued last month by five timeshare owners who claimed they were overselling the facility and making it impossible for them to book stays — even well in advance.

While Eichner declined to comment on the lawsuit, before it was filed he told The Real Deal that Manhattan Club has a 5 percent vacancy rate.

Several other insiders doubted the viability of another timeshare in New York.

But Gurnik said the demand for timeshares here is so high, that it’s only a matter of time before more developers pursue them in the city.

“Timeshares are a great way for developers to maximize their return and monetize their asset,” he said. “It might take more time to sell, but you can generate more revenue by orders of magnitude.”

PKF’s Eble disagreed. Because of the effort needed to sell units, he noted that timeshares are simply too illiquid to overcome the costs of development.

“Timeshares can be exceptionally profitable,” he said. “But if you believe in efficient markets, the cost of all that goes in to creating and marketing a timeshare in the city is evidently providing a hurdle that’s too high for developers to cross.”

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