Timeshares are a mystery to many. What are they really? An investment? A vacation club? Some combination of both that affords an opportunity to have an ‘insider’ vacation with the vague sense of property ownership? The product often seems more like marketing than life planning or real estate. 

The Timeshare Story

According to the website of American Resort Development Association (ARDA.org), which is the national trade organization for the timeshare industry, timeshares were born in the mid-1970s as a result of overbuilding in the condominium industry. The banks that funded these developments were seeking ways to turn excess supply into profitable projects. 

Resorts Condominiums International (RCI) entered the industry in 1974 as the first exchange company, adding a level of flexibility in both time and location. The next improvement to the timeshare system was floating alternatives, which freed owners from being locked into a specific week or unit. Today’s standard of points programs added even more flexibility. Marriott entered the business in 1984, the first hospitality brand to do so. And so-called fractionals and private residence clubs were introduced in the 1990s.

Today, the timeshare industry is an $8.6 billion business. There are more than 1,547 timeshare resorts in the United States, containing 200,720 units and averaging 130 units per resort. Globally, there are more than 5,000 timeshare resorts spread across 121 countries. Timeshare owners average 47 years of age – 68 percent are married, and around 11 percent of owners earn $100,000 or more per year. More than 46 percent of these owners are first-time buyers – and that percentage has been increasing annually, reversing a trend of existing owners purchasing new or additional units. The timeshare industry provides 511,782 full- and part-time jobs, and accounts for $28.1 billion in income and wages, as well as $10.2 billion in tax revenues. 

What Is a Timeshare?

When you buy a timeshare, what exactly are you buying? Is it real estate? Well, it might be...or it might not be. Samantha Sheeber, a co-managing and lead transactional partner with Starr Associates, a New York City-based law firm active in the timeshare industry, says that “[A timeshare] is the guaranteed right to a vacation home for a period of time that you are able to use for a number of years going forward. It can take many different forms. It can be funded as a deeded interest in a condo unit, 1/52nd interest in that unit, which would be a fee interest.”

Sallie Schlam Levi, of counsel at Starr Associates, says that in addition to the condominium alternative, “It can be set up as a co-op interest, with an allocation of shares where you wouldn’t actually own the fee,” but rather an interest in the corporation that owns the property. “There could be a leasehold interest. There are lots of different ways to structure it. It could also be a right to use, where there aren’t any property interests at all.”

Ellen Shapiro, a principal at the law firm of Goodman, Shapiro & Lombardi in Dedham, Massachusetts, perhaps says it best: “You’re buying the right to use the locus. You don’t exactly have full legal title. You have the ability to transfer and convey. You can convey, sell, leave it to your heirs, or perhaps—depending on the timeshare—rent it out, but you don’t have the entire bundle of rights. At the end of the day, you own a right to use a space during a prescribed time.” 

The basic arrangement requires the buyer to pay a fee for the timeshare. These fees can range from $50,000 to $500,000, according to Sheeber. In addition, the buyer pays an annual fee, not unlike an annual aggregate of condo fees. These fees cover whatever costs are incurred in operating and maintaining the property. They also cover the management of your interest, should you wish to have the management of the property rent out your interest when/if you opt not to use it.

The State of the Market: Points

As mentioned earlier, the timeshare industry has evolved over the years. Its original concept – the control of a specific space for a pre-set specific period of time – was somewhat restrictive. The introduction of ‘swapping’—trading your two weeks or some portion of it for someone else’s somewhere else—eased those restrictions somewhat. The ultimate restructuring of the product with ‘points’ added a much higher level of flexibility.

Lena G. Combs, an Orlando, Florida-based certified public accountant with WithumSmith + Brown, a national firm actively involved in the timeshare industry, explains the point system as follows: “Your unit or interest is dedicated to a trust. There is a trustee, and that trustee is responsible for maintaining clear title, making sure the assessments get paid, etc. The trust takes the place of the owner. The trust could own five weeks at Resort A, 10 weeks at Resort B,  and 16 weeks at Resort C, but all get grouped together. The developer or seller then sells ‘points’ to individuals who can choose between these rentals based upon their points. Points can be deposited with larger organizations as well, such as RCI,” which further expands the pool of possible vacation choices.

“Pricing in points,” Combs adds, “depends upon location, season, and so forth. So, if you want to go to Cape Cod in March, it would require fewer points than, say, Key West in March would.” With the point system, there is still an annual fee beyond the purchase of the points. 

Financing and Tax Benefits

Financing a timeshare is not easy. To some extent it depends on what the ownership structure is, and who the buyer/borrower is. According to New York tax attorney Warren Gleicher, “A timeshare is a horizontal slice of a building. A tenant-in-common interest,” like a condominium, “is a vertical interest. There are some banking institutions that will finance a timeshare.” That financing often depends on the existing relationship the borrower has with the banking institution. It’s more a function of who you are than what you’re financing.

Combs says that it’s highly unlikely “that you can walk into your bank and finance a timeshare the way you would a new car.” Sheeber and Levi explain that most timeshare financing is provided by the seller, and still requires a down payment of at least 10 percent. Interest rates on this type of financing tend to be high, around 13 percent annually.

Tax benefits are another elusive component in the timeshare process. One might think that if a timeshare is real estate, then it would be entitled to the same treatment under the tax laws – but that’s not necessarily the case. First of all, how is the property held? Is the underlying project a fee simple, condo or co-op? Those forms of ownership might entitle the owner to some pass-through of ownership benefits for tax purposes, depreciation for instance. According to Gleicher, “The unit must pass an initial IRS test of a residence. Does the unit include cooking, sanitation and sleeping facilities? Hotel rooms don’t qualify.”

When it comes to mortgage interest deductions, up until the recent passage of the GOP’s new tax law in December 2017, mortgage interest on timeshare units might have been deductible if the unit met the requirements of the IRS outlined above. With the new law in place, the mortgage interest deduction rules have changed, and the unit may longer qualify. The same is true on any pass-through of real estate taxes from the property housing the timeshare. Taxpayers may already exceed the maximum deductions before consideration of state and local taxes passed through by the timeshare. “There really isn’t any tax benefit,” says Combs. “Everything has changed with the new tax law.”

The Good, the Bad, and the Ugly

Frank Lombardi. also a principal at Goodman, Shapiro & Lombardi,  has represented many timeshare owners in cases against timeshare companies. “I believe timeshares to be a bad investment,” he says. “They are not easily transferable if you find they don’t meet your needs.” 

His various clients bought into timeshare properties and then found it difficult to get the weeks they needed for their vacations. This often resulted in them paying high airfare rates for the week(s) they had to use. They had to tell the timeshare companies they would walk away from their units and offer the company a deed in lieu of foreclosure. 

Some timeshare companies accepted the deed in lieu, others didn’t. In some cases, the timeshare owners had to pay what’s known as a ‘nuisance fee’ to get the timeshare seller to take back the deed. Offering a deed in lieu is no small matter for the unit owner. It is a serious black mark on personal credit. Lombardi was successful in convincing timeshare companies in some cases to take the deed without reporting the default (which is akin to a foreclosure on the owners’ personal credit) by demonstrating that the seller had misrepresented the product in the sales pitch.

“There’s a systemic problem,” says Lombardi. “There’s no actual representation to deal with, and it costs the owner lots of time and money to deal with them. [Timeshare companies] can be located anywhere. A few have representatives that make threatening statements to timeshare owners, stating that they will come after you for any deficiency on resale of your unit, or even come after your estate or kids.” If there is a right to a deficiency judgment in your documents, they have the right to do that. “When it goes bad, it goes really bad,” Lombardi says, with emphasis.

Lori and Alan Silver of West Orange, New Jersey, purchased a timeshare approximately 15 years ago, and say that “The overall experience has been positive.” Their unit is a part of the RCI network, and they have used it approximately every other year since they made the purchase. They feel that the economic aspect of the deal is either a wash, or it was slightly beneficial in their favor. Their unit is a hotel room and is part of the Club Solaris system, a hotel chain based in Mexico. The Silvers have visited many locations in Mexico, including Cabo San Lucas, Cancun, Playa del Carmen, Tulum, and Riviera Maya. “We bought the unit for a specific reason, to force us to take more vacations,” says Alan, “and it did.” (Coincidentally, the American Resort Development Association  website states one of the organization’s principal goals is promoting Americans to take more vacations.)

The Silvers recently extended their timeshare contract for three years for a small additional fee. They want to visit more cities around the United States, which their timeshare’s affiliation with RCI will provide. Interestingly, according to Sheeber, future growth in the industry is expected in urban locations, rather than the more traditional beach venues.

All considered, timeshares are a multifaceted product. Perhaps the best approach for a potential buyer is to consider them less as an investment and more as a lifestyle choice – a way to make taking a meaningful vacation a little easier.        

A J Sidransky is a staff writer with The Cooperator, and a published novelist.