Grand Floridian Expansion - The math is nuts to me!

[vint43]

We have been happy owners of DVC for about 10 years. We purchased at the opening of the original Grand Floridian and the opening of the Riveria. We always purchased direct at the opening. We have enjoyed our trips and really have few complaints about DVC. However, the trend to "renovate" existing buildings (back with the Poly and now the Grand) is just perplexing math.

In the latest case, DVC generated 1.8 million more points to sell at the Grand and created 200 more villas (all studios).

At an average sales price of $190 per pt - that is $342 million in points sales. That is about $1.7 million per studio.

If you look at the room remodel, it would be hard to believe they spent more than $75k per studio in actual interior remodel. They did not even include a microwave in every studio. It looks like they re-used the original bathtubs. $75k per room is *very* generous. That means, for the interior remodel, they spent about $15 million - being very generous with the budget.

So, where did the other $327 million go? They most likely had to do some structural upgrades / repairs - again, however, even with an additional $15 million to do these - we are still looking for the $300 million extra?

I am guessing the vast majority of this money was an internal transfer within Disney. Meaning, the parks division "sold" DVC the building for $250m - $300m. This is a building over the many years probably had a book value of zero within the parks division (meaning it was fully depreciated). I am not sure if they "sold" the dirt to DVC - or just the building. Basically, Disney makes an absolute killing on these refurbs. They "sell" an old building to DVC at a crazy price, do a basic remodel, and sell it back to members at a huge profit. They then pass on the maintenance of this fully depreciated, old building to the members to cover the next 50+ years.

The fact they can sell these building "flips" at the same price (or more) than full new construction site just tells you how lucrative this must be for Disney.

Again, we really have no complaints about DVC. We have enjoyed it. Our points have held their value. I just cannot believe honest people internal to Disney are not embarrassed by how much they are taking members for a ride with these building flips.

 

[LYSE]

I wouldn't be surprised if the profit here is paying to fix all the deferred maintenance at GF in general.

 

[CarolynFH]

We have been happy owners of DVC for about 10 years. We purchased at the opening of the original Grand Floridian and the opening of the Riveria. We always purchased direct at the opening. We have enjoyed our trips and really have few complaints about DVC. However, the trend to "renovate" existing buildings (back with the Poly and now the Grand) is just perplexing math.

In the latest case, DVC generated 1.8 million more points to sell at the Grand and created 200 more villas (all studios).

At an average sales price of $190 per pt - that is $342 million in points sales. That is about $1.7 million per studio.

If you look at the room remodel, it would be hard to believe they spent more than $75k per studio in actual interior remodel. They did not even include a microwave in every studio. It looks like they re-used the original bathtubs. $75k per room is *very* generous. That means, for the interior remodel, they spent about $15 million - being very generous with the budget.

So, where did the other $327 million go? They most likely had to do some structural upgrades / repairs - again, however, even with an additional $15 million to do these - we are still looking for the $300 million extra?

I am guessing the vast majority of this money was an internal transfer within Disney. Meaning, the parks division "sold" DVC the building for $250m - $300m. This is a building over the many years probably had a book value of zero within the parks division (meaning it was fully depreciated). I am not sure if they "sold" the dirt to DVC - or just the building. Basically, Disney makes an absolute killing on these refurbs. They "sell" an old building to DVC at a crazy price, do a basic remodel, and sell it back to members at a huge profit. They then pass on the maintenance of this fully depreciated, old building to the members to cover the next 50+ years.

The fact they can sell these building "flips" at the same price (or more) than full new construction site just tells you how lucrative this must be for Disney.

Again, we really have no complaints about DVC. We have enjoyed it. Our points have held their value. I just cannot believe honest people internal to Disney are not embarrassed by how much they are taking members for a ride with these building flips.

I think Disney is hoping that very few people figure it out like you have.

 

[BaybeeYoda]

There’s a thread out there on whether Disney is going broke….. Based on your numbers, I would say nay…,

 

[stwaldman]

Obviously they make a killing early on, but it's worth remembering that converting the building to DVC is removing rentable room inventory for 40+ years (other than points rented through breakage). I think the general understanding is that GF has been under booked in recent years which is why this isn't a big loss to them, but it's not quite as simple as left pocket right pocket transfers. The same 200 rooms, rentable 365 days a year, now are no longer going to generate revenue other than the small percentage of points DVC is renting out. Those numbers do add up eventually, even if much slower (and with more risk built in because members aren't contractually obligated to foot the overhead)

 

[vint43]

Obviously they make a killing early on, but it's worth remembering that converting the building to DVC is removing rentable room inventory for 40+ years (other than points rented through breakage). I think the general understanding is that GF has been under booked in recent years which is why this isn't a big loss to them, but it's not quite as simple as left pocket right pocket transfers. The same 200 rooms, rentable 365 days a year, now are no longer going to generate revenue other than the small percentage of points DVC is renting out. Those numbers do add up eventually, even if much slower (and with more risk built in because members aren't contractually obligated to foot the overhead)

This did cross my mind. However, with DVC, we pay for our share of the common services provided by the hotel (pool, etc,), we use the hotel restaurants, we shop at the hotel stores. So, basically, the hotel still gets some of the profit from the visit (outside of the hotel room itself) and carries none of the cost. They get reliable occupancy for 50+ years. In the meantime, they get a windfall of $200 million plus for selling the building to DVC. BTW, who negotiates the price of that building? Basically, Disney decides what it is worth. When making that price determination I am sure they used "future lost room revenue/profit" as a major component for determining the selling price. So, as setup, I am guessing they got near full value for the future lost room revenue/profit and still got the ongoing related hotel revenue from the DVC visitor over time. Time value of money, they realized those future "profits" from the next 50 years of possible room rents in the 4-5 years it will take them to sell out the DVC.

Basically, I think this is a financial home run. We should expect to see more and more of it. I would not be surprised if a DVC is created within the Yacht Club eventually using this same approach.

 

[New Mouse]

It's basically like taking out a 40 to 50 year $300 million loan from yourself. Grab the profits now let the fools who are around in 30 years deal with the mess you made.

 

[DisneyOutsider]

You seem to be working from the assumption that Disney should merely be breaking even on their DVC investments. Why on Earth would they even bother if that was the case? Of course they're taking profits. There's nothing devious about it. You could argue it to be short-sighted if they're watering down the quality of the product, however. But from all reports I've seen, people seem to like the new studios and what it gives them access to.

Also, you have to stop comparing this to any normal real-world real estate transaction. That's now what this is. Apples to oranges.

 

[vint43]

You seem to be working from the assumption that Disney should merely be breaking even on their DVC investments. Why on Earth would they even bother if that was the case? Of course they're taking profits. There's nothing devious about it. You could argue it to be short-sighted if they're watering down the quality of the product, however. But from all reports I've seen, people seem to like the new studios and what it gives them access to.

Also, you have to stop comparing this to any normal real-world real estate transaction. That's now what this is. Apples to oranges.

DVC is a division of Disney buying the building. It is not the only profit taker here. It is the division that is selling DVC the building that is the first profit taker. In a normal timeshare (which is what DVC is - not sure why you feel this falls outside the real-world of real estate?), the developer builds a building (or buys it) and profits from that investment by selling smaller real estate interests in the building as a timeshare.

While never described as "devious" - the questionable transaction here is the fact DVC is not building a building. It is not even purchasing a building from a third-party (which also happens in other timeshares). They are purchasing a building from another sister organization within the same company. These internal transfers are notorious for questionable accounting.

DVC turns around and sells this property at the same price as if they built it from scratch after a basic remodel. However, is the roof brand new? Is the foundation? Is the plumbing infrastructure? Is the electrical infrastructure? The framing? They also put zero into a new pool, new landscaping, new parking, new restaurants, etc.

Basically, one division is selling DVC a building at a potential non-fair market rate due to it being an insider deal, DVC turns around and sells it to members at a new construction rate as if they developed the entire property. I am not suggesting this is illegal, however, I am not sure about the ethics. Self-dealing is a slippery slope. It often ends with accounting issues.

In the end, I am happy with DVC. This method of generating new timeshares to sell is questionable to me if they continue to increase rates to new members for points. I am not sure new members are getting a "fair deal" given the setup. DVC purchased an existing building from a sister division, added some paint and interior finishes and sold it to new members at a cost higher than the Riveria where they had to knock down multiple buildings, build a completely new building, new pools, new restaurants, new pathways, new landscape, etc. Yet, this refurb building is being sold at a higher price per point.

As a real estate owner in this timeshare system, I am just making what I believe to be a fair observation. This could be a questionable deal.

 

[AvidDisReader]

DVC is a division of Disney buying the building. It is not the only profit taker here. It is the division that is selling DVC the building that is the first profit taker. In a normal timeshare (which is what DVC is - not sure why you feel this falls outside the real-world of real estate?), the developer builds a building (or buys it) and profits from that investment by selling smaller real estate interests in the building as a timeshare.

While never described as "devious" - the questionable transaction here is the fact DVC is not building a building. It is not even purchasing a building from a third-party (which also happens in other timeshares). They are purchasing a building from another sister organization within the same company. These internal transfers are notorious for questionable accounting.

DVC turns around and sells this property at the same price as if they built it from scratch after a basic remodel. However, is the roof brand new? Is the foundation? Is the plumbing infrastructure? Is the electrical infrastructure? The framing? They also put zero into a new pool, new landscaping, new parking, new restaurants, etc.

Basically, one division is selling DVC a building at a potential non-fair market rate due to it being an insider deal, DVC turns around and sells it to members at a new construction rate as if they developed the entire property. I am not suggesting this is illegal, however, I am not sure about the ethics. Self-dealing is a slippery slope. It often ends with accounting issues.

In the end, I am happy with DVC. This method of generating new timeshares to sell is questionable to me if they continue to increase rates to new members for points. I am not sure new members are getting a "fair deal" given the setup. DVC purchased an existing building from a sister division, added some paint and interior finishes and sold it to new members at a cost higher than the Riveria where they had to knock down multiple buildings, build a completely new building, new pools, new restaurants, new pathways, new landscape, etc. Yet, this refurb building is being sold at a higher price per point.

As a real estate owner in this timeshare system, I am just making what I believe to be a fair observation. This could be a questionable deal.

There was a report that came out a couple of years before COVID shut down that the biggest profit segment in all of Disney Corp (as computed by ROI) was DVC. Is buying an existing building and flipping to DVC devious, heck no--Just very profitable. This is why I get so very upset with DVC for putting resale restrictions when they make a TON of profit on the original sale. So why punish your most loyal customers by putting resale restrictions on DVC points when you have already made huge profits. Ok-- off my soap box.

 

[limace]

Yeah, that’s why I struggle with the explanation (that is often shared with sympathy on these boards) that the poor customer service with DVC-whether it’s incredible waits for points to be loaded or long waits on hold is due to staffing issues. Pay your staff more and create a few more positions. You can afford it.

 

[DisneyOutsider]

DVC is a division of Disney buying the building. It is not the only profit taker here. It is the division that is selling DVC the building that is the first profit taker. In a normal timeshare (which is what DVC is - not sure why you feel this falls outside the real-world of real estate?), the developer builds a building (or buys it) and profits from that investment by selling smaller real estate interests in the building as a timeshare.

While never described as "devious" - the questionable transaction here is the fact DVC is not building a building. It is not even purchasing a building from a third-party (which also happens in other timeshares). They are purchasing a building from another sister organization within the same company. These internal transfers are notorious for questionable accounting.

DVC turns around and sells this property at the same price as if they built it from scratch after a basic remodel. However, is the roof brand new? Is the foundation? Is the plumbing infrastructure? Is the electrical infrastructure? The framing? They also put zero into a new pool, new landscaping, new parking, new restaurants, etc.

Basically, one division is selling DVC a building at a potential non-fair market rate due to it being an insider deal, DVC turns around and sells it to members at a new construction rate as if they developed the entire property. I am not suggesting this is illegal, however, I am not sure about the ethics. Self-dealing is a slippery slope. It often ends with accounting issues.

In the end, I am happy with DVC. This method of generating new timeshares to sell is questionable to me if they continue to increase rates to new members for points. I am not sure new members are getting a "fair deal" given the setup. DVC purchased an existing building from a sister division, added some paint and interior finishes and sold it to new members at a cost higher than the Riveria where they had to knock down multiple buildings, build a completely new building, new pools, new restaurants, new pathways, new landscape, etc. Yet, this refurb building is being sold at a higher price per point.

As a real estate owner in this timeshare system, I am just making what I believe to be a fair observation. This could be a questionable deal.

The value of the real estate interest is not determined by historical development costs. What would be unfair to existing members is if they sold these GFV points with all of the same rights as the pre-existing association at a significantly lower price point just because it was constructed a long time ago. The new owners can use their points across all room categories, not just the new studios. Why would that be worth less? It makes no sense for these points to be sold at a discount just because the new units are constructed differently. They're buying the exact same product that GFV members who bought years ago have.

Yes, it's extremely profitable.. but that doesn't make it questionable so long as they're following applicable timeshare laws. As a CPA, the intercompany transfer of assets really isn't an issue here. It's a formality so long as it's documented correctly.

 

[stwaldman]

DVC is a division of Disney buying the building. It is not the only profit taker here. It is the division that is selling DVC the building that is the first profit taker. In a normal timeshare (which is what DVC is - not sure why you feel this falls outside the real-world of real estate?), the developer builds a building (or buys it) and profits from that investment by selling smaller real estate interests in the building as a timeshare.

While never described as "devious" - the questionable transaction here is the fact DVC is not building a building. It is not even purchasing a building from a third-party (which also happens in other timeshares). They are purchasing a building from another sister organization within the same company. These internal transfers are notorious for questionable accounting.

DVC turns around and sells this property at the same price as if they built it from scratch after a basic remodel. However, is the roof brand new? Is the foundation? Is the plumbing infrastructure? Is the electrical infrastructure? The framing? They also put zero into a new pool, new landscaping, new parking, new restaurants, etc.

Basically, one division is selling DVC a building at a potential non-fair market rate due to it being an insider deal, DVC turns around and sells it to members at a new construction rate as if they developed the entire property. I am not suggesting this is illegal, however, I am not sure about the ethics. Self-dealing is a slippery slope. It often ends with accounting issues.

In the end, I am happy with DVC. This method of generating new timeshares to sell is questionable to me if they continue to increase rates to new members for points. I am not sure new members are getting a "fair deal" given the setup. DVC purchased an existing building from a sister division, added some paint and interior finishes and sold it to new members at a cost higher than the Riveria where they had to knock down multiple buildings, build a completely new building, new pools, new restaurants, new pathways, new landscape, etc. Yet, this refurb building is being sold at a higher price per point.

As a real estate owner in this timeshare system, I am just making what I believe to be a fair observation. This could be a questionable deal.

it unlikely to be a questionable deal (although i'm sure they papered things in a way for everybody to be made whole from an accounting side) and there's certainly nothing amiss about ethics here. Its an intercompany sale between separate entities of a publicly traded company with audited books and records. A hotel that has had recent history of struggling to fill its hotel rooms sold a chunk of those hotel rooms to a timeshare company. Company A "cashes out" but now will never earn a dime from those rooms again. Company B incurred a large expense upfront and is taking on the risk of selling those rooms for a shorter term (but pretty beefy) profit, knowing that after a few years, the only income they will receive further from those rooms will be from a smallish population of point rentals.

Its a short/medium term cash generator that probably will help offset some of the huge covid loans, if nothing else. By the time they start to feel the relative "pain" of losing the hotel rooms, they will have expanded the Poly with another building they are building from scratch and possibly taken actions on other sites such as the reflections site, or building another hotel in the epcot area.

I just dont get the complaint about it being a "flip". If the rooms are nice enough to sell, people will buy them. If the sidewalk cracks, the parking lot needs paint, or the pool gets run down it will get fixed. If anything, VGF buyers, including new ones, will always benefit from the hotel side initially providing for and continually incurring a portion of the upkeep costs which keep dues low. That's always been a selling point to counteract the high point cost, even when the resort was sold out.

 

[jade1]

This is a building over the many years probably had a book value of zero within the parks division (meaning it was fully depreciated).

Yea quite an upfront chunk of money. I can never tell what's up either.

I guess they would compare just normal renting like 200 rooms times $500 a night times 365 is $36 Million a year, or $360 Million in 10 years, or $1.8 Billion over the 50 years?

Is that correct?

 

[stwaldman]

Yea quite an upfront chunk of money. I can never tell what's up either.

I guess they would compare just normal renting like 200 rooms times $500 a night times 365 is $36 Million a year, or $360 Million in 10 years, or $1.8 Billion over the 50 years?

Is that correct?

they paid a third party valuation expert to determine a FMV and then passed on the advisory fees to the members

 

[tjkraz]

Disney now has 200 fewer hotel rooms to book at >$600 per night for the next 40 years. That's why the high cost per point.

Even new construction is just a fraction of the buyer's cost.

I think Disney is hoping that very few people figure it out like you have.

Does it even matter? Buyers get a guaranteed hotel room until 2064. Rooms that cost hundreds per night to book otherwise. If the buyer concludes that DVC is the most economical way to satisfy their WDW vacation needs, how much Disney earns from the deal doesn't really factor.

 

[CarolynFH]

Disney now has 200 fewer hotel rooms to book at >$600 per night for the next 40 years. That's why the high cost per point.

Even new construction is just a fraction of the buyer's cost.


Does it even matter? Buyers get a guaranteed hotel room until 2064. Rooms that cost hundreds per night to book otherwise. If the buyer concludes that DVC is the most economical way to satisfy their WDW vacation needs, how much Disney earns from the deal doesn't really factor.

LOL! I guess I'm becoming cynical. Instead of thinking "Oh, I've always wanted to stay at the Grand, and look how beautiful those rooms are!" I'm thinking "Oh, look how Disney shifted the cost of maintaining that building from themselves to the DVC owners there!"

 

[Ssplashhmtn]

LOL! I guess I'm becoming cynical. Instead of thinking "Oh, I've always wanted to stay at the Grand, and look how beautiful those rooms are!" I'm thinking "Oh, look how Disney shifted the cost of maintaining that building from themselves to the DVC owners there!"

I’m not sure I understand why that’s a bad thing. Yes Disney shifted the cost of maintaining Big Pine Key to the new users of Big Pine Key. They forego the maintenance cost when they forego future rental income. I’m not seeing the cynicism. As an owner, I’m delighted to have ownership, use, and access to those rooms, and thus happy to pay the maintenance cost on them. It’s a ton less than I was paying for the nightly rate for a hotel room at The Grand. Seems like a win win.

However — they DO need to use those funds to bring back the GF Orchestra AND the coffee machine in the Villas!!

 

[vint43]

They forego the maintenance cost when they forego future rental income. I’m not seeing the cynicism.

However — they DO need to use those funds to bring back the GF Orchestra AND the coffee machine in the Villas!!

I truly do appreciate why this does not matter to most - in the end - it is just another way to get access to a DVC room. Disney internal account is not overly important to the average member.

However, it does help to at least understand what they are doing.

They are not foregoing rental income. They are pre-collecting it. The average hotel has a gross margin of about 30%. Let's say Disney does not much better - make it 50% gross margin. This is just profits after direct expenses of operating the hotel. It does not include the marketing expense to fill those rooms, etc. For 200 rooms, at 85% occupancy, they are getting about $13m or so per year in gross profit from renting those rooms. I am guessing they just got $250m or more for that building. This $250m is an asset sell without further expense. So, they basically got prepaid 20+ years of rental gross profit by having DVC buy this building. Given time value of money, that probably covers the entire operating profit of the building until the DVC contracts expire.

Again, I realize, in the end, for most, this does not matter. However, to your last point, when you see DVC nickel and dime the members you have the basis to be a bit disappointed. We are a complete cash cow.

It would be nice if they fed the cows a few times while milking them for this type of profit. Is a coffee maker and microwave in every room too much to ask?

 

[Sandisw]

Yeah, that’s why I struggle with the explanation (that is often shared with sympathy on these boards) that the poor customer service with DVC-whether it’s incredible waits for points to be loaded or long waits on hold is due to staffing issues. Pay your staff more and create a few more positions. You can afford it.

Just remember that DVCMC runs it’s own profit and loss statement as do all the divisions within the larger TWDC.

So, any increase in staffing, etc. comes directly from that and isn’t subsided by other divisions and unfortunately, the contract with them is set up to be paid a set fee and they get to decide on how to staff…or not.that division based on whatever profit goals they have.

The profit from DVD sales does not get used to help DVCMC runs its division, other than whatever costs it may be required to give them to cover certain operating costs.