It has been over a year since Graham Kos has spoken to any member of the media as to the fate to The Solstice Collection, the highest end of all Destination Clubs. Here are some questions I posed to him, with answers that may shed some light on what happened from December 2008 to December 2009. - Susan Kime

Remind our readers about what the Solstice Collection was, and what it meant to you and to the members at first.

Our model was small to begin with – our original plan at the outset was to have 7 exceptional homes and 42 members. I originally found the destination club industry compelling as, for the first time, it presented a real estate investment model that allowed you to purchase a category of real estate ( high end second homes ) which historically had the greatest appreciation over time but typically was not acquired for strictly investment purposes. In addition, it was a uniquely fun and creative project that took you to the most beautiful locations in the world.

In the beginning, I had an extremely small but very effective team. I did not hire my first "employee" for the company until year three. I did not take a salary for myself the first two years nor did the company have an office during this time. We were able to accomplish quite a bit with a very small budget. Our secret weapon was my wife, Shay, who did all the design work for Solstice. It was her style, her vision, her way of living that we were selling.

We had great PR, and we received many awards – Best of the Best for three years from Robb [Report], and two years from Business Britain. We raised our rates to the highest in the industry, we bought more properties, our credit lines were solid, and things were going well.

To us, Solstice was more than just a business venture – it was a vision; a way of seeing and indeed a way of being. It also fulfilled a need that I saw consistently with those who I knew were on the UHNW [Ultra High Net Worth] level: to travel in the most elite, seamless manner possible – and not with a lot of extra services by the way! We wanted members to have a real second home experience and with homes that had soul, a story, reflected by great interiors. Where other clubs had a very generic approach to interior design, we had furniture from the best European design houses, original art and sculpture, all hand picked from French flea markets in Paris and Lyon, or made specifically for us. Each item reflected the Solstice vision. We had a Villa in Florence whose façade was created by Michelangelo, a residence deep in the Amazon rain forest, a home in Aspen, designed by a famous young architect, Scott Lindenau, and our newest property, the home in Napa, that took about four years to build, as each stone had to be removed from an old Pony Express office in Texas, and brought here to [the] Napa Valley. I co-architected the home, and Shay did the interiors.

One of the greatest challenges along the way was balancing sales and profitability with the original vision of quality and uniqueness - these two concepts are often at odds in a business proposition and balancing these two somewhat conflicted concepts was one of the underlying issues of contention with the Parallel Group.

How did the merging and de-merging with Parallel affect the structural integrity of the Solstice collection?

We had very high hopes at the time of the Parallel merger. At the time they were a new high end destination club competitor, and we thought that merging would give our members and their members more access and variety of high-end homes. We thought also economically it made sense, but in the end, their focus – making Solstice into a much larger club – and ours, doing so without sacrifice to the quality and uniqueness – just did not jell. We also believed that with the merger additional monies would be invested to expand the portfolio and subsequently that did not happen. So, with the help of a Swiss investor who provided the money to de-merge, we de-merged. This was a necessary step, but it began a process where the de-merge circumstances began to control us, we did not control them.

After the de-merge in May of 2008, ironically, other things became clear but also painful. We took back management of the club in June and then spent the first 90 days closing our Scottsdale office and dramatically downsizing management. A month later Lehman went bankrupt and our phones literally stopped ringing. Our business model was not fundamentally different than others in the industry and it required a certain amount of sales to support the development side of the business. The combination of an abrupt end to sales, and mounting membership redemptions caused great stress to the model. As difficult as these issues were to deal with an even more daunting issue was our main credit facility – the Fortress debt – was coming due at year‘s end, and our lender, like many others at that time, was calling every loan they could (our interest rate had no floor and was yielding just 3.5% - not a terribly attractive yield to a hedge fund). The environment for new lending was extremely difficult at the time.

How did the decline begin, and when did Solstice declare bankruptcy?

2008 was a difficult year as for many reasons, potential members just weren't committing to Solstice, even though many loved the idea. In the beginning of the year our unwinding from parallel seemed to distract from our core sales efforts. We remained optimistic that once past this distraction things would return to normal - they did not. I was asked by certain members of the advisory board to step down in November of 2008. I agreed to do this, despite my misgivings, on the condition that they provide me with a viable plan to retire or replace our existing credit facility coming due at year end. After all I was personally liable on the debt. I actually never received an official response to that proposition as a few days later, after employees left the office one by one , I was informed by a third party in my now empty office that I had been removed by the board. In March of the following year Solstice declared bankruptcy.»

Could you explain the relevance of the Fortress debt and how that impacted - both positively and negatively - the fate of Solstice?

Fortress is a hedge fund and manages private investments. They provided a $50M credit line for Solstice in the summer of 2006. We were allowed to draw 40% of the cost of homes, furnishings and closing costs with that credit line.

At the time we placed the debt Fortress was a new player to the space. Prior to our securing this debt only Textron and Capital Source were lending in this area. From the outside looking in I am sure that this financing would appear to be simple but the reality was that you were purchasing and lending in many different countries - all with different laws regarding lender and borrower rights. At the time we secured this financing it provided the lowest cost and greatest flexibility of any facility that I was aware of in the destination club market, including all the largest clubs. But then again, the Fortress debt was one that our Member Advisory board eventually had issues with: they suggested it was a mistake to fund long-term assets with short-term debt. Like we didn’t know this? The reality was this completely ignores the fact that no long term debt was available in the marketplace at that time (after all, this was a new and unproven industry). Another suggestion I have heard put forth is we took out the line of credit knowing we could never pay it back. That is so ludicrous – I don’t even want to discuss it.

I tend to focus on the bottom line and as it relates to financing the bottom line is no new third party financing was ever put together by the new management last year save the club. I believe now, as I did then, that it was extremely reckless to take control of the club with no plan in place and no past experience to fully understand the all the challenges the club faced.

Part II will be Published Soon.. -Ed

It is no wonder Luca is proud. Even in this capricious economic climate, the Vallarta Garden’s launch in mid December 2009 has created major buzz. Its location is on Banderas Bay, a peaceful body of water that spans about 40 miles, and is protected by the Sierra Madre mountains. This area is known as the Nayarit Riviera, located on the Pacific, non-Hurricane side of Mexico, midway between Puerto Vallarta and Punta Mita, near a picturesque town of La Cruz de Huanacaxtle.

“And this beachfront getaway is much more than the phrase implies..” Luca comments, “It is a boutique resort, with many luxury amenities. A few minutes away from the residences owners have access to Jack Nicklaus and Tom Weiskopf signature golf courses. There is also is a yacht on the property for owners and members to use. Sportfishing and pleasure cruising are just two of the great amenities here. And then there is the spa… on the beach!”

Vallarta Gardens combines fractional, full ownership and basic vacation rental structures. The homes themselves are between 3,500 and 5,000sf, four and five bedrooms respectively. Pricing starts at $80,000 for 1/13 share.

Luca is one of the few people in the luxury fractional industry whose international reputation is widely known and respected. Multilingual, multicultural, and of European descent, he has been involved in finding and creating successful fractional projects for the past decade. He puts teams together that define the who’s who of the fractional interest industry. Jim Marmorstone, Lisa Manley, Sarah Rezak, Andrew Berry, Daned Kirkham, Eric Pierce and others who are very well-known as the best of the best when it comes to negotiating, sales, and marketing, now consult for the various LLPI projects.“ We have hand picked the best in the fractional field, and can call on them anytime to create new strategies for each of our projects.”

LLPI is an international advisory and management company servicing developers and investors in luxury mixed-use hotels & resorts. Luca said: “Our aim is to maximize value for the hospitality real estate asset,” said Luca, "and this is done by applying creative strategies toward the leisure real estate product. In turn, we can drive significant synergies between the different hotel and resort components.”

LLPI is working in partnership with Valhalla group, with its visionary president Preben Vestdam, in EMEA (Europe, Middle East and Africa) to deliver a consistent global product line -- sharing resources, know-how and operating processes & procedures.

LLPI has also established a preferred alliance with Strategic Hotels & Resorts, a leading owner, developer and asset manager of luxury hotels in North America and Europe. SHR is viewed as the pioneer and “blue chip” of hotel and resort asset management with its leading edge systems -- setting the standard for operators and owners alike.

One of the more fascinating aspects of Vallarta Gardens is the marketing decision to include a major emphasis on the Mexican market. As Luca says, “We are, of course, vitally connected to the American and pan-Asian market as well, but we know that Vallarta Gardens is only three hours away from Guadalajara, Mexico, with nearly 5 million people, and we believe that many of them want and need a beachfront getaway.”

Luca pauses, then says, “Actually, we all need a beachfront getaway, and Vallarta Gardens combines the best of both. It is a true sanctuary.”

www.llpi.us

Calistoga Ranch architect Scott Lee knew that Calistoga Ranch needed to reflect a well-defined, natural organicity. “Our charge was to create a private retreat, a sanctuary celebrating what Napa Valley is all about - food, wine and nature. We designed and individually placed each of the more than 200 structures on the site not only to avoid cutting down the 100-year-old heritage oak trees but also to integrate them into our design.”

Lee and his team focused on the tradition of outdoor living by creating what he calls the campground legacy. Each guest lodge is its own camp, he says, made up of a cluster of spaces centering on the outdoor living space and fireplace, just as in a campsite. And interior designer Darrell Schmitt used rustic, natural materials to create a connection between the inside and outside, incorporating such elements as handmade tile baths and fabrics like hand-woven chenille and Tibetan wool carpets. There are outdoor and indoor showers, and multiple meditation spaces as well.

Mark Harmon, principal and CEO of Auberge Resorts, the company that owns and operates Calistoga Ranch, says members love the sense of peace the club’s design and surroundings offer. “I have spoken to so many members over the years,” he says. “They say that Calistoga Ranch is their true sanctuary ... When they leave here, they are refreshed and calmed.”

I spent some time recently at Calistoga Ranch, the experience was one of true sanctuary, just as Mark Harmon said. Calistoga Ranch is a little off the beaten and crushed wine paths of Napa. It is a high end resort with guest cottages as well as a Private Residence Club with owner’s residences. The owner’s residences are of an exceptional, modular design, with an enclosed interior living area, kitchen, and two master bedroom modules. What ties these together is the exceptional outdoor living space, with deck, fireplace, grill, outdoor dining areas, all with views of California's live oak bosques, Ponderosa and Cottonwood trees.

The undeniable feeling is that of living in an elite treehouse, with all the spa and dining amenities of living at a large resort, defining the best of both worlds, nature and culture, sanctuary and society, peace and - if you choose - activity.

The Spa at Calistoga Ranch is one that allows an enhanced feel of true sanctuary. It is located in area called The Bathhouse, where you can truly “take the waters” in a multiplicity of ways. The soaking pools overlook one of the ranch’s creeks, or you can take a mud bath in one of the large private outdoor spaces. When I was taking one of the baths, along with my thoughts, a hawk was flying high above me, moving from Live Oak to Live Oak. There was no sound, save of the soughing of the oaks and pines. The scent of cucumber and a slight odor of something vegetable, probably the mud in the bath, were all that I was aware of. When the mud bath and massage session was over, I felt as if my body had been freed from all the stress armor I wear.

The sense of peace, brought on both the complement of external environment and interior design, stays with the guest or the member or the owner. Here, everything else that used to matter, seems so far away.

“The closing of this transaction is an important milestone in the evolution of Ultimate Escapes and the entire destination club industry,” stated Jim Tousignant, President and CEO of Ultimate Escapes. “As the only pure-play public, luxury destination club company in the world, we are excited about the growth opportunities that lie ahead in this highly attractive segment of the luxury leisure market and are well positioned to take this business to the next level.”

Jim Tousignant realizes he is rewriting the destination club industry rule book, regarding the future implications and the present trends of the destination club industry. Given the significant nature of this deal, he knew he was in process of defining the nature, business structure and the culture of future clubs, both equity and non-equity based. Recently, he expanded on these ideas in detail.

What were the most complicated problems you had to overcome when completing this deal?

“We had two complex issues to overcome: a brutal economy and the complicated nature of the two year merge process relating to the acquisition of Private Escapes. And with regard to completing the acquisition of Private Escapes, people began thinking, "Why is this taking so LONG?" Well, the simple answer is… some transactions take LONGER than others! But both this deal and the SPAC deal closed within nearly a month of each other. In both cases, we set a new standard for the industry. So, patience pays off as it always does in the long run."

Discuss the SPAC deal and its consequences

“With the SPAC deal especially, we generated both excitement - and controversy - as the outcomes set a new standard in the industry. The long-term consequence of this transaction (Ultimate Escapes going public) is that ALL the clubs must now ensure greater financial transparency and disclosure than in the past. This means that every DC — from the Ritz Carlton Destination Club to Exclusive Resorts to Quintess - who all generally provide members with some level of financial information - will likely have to do much more in the future, including audited financial information and other disclosures for prospective members. This high level of financial transparency and disclosure sets us apart from the others: we are the only publicly traded destination club, with audited financials and other detailed material disclosures available for all to see, whereas the other private clubs, at this juncture, provide limited financials and little if any other material public disclosures. This may change in the future."

You have mentioned that the Ultimate Escapes model defined third generation thinking. Can you explain this further?

“The transparency difference is the one most apparent right now, but the Ultimate Escapes business model has always been different from the others. One of the main differences is that we sell lifetime memberships and charge a membership fee – and we earn into income 100% of the one-time membership fee over the first ten years of a member’s lifetime membership. We do not believe in the 1st generation (100% refund) or 2nd generation (80% refund) membership DEPOSIT model – where members “loan” the club money and the club has a contractual obligation to repay all or most of the membership deposit back when the member resigns. Our obligation is to provide a lifetime of memorable vacation experiences and to use reasonable commercial efforts to resell a resigning member’s lifetime membership, for which they will receive 80% of the resale proceeds received.

To date, we have seen these 1st and 2nd generation models not working financially, either for the members or the clubs. The 1st generation 100% deposit refund model was first offered by Private Retreats in 1998 and eventually led to the well publicized bankruptcy of Tanner & Haley in 2006, as a result of being unable to earn any portion of the initial membership deposit into income. Tanner & Haley did not earn a single penny of profit in more than seven years of club operations, even with over $300 million of membership deposits received from almost 1,000 club members. They also were not able to attract the necessary private equity capital to capitalize the business properly, given the 1st generation business model not showing a profit. Investors (and many potential members) were not comfortable with a business model that assumed future profits would somehow come from future “real estate appreciation."

The 2nd generation business models, adopted by most clubs including Exclusive Resorts, Quintess, High Country Club, Lusso, and many others, generally retained only 20% of the initial membership deposit into income as a “non-refundable initiation fee” and treated the remaining 80% as a refundable membership deposit, which over time created huge member liabilities on the club’s balance sheet that did not go away. Again, while somewhat better than the 1st generation 100% refund membership deposit model, the 2nd generation 80/20 model still did not generate any positive operating income, and again made it difficult, if not virtually impossible, to attract private or public equity capital, as well as difficult to attract lenders and increasingly savvy prospective members.”

So, Ultimate's third generation model was created to make the destination club a more profitable entity than in the past?

“Ultimate Escapes' 3rd generation business model was created to make a viable, profitable and sustainable business model for members, equity investors and lenders. We wanted investors and lenders to be comfortable in investing and lending capital to the club, as well as provide prospective club members with confidence in joining our club, as well as provide existing club members with a sustainable membership that is owned for a lifetime as a true intangible asset. This means that Ultimate Escapes club members can resell their lifetime membership in the future generally at 80% of the future resale value of that membership interest. This is really no different from buying a house, car, plane, boat, etc., except the asset is more intangible than tangible. I never understood how other 1st and 2nd generation clubs, based on a 80-100% refundable membership deposit structure, would actually make any money and provide a financially stable club for their members. And without financial stability, how could they be successful in the long-term?

A simpler way to look at the inherent flaws in the 1st or 2nd generation business models is this: from each membership dollar received, it generally costs 60-75 cents to purchase or lease club properties, as well as cover the entire cost of sales, marketing, member services, property home maintenance, etc. These 1st and 2nd generation clubs can only realize about 20 cents income on every dollar. I can't understand how those early business models were ever created to make a profit. This, more than any other factor, is what separates Ultimate Escapes from every other club from a business model point of view: Ultimate is structured to be profitable in order to provide long-term viability for our members, and now has successfully gone public. In the future, successful clubs will likely avoid the failed 1st and 2nd generation membership deposit refund models and embrace Ultimate Escapes’ 3rd generation membership fee/resale model. As they say, “success leaves clues”.”

What do you want the Ultimate Escapes legacy to be, now that the deal is completed?

“At the end of the day, what we in the industry must remember are a few simple things - create a compelling vacation experience that people LOVE, and operate a business model that balances the needs of the members with the needs of the business, including the need to make a profit. If we can achieve those two objectives, the positive energy will keep us alive and alert. On vacation, a club member or a potential member does forget about product forms, SPACS, business models, mergers, economics, all the stuff you learned in business school. The truly memorable vacation experience maintains itself – it has a generativity, a continuous magic, that will keep our industry alive and well for many years into the future. And, as I see it, more new clubs will form in the future, and existing clubs will change and modify their structures, based on solid business fundamentals and club models that work, creating entities that generate a necessary profit potential. We happen to have been the first to do so many things in a different way, but we will certainly not be the last.”

As for history, the Lodge was established on the grounds of the 100 year-old Fort Baker, just a few miles from the north end of the Golden Gate Bridge. The Fort was built around a natural inlet called Horseshoe Cove, a small protected body of water that has been inhabited for hundreds of years; Before the U.S. Army, there were French and Spanish settlers, and before them were the Miwoc Indians. The little inlet provided a climatic sanctuary from the wind, fog, and turbulent seas, and also afforded a perfect view of the land on the other side. This was a very important security dimension to the Indians, then the settlers, then the Army in the early 1900’s, as it was the only way into (and out of) the San Francisco Bay.

The Officer’s Quarters, constructed in 1900-1902, were originally built in the style of Colonial Revival architecture, and due to the Cavallo Point’s meticulous restoration, the quarters are now 74 new guest residences, situated near groves of ancient Monterey Cypress and California Eucalyptus. Each guest room has unimpeded views of the San Francisco Bay and the Golden Gate Bridge, with the city beyond. On the hills close by are the Lodge’s more contemporary suites and rooms, closer to hiking trails, all leading around the area, and one trail leading to the bridge itself.

A clear sense of history pervades, yet a sense of eco-sensitive contemporaneity does also. On the long veranda of the Lodge, guests can sit in over-sized rocking chairs, and watch the bay and the city beyond. On the Lodge property is The Healing Arts Center and Spa at Cavallo Point which specializes in organic massages, soaks, wraps and facials – as well as in acupuncture, personal fitness training, herbal consultation, nutrition and hypnotherapy, the last applying to addictive behaviors, weight control and anxiety.

The Cavallo Point area lies close to the Marin headlands, with its great abundance of sea life, eel grass and rare blue Mission butterflies. The Lodge is part of the Golden Gate National Parks, and is the newest in the National Park system, having opened in July of last year. As the area abounds in wildlife, fruits and vegetables, it is not surprising that Chef Joseph Humphrey, founder and creator of the great dishes at Murray Circle, showcases the bounty of local and organic produce, seafood, cheeses and wines of Northern California. On the menu, Chef Humphrey lets you know the origin of his dishes – a few examples (not everything!) from the entree menu –

Vegetables:

Heirloom tomatoes, Verdure farms, Healdsburg

.. in a salad with compressed watermelon, steamed brioche, tomato jam

Baby beets, County Line Harvest, Petaluma

…roasted in coals, crisp quinoa, fresh ricotta, sherry vinegar, truffle

Fish & Shellfish:

Baby red abalone, Monterey Abalone company, Monterey

…from the plancha, suckling pig confit, fresh crowder beans, salted plum

Wild day boat Halibut, f/v Midnite Charger, Puget Sound

grilled in fig leaves,sassafras,hazelnut,sea urchin emulsion

prices range from $13.00 - $19.00 each.

Meats:

Quail – Wolfe ranch, Vacaville

….with romesco, swiss chard ravioli, dry cured olive

Peking Duck, Liberty Farms, Penngrove

Slow roasted breast, fennel confit, turnips cooked in caramel, licorice

(prices range from $14-$29.00)

These entrees change regularly, as do the tasting menus. The grand tasting menu has eight tastings with wine pairings to match, and the simpler tasting menu has three entrees and a dessert. In addition, the wine list for Murray Circle is in the process of becoming one of the largest and varied in the state: 13,000 bottles and counting from California, France, Australia and New Zealand.

All the taste dimensions, though diverse, work together to create the most memorable of gustatory experiences. Indeed, the wide variety of flavors at Murray Circle seems to underscore the multiple sensuous threads of guest experiences at the Lodge at Cavallo Point. The area’s colorful history melds into the present as naturally as the day boat Halibut blends with the fig leaves and sassafras emulsion, or the Quail with the chard ravioli.