Steve Greer Outlines Differences Between LUSSO and Tanner & Haley

In late July, it was announced that Tanner & Haley (the pioneer of destination clubs, formerly known as Abercrombie & Kent Destination Clubs and before that as Private Retreats), filed under Chapter 11 to reorganize their company and modify their ongoing business model.

This letter will explain certain key features of the LUSSO business model and operating philosophy, contrasting these where appropriate with those employed by Tanner & Haley. We believe the significant differences in how our model is designed and managed positions The LUSSO Collection for long term success in the destination club industry. If, however, you have additional questions after reading this letter, please feel free to contact me at any time.

Member access to properties

Both LUSSO and Tanner & Haley offer "unlimited" access to Club properties—this means that there is no annual limit on the number of days an individual member may use the Club's properties. However, there are significant differences between the "unlimited" access model used by Tanner & Haley and that used by LUSSO.

The most significant difference between the two membership usage models is that LUSSO's unlimited access is subject to availability (meaning a member may travel if a property is available) whereas Tanner & Haley offers unlimited access with a 51 weeks per year "anytime, anywhere guarantee" so long as the member provides sufficient advance notice. This means that if Tanner & Haley does not have a club property available it is generally required to procure a comparable property at the club's expense.

LUSSO's policy of unlimited access subject to availability (other than in certain limited guaranteed circumstances that LUSSO Members do enjoy) does not expose the Club to potentially onerous commitments. In our opinion, unlimited access with such an extensive guarantee as that offered by Tanner & Haley leads to an unsustainable business model.

Interestingly, even among destination clubs that seemingly limit the number of days' annual usage for each member, the reality is that they often do offer unlimited access to their properties — they just choose to charge for any usage in excess of a member's basic annual entitlement. LUSSO's philosophy is that if a property would otherwise be unoccupied, there should be no additional charge to the Member.

Use of short-term rental properties

In a publicly available letter to its members, Tanner & Haley admitted that "its financial difficulties were largely attributable to a business model that proved to be unsustainable, with revenues unable to keep pace with the costs associated with its 'members-first' approach. Among other things, the company in the past rarely refused a Member's travel request, and if a desired property in the company's portfolio was unavailable when requested, the company would commonly enter into a costly short-term lease with a third party."

We believe that the practice of regularly using short-term rentals would be detrimental to our business in two ways—firstly, the costs can be prohibitive in the long run and secondly, the wide variation in quality of the property, furnishings and amenities would lead to member dissatisfaction.

LUSSO only engages in short-term rental properties on a very limited basis and for specific reasons, not as a general business practice. We currently have only two properties which are short term (interim) rental properties—one in Abaco (Bahamas) and one in Miami , both of which we have commissioned while construction of our own properties is completed.

Other than the properties mentioned above, LUSSO owns its properties either in its own name or under a financing arrangement that is in substance equivalent to ownership. The typical features of this type of financing arrangement are (1) an equity contribution by LUSSO, (2) a lease, the annual costs of which are the equivalent of mortgage financing, (3) an option to take the property into LUSSO's name at a future date at either cost or with a small annual appreciation (so that LUSSO is the beneficiary of substantially all anticipated appreciation), and (4) the property is fully furnished by LUSSO to its exacting standards and at its own expense.

Ratio of members to properties

Tanner & Haley's court filings state that its clubs (principally Private Retreats and Distinctive Retreats) had in aggregate 874 members and only 67 owned homes, a ratio of 13 members per property. For a club with Tanner & Haley's usage model (which includes extensive guaranteed availability as described above) one would expect that the ratio of members to owned properties would need be among the lowest in the industry (that is, lower than 5 or 6 to 1). It would appear that Tanner & Haley relied upon short-term rental properties not only to deliver on its guarantee, but also to compensate for an insufficient "base" number of owned properties in its own portfolio.

LUSSO covenants in its Membership Agreement never to exceed a ratio of 5.5 members per property—the lowest in the industry. At present our ratio is even more favorable than this, creating exceptional availability for our Members.

Use and security of membership deposits

Most destination clubs offer to refund only 80 percent of a membership deposit, using the other 20 percent either to support operations during the club's development phase when annual dues do not yet fully cover operating costs, or for returns to investors.

The LUSSO business model is similar to the extent that approximately 80 percent of Membership Deposits is used for real estate purposes or held in cash. The balance is available for the operations of the Club during its development phase. LUSSO has made no distributions to any of its investors and will not do so until the Club is substantially developed (in terms of both Members and properties) relative to its ultimate target of 550 Members and 100 properties, and only then on the basis that the financial viability of the Club would not be impaired by any such distribution.

In the event that a Member wishes to leave LUSSO, the Membership Deposit is refunded on a three in, one out basis (or one in, one out when the Club is fully developed) by new Membership Deposits received into the Club. We expect that the Membership Deposit will continue to increase over time so the incoming Member will be paying more than the amount due to the outgoing Member. As you know, LUSSO offers a full refund of the Membership Deposit and the potential for a Membership Reward based on increasing values in the Membership Deposit.

In any situation where a Membership Deposit is not being refunded out of the proceeds of a new Membership Deposit, the market value of the net assets of the Club is the underlying measure of security for the Deposits paid by existing Members. As of June 2006, the estimated market value of the net assets of the Club, if realized, was sufficient to cover Membership Deposits in excess of 1.4x.

Corporate governance and financial transparency

The destination club model is of course still a relatively new concept but under the stewardship of responsible management, executed according to a carefully assembled business plan, and with a sound member usage model, it is a viable business proposition. LUSSO extensively reviewed and evaluated many alternative usage models before deciding on its own model and we believe that our model achieves a unique level of accommodation of Member desires without compromising the financial stability of the Club.

The Club's operations and development progress are regularly reviewed by the board to ensure that management is executing the business model in line with the strategic plan and managing the Club for long-term financial stability throughout each phase of the Club's growth.

From December 2006 onwards, the Club's annual financial statements will be subject to an independent audit. The Club will work with its auditors to develop a financial report to Members that provides meaningful financial information, including a calculation of the extent to which the estimated market value of the Club's assets (net of indebtedness, other than Membership Deposits) is sufficient to repay Membership Deposits. As previously noted, based on management's estimate of the fair market value of the Club's properties, this measure at June 2006 resulted in coverage of in excess of 1.4x.

I hope that this communication has provided the answers to any questions you might have. However please feel free to contact me if you have any further questions.

STEVE GREER, President & CEO