HCC is living way beyond its means (Hell, the entire DC industry is) – it’s mortgaged to the hilt. If HCC paid cash for the condos then they could easily make it up in volume. Right now HCC offers a Private Membership for $70k – get 35 nights and pay $9k in MF. I’m assuming this is for a 1/8 share.
That relates to $560k or 50% leveraged about $1 M condos.
If $560k is mortgaged in a 30 year loan at 8% (highly risky and jumbo loan) then the monthly mortgage is $4,100 or $49k per year. The MF of 9k * 8 members = $72k or $23k per year or about $2k per month for taxes, replacement reserves, management fees, and housekeeping.
You may call 50% leverage as living beyond its means. To me, 50% leverage in DC is a reason to sign up when the industry norm is 20-30%. Anyone in commercial real estate will confirm that 50% leverage is a pretty safe bet.
We may have a difference of opinion here.
There isn’t any room for even the slightest hiccup in this business plan.
So I agree, the current HCC business plan is drowning in debt. They need to switch to 100% cash and a $560k condo and their solvency is much more assured. Then they could offer 80% back of Current membership fees - and let the members participate in real estate appreciation.
Again, 50% leverage is not drowning in debt. Regarding the example you provided, I think you missed my point completely.
A DC will only switch to 100% cash to market itself as a 100% equity based plan. Once it becomes a 100% equity club, it has to market the member's participation in real estate appreciation. Once it starts doing that, it can only market to Accredited Investors i.e. a person with documented $1Mil net worth or 200K+ annual income. To me, that is not mass market and sales volume will actually fall down. Bell Havens is a classic example of this situation.
http://www.sec.gov/answers/accred.htm
Here are some other points...
The calculations provided are very simplistic. A DC cannot run as a non-profit.
Even the best run Equity based club has its risks. To take an example,
-A $2M home added to the club is based on 10 full members joining with $200K each.
-Add 10 members and the price of membership goes up by approx 10%. A member leaving at this point expects $220K in return.
-The moment a $2M home is added to the club, it loses 20% of its value.( 15% management and 5% closing)
-An underlying asset of $1.6M has a liability of $2.2M at the point of addition.
To drive my point home, An underlying asset of $1.6M has a liability of $2.2M at the point of addition. . And BH is a well run company.
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