Breakage Income

[rlmas]

Does anyone know how the income in the following statement works? I read it over at DVCNews.com and was specifically curious about the 2.5% cap.


"Breakage Income - As stated in the Condominium Documents, Disney Vacation Club Management Corp. ("DVCMC) rents, during the Breakage Period, certain accommodations that have not been reserved by Members. The Association is entitled to receive, as breakage income, the proceeds of such rentals not to exceed 2.5 percent of the aggregate of the Condominium Operating Budget (total operating expenses less the sum of interest income and Member late fees and interest) and Capital Reserve Budget in each calendar year. "

Thanks

 

[RobDoc]

The "Breakage" period is the period 60 days before any reservation date. Any member inventory not reserved by that time is passed along to CRO for cash reservations and income derived from that inventory is used to defray our annual fees. It is capped at 2.5% of the operating budget - but I doubt it has exceeded that amount.

"Breakage" is one of the sources for cash inventory thru CRO. The biggest source for cash inventory comes from points used by members for non-DVC reservations like the Disney cruise, Concierge Collection and other Disney resorts. Cash reservations from that source do not enhance the member budget since that is used to repay the costs of the non-DVC reservations. The remaining source of cash inventory is the percentage of units retained by DVD. That inventory is mostly used to replace member inventory taken out-of-serivice for rehab and renovation. Any income from that source would go to DVD.

 

[rlmas]

Thanks for the info. I am curious as to why you think the figure never reaches 2.5% With all the trading that takes place, I would think the number could far exceed that. If it does not, we should all "talk up" ou resorts to our friends to get the number up to help our dues. we can get them 25% off as well. If it does exceed that figure, it would seem like we should receive the benefit. Is the 2.5% a law or just what happens to be in place with Disney?

Thanks

 

[Dean]

Thanks for the info. I am curious as to why you think the figure never reaches 2.5% With all the trading that takes place, I would think the number could far exceed that. If it does not, we should all "talk up" ou resorts to our friends to get the number up to help our dues. we can get them 25% off as well. If it does exceed that figure, it would seem like we should receive the benefit. Is the 2.5% a law or just what happens to be in place with Disney?

Thanks

Trading doesn't come under breakage. Breakage is ONLY inventory owned by DVC (not DVD) and either not reserved at 2 months our OR in some cases, not anticipated to be reserved. It does not include rentals for exchanges or any rental for units owned by DVD.

 

[drusba]

My personal guess is that breakage income greatly exceeds that 2.5% of a resort's budget per year. If you have a $10 million budget at a resort, 2.5% equals $250,000. To reach that amount per year, Disney only has to rent out 2 to 3 rooms a night on average from inventory coming in at the breakage period and I am guessing the actual average will be significantly higher than that. The amount over that 2.5% goes towards paying the costs of Member Services (officially named the Buena Vista Trading Company) and any amount over defraying those costs goes to a DVD subsidiary essentially as profit.

 

[Dean]

My personal guess is that breakage income greatly exceeds that 2.5% of a resort's budget per year. If you have a $10 million budget at a resort, 2.5% equals $250,000. To reach that amount, Disney only has to rent out 2 to 3 rooms a night on average from inventory coming in at the breakage period and I am guessing the actual average will be significantly higher than that. The amount over that 2.5% goes towards paying the costs of Member Services (officially named the Buena Vista Trading Company) and any amount over defraying those costs goes to a DVD subsidiary essentially as profit.

Don't forget that CRO keeps roughly half of the rental income and a lot of the rest is discounted 25%.

 

[drusba]

We actually do not know what portion is kept by CRO or extent of any discounts, but here is my farfetched theory. Let's take Boardwalk, about 383 rooms, most of which are 2BR's which can all be 1BR and studio. There are many times of year when they know from experience that DVC reservations aren't going to fill those rooms, particularly many preferred, non-boardwalk views, and DVC reservations will only fill 85% at most. That means they know that about at least 56 rooms per night (which can be many more if divided into 1BR and studio) are going to be open many times of year. Long before the 60 day breakage period, they can safely start taking CRO reservations for at least half that number (28 rooms) for those times of year because it is essentially certain that number of rooms will become available at the breakage period. Even after discounting and giving CRO half they can still end up with average income of at least $150 a room (a number will be rented as 1BR's and 2BRs). They only have to do that for about 60 nights to get to $250,000 in breakage income. That does not account for the other probable 28 rooms that they may actually get at the breakage period and wait to rent until then. Of course, they do not reveal actual income from breakage units but my perhaps completely unfounded belief is that it is way more than the 2.5% of the budget that goes back into the DVC acoount.

 

[tjkraz]

I would have never thought breakage to be a significant $$ amount, but I was surprised at what I found out. I pulled the OKW budget at random and here are the relevant numbers for 2009:

Operating Expenses: $25,251,888
Capital Reserves: 4,899,048
Interest Income: (155,873)
Late Fees & Interest: (137,436)

Breakage Basis: $29,857,627

2.5% of Breakage Basis: $746,440
Breakage revenue stated in budget: 746,441



Surprised the heck out of me!

 

[Dean]

We actually do not know what portion is kept by CRO or extent of any discounts, but here is my farfetched theory. Let's take Boardwalk, about 383 rooms, most of which are 2BR's which can all be 1BR and studio. There are many times of year when they know from experience that DVC reservations aren't going to fill those rooms, particularly many preferred, non-boardwalk views, and DVC reservations will only fill 85% at most. That means they know that about at least 56 rooms per night (which can be many more if divided into 1BR and studio) are going to be open many times of year. Long before the 60 day breakage period, they can safely start taking CRO reservations for at least half that number (28 rooms) for those times of year because it is essentially certain that number of rooms will become available at the breakage period. Even after discounting and giving CRO half they can still end up with average income of at least $150 a room (a number will be rented as 1BR's and 2BRs). They only have to do that for about 60 nights to get to $250,000 in breakage income. That does not account for the other probable 28 rooms that they may actually get at the breakage period and wait to rent until then. Of course, they do not reveal actual income from breakage units but my perhaps completely unfounded belief is that it is way more than the 2.5% of the budget that goes back into the DVC acoount.

I don't have time to look but there is something in the POS that suggested 50% to me plus that number was thrown around by management in a conversation in the past. Regardless, it's got to be 35% or MORE based on industry standards.

 

[rlmas]

Thanks for all the great discussion. I checked the budgets for each resort and the breakage income ranges from 8 to 17 cents per point. This is a significant amount of money. The real point of my question is - If we own the place, why don't we get the income net of a piece for CRO regardless of the amount. We pay them via CRO to take care of it, but why is it limited to 2.5%. I agree with the earlier post that this does not include the inventory freed up by trading outside of DVC. That cash rent generates the cash that DVC gives the non-DVC resort for our traded stay. The more we fill the place up on cash, the more attractive our trading power.

 

[Dean]

Thanks for all the great discussion. I checked the budgets for each resort and the breakage income ranges from 8 to 17 cents per point. This is a significant amount of money. The real point of my question is - If we own the place, why don't we get the income net of a piece for CRO regardless of the amount. We pay them via CRO to take care of it, but why is it limited to 2.5%. I agree with the earlier post that this does not include the inventory freed up by trading outside of DVC. That cash rent generates the cash that DVC gives the non-DVC resort for our traded stay. The more we fill the place up on cash, the more attractive our trading power.

Because we agreed to the deal when we bought in, the table is almost always slanted in Disney's favor.