Testimony for the Judiciary Committee, Thursday March 26, 2015

Transcription

1 Testimony for the Judiciary Committee, Thursday March 26, 2015 Good afternoon my name is Mike Kosor and I reside in Las Vegas. Thank you for the opportunity to address this committee in support of SB 320 I have some prepared remarks but welcome questions as I work thru them. I would certainly be willing to field questions at the conclusion. I believe each of you has a hard copy of my testimony and hopefully a copy of the conceptual amendment to SB 320, I would ask this committee consider. I believe the amendment provides some much needed additional timeshare consumer protection measures. To make it clear I am not a lobbyist nor do I have a business interest in this legislation. I am a Nevada timeshare owner. I would like to open with a special thank you to the bills sponsors. They should be applauded for taking up this issue despite the fact that few Nevada constituents will be directly affected if the bill is enacted, given that most timeshare owners do not own in the same state they reside. But what SB 320 will do is address an important consumer protection issue related to timeshares- specifically the lack of a viable resale market and in turn protects the interests of our much valued tourists. SB 320 would require a timeshare developer to provide a clear disclosure to all prospective purchasers, requiring it is acknowledged, informing them that the future value of the timeshare they are contemplating is uncertain. To establish some context allow me to describe a timeshare in a light that is not typically used. To my knowledge timeshares are the only legal product sold with the oversight and concurrence of a regulator, in our case the Nevada Real Estate Division, and

2 combines all of the following- 1) a mark up of 400%-500% on cost, 2) attaches perpetual and unlimited financial obligations to a buyer's estate, 3) has virtually no resale market typically depreciating to near zero upon initial sale, and 4) runs the real risk of special assessments- this all in exchange for access to a product often and regularly available outside the timeshare structure at a charge to the consumer often below the timeshare s annual owner assessments. Today it is common to find timeshare developers renting out units for less than the association s maintenance fees. That said I am generally supportive of what I will describe as the original timeshare product. As a retired businessman I certainly understand why the industry has historically fought efforts like SB 320 that mandate negative information being given to possible customers about their product. But if we take the consumer side the timeshare industry has long acknowledged the lack of a timeshare resale market in their investor disclosures (10K filings) as required by the SEC. Take Wyndham Corporation for example, the worlds largest timeshare developer and representative of most developers, published in their 10Ks since 2007, and I quote, private resale of vacation ownership interests could adversely affect our vacation ownership resorts and vacation exchange businesses. In 2013 they modified the language slightly saying the sale of vacation ownership interests in the secondary market could negatively impact our sales. When it comes to timeshare resales, nearly everyone in the business agrees that a problem exists, Until that problem is fixed, SB 320 simply requires a similar disclosure of the problem be provided to the timeshare consumer.

3 To provide some additional context using Wyndham Corporation once again as representative of the industry, extracts nearly half their timeshare related revenue (40% for Wyndham in 2013) from the financing of their sales. Conventional bankers will not touch timeshares due to the lack of a viable resale market for the product. So the reality is, if you are an owner the deck is stacked against you should you wish or need to sell. Often owners find themselves stuck with timeshares they can not afford or simply do not want any more. The trigger, more often than not, is an increasing in age. It is well recognized among industry experts, owners have few good resale options. You could try and sell but good luck locating a timeshare resale broker or sales agent. In addition, AARP, a few industry reporters, and several timeshare internet blogs have tried to spread awareness that many companies offering to sell timeshare are scams. The latest information as to the extent of these frauds comes from the Florida attorney general were over 12,000 complaints were logged in 2010, up fourfold from the prior year. From my research of resale providers all but one I located wanted significant upfront listing fees and then could not or would not provide sales completion data. None were endorsed by the BBB. The biggest reseller to my knowledge is Ebay, where you can typically find 30 plus units that match yours, most starting at $1. Clearly there is something amiss in the resale market. You could rent it and some sites do exist such as Redweek, Ebay, or TUG. But as I noted earlier, developers have entered this market with both feet and regularly rent units over the internet or their proprietary sites for less than your maintenance fees. You could walk away from your unit, as far too many owners do today, but you can expect to be turned over to a collection agency which must submit your nonpayment of association fees and

4 potentially any financing default, to a credit reporting company. On a good credit score, this could prompt a 100 point drop and if debt is cancelled, you could end up owing taxes. You are even unlikely to be able to give it away as most donation oriented organization recognizes the associated perpetual financial obligations that accompany the donation. On a different legal front one could argue the lack of a resale market constitutes a material fact. As such it is something a Realtor or sales broker would be required to disclose to a purchaser-as would be required in all other real property transactions. The mandatory disclosure proposed by SB 320, I argue should be seen as also protecting the sales side. Now to be clear I do not ask this committee or the Nevada Legislator to fix the resale problems. SB 320 simply sets in place a consumer protection element putting a purchaser on notice that timeshares have a resale problem. Consumers should be put on notice that timeshares are different from that which the typical consumer understands - like selling their homes. They may be unable to resale, giveaway, or otherwise dispose of the timeshares and should consider the implications.

5 I also wish to make it clear I defend the right of a business, to construct strategies that promote increased revenue. This bill and the conceptual amendment I have provided do not regulate those strategies. I believe in limiting regulator involvement where possible. As such it is my opinion any destruction of resale value and the eventual development of a resale market should rightfully be left to the association boards that have a responsibility to represent the owners on valuation. Thus it is in support of this issue - protecting the power of the association boards to act in the best interest of the owners - I ask the committee to consider my proposed amendment to SB 320. The amendment adds a few provisions, all essentially identical to those already enacted for common-interest HOAs under NRS 116. One of the provisions requires timeshare boards be held to the business judgment rule. The Nevada legislature deemed it important when writing NRS116 common-interest HOA, to hold common-interest real property owner boards to the business standard rule. Most Nevada timeshares associations however are organized under NRS 82- non-profit corporations. I am not a lawyer but I have for-profit and non-profit board experience. As I understand the effect of the rule, it simplistically, sets a legal standard for performance higher than that set for non-profit Boards under NRS 82 alone. To enjoy the legal protection of the BJR, directors and officers need to perform their duties in a manner the directors believe to be in the best interests of the corporation with some objective review as to the quality of the board s decision allowed on the part of the courts-all be they limited. Directors, who do their homework before acting and act in the overall best interest of owners, can take comfort in the knowledge that the courts will protect them come

6 rain or shine. However, directors who fail to investigate and study their decisions had better own a magic mirror capable of predicting the future, as losses attributable to rash and/or neglected acts that are clearly not made using business like judgment, may and should result in liability outside the protection of the BJR. Keep in mind NRS 82 was designed to cover a large spectrum of possible non-profit corporations and entities. The statue is generally recognized appropriate for philanthropic type processes. Holding all non-profit Boards to the business standard can rightly be argued as inappropriate - and I would not disagree. However, in the case of timeshare boards, probably better defined as mutual interest boards vs non-profit, where millions of dollars are at stake, the lack of a business judgment standard among directors that run them provides a very low minimum performance standard. This low standard can, and I argue is, leveraged by developers to take advantage of timeshare boards and the directors that run them, ultimately and negatively affecting owner s timeshare valuations in the resale market. Once again, the language I am asking for is already in place for common-interest HOAs, and already applies to virtually all other real property association boards. I see little difference and have been presented with no real good reason from opposing stakeholders, as to why timeshare boards should not be held to the same standard. Legislators have long held that association boards not remain indefinitely under developer control. But that is the problem we face. Too many developers are exerting too much influence over timeshare boards. Not holding the association boards to a business judgment standard has fueled this practice and allowed some large developers to hide behind and manipulate these non-profit boards.

7 Keep in mind the typical timeshare board is initially selected by the developer, has its bylaws drafted and adopted by a developer run board, thus inherit bylaws that are rarely amended or may not even be amendable given the terms, and that significantly favor continued developer influence. Developers understand owner apathy allows the retention of developer picked boards comprised of directors all too often unequipped with the business experience necessary to protect the association s owner interests. Once again, this committee may not be able or willing to address each of these issues but it can propose boards be put on notice as to their fiduciary responsibilities in service of the owners. The second set of added provisions in the proposed amendment sets forth requirements needed to ensure a minimum acceptable level of transparency surrounding timeshare board actions. Here again timeshare associations are usually organized, by the developer, under NRS 82, the non-profit statues. The requirement in NRS 82, applicable to all non-profit boards, set virtually no requirements for board visibility. Under current rules and the practice of many branded timeshare boards today, the bare minimum of board actions is the standard this in turn significantly limits the availability of information for owners. Considering the usual geographic distance of most timeshare owners from their timeshare board, getting information and attending board meeting is challenging. The dislocation and minimal information released feeds apathy and frustration among owners and precludes interested owners from understanding board operations and in turn holding directors accountable if necessary. As an example I was the only owner outside of director spouses, present at my association s annual meeting this year. We have over 5500 owners.

8 The additional requirements I am proposing are again, essentially identical to the requirements established by HOA Boards under NRS116, common-interest HOAs and most of those HOAs do not have to deal with the added geographical dislocation issues of timeshares. To conclude I will point out it is my understanding the Nevada Real Estate Division defends the need for maintaining the separation of NRS 119A from NRS 116, common-interest HAO. I agree. Timeshare formation is very complicated and subject to highly legalized functions addressed in NRS 119A. The need for separation should not be construed as requiring a completely different set of rules. NRS 119A has little to say on the operations of timeshares once established-the problem and NRS 116 does a good job in this area. I argue once a timeshare is established and the real property of the timeshare is purchased, the distinction as to the rights of timeshare owners from those of other real property owners are minimal. Owners of all real property have a right to engage those that represent their interests and affect their valuations in a similar fashion. The Legislature recognized this right and the potential issues of developer influences in drafting and passing NRS 116. The amendments I am asking for simply applies the same standard of transparency for timeshare owners. I will again thank this committee for allowing me to speak. This concludes my remarks and I would be happy to field questions.