18 TIMESHARE STRATEGY – IMPAIRMENT CHARGES
In response to the difficult business conditions that the Timeshare segment’s timeshare, luxury residential, and luxury fractional real estate development businesses experienced, we evaluated our entire Timeshare portfolio in the 2009 third quarter. In order to adjust the business strategy to reflect current market conditions at that time, we approved plans for our Timeshare segment to take the following actions: (1) for our luxury residential projects, reduce prices, convert certain proposed projects to other uses, sell some undeveloped land, and not pursue further Marriott-funded residential development projects; (2) reduce prices for existing luxury fractional units; (3) continue short-term promotions for our U.S. timeshare business and defer the introduction of new projects and development phases; and (4) for our European timeshare and fractional resorts, continue promotional pricing and marketing incentives and not pursue further development. We designed these plans, which primarily relate to luxury residential and fractional resorts, to stimulate sales, accelerate cash flow, and reduce investment spending.
As a result of these decisions, in 2009 we recorded the charges shown in the following table in our Income Statements, with charges that impacted operating income under the “Timeshare strategy - impairment charges” caption and charges that impacted non-operating income under the “Timeshare strategy - impairment charges (non-operating)” caption:
The impairment charges were non-cash, other than $27 million of charges associated with ongoing mezzanine loan fundings and $21 million of charges for purchase commitments. Grouped by product type and/or geographic location, these impairment charges consisted of $295 million associated with five luxury residential projects, $299 million associated with nine North American luxury fractional projects, $93 million related to one North American timeshare project, $51 million related to the four projects in our European timeshare and fractional business, and $14 million associated with two Asia Pacific timeshare resorts. Except for the $40 million loan impairment and the $27 million funding liability, we allocated the remaining pretax charges totaling $685 million to our Timeshare segment.
For additional information on these impairment charges, including how we determined these impairments and the inputs we used in calculating fair value, please see Footnote No. 20, “Timeshare Strategy - Impairment Charges,” in the Notes to the Financial Statements of our 2009 Form 10-K.
In the 2010 fourth quarter, we reversed (based on facts and circumstances surrounding the project, including progress on certain construction-related legal claims and potential funding of certain costs by one of our partners) $11 million of the $27 million funding liability we recorded in 2009. We recorded the reversal of the funding liability in the equity in (losses) earnings line in our Income Statement, but did not allocate it to any of our segments. In addition, the venture was unable to pay one of its promissory notes when it was due on December 31, 2010. The partners, on behalf of the venture, continue to negotiate an extension of the maturity date.
