Consumer Usually Takes a Bath If Spas Go Down Financial Drain

Times Staff Writer

When the owners of Nautilus Dynamics abruptly shut down their Woodland Hills health club on Feb. 5, angry members milled around in front of the locked doors, signing petitions to their state representatives and vowing to find a way to get their money back.

But several other members knew better. They had been victims of closings of other clubs and were not surprised that it had happened again.

"It was a very dirty club. The heart monitors on the exercise bicycles were always broken and lots of the equipment didn't work properly, but the price was right and I figured I could take the chance because they had been in that location for a few years," said Kaye Hiatt, 48, who paid $99 for a two-year membership at the club shortly after another club she had joined closed down. "I guess you can never tell."

Unhealthy Investment

Thousands of Valley exercise enthusiasts have been discovering that long-term health club memberships are not always a healthy investment. At least seven spas have thrown in the towel in the Valley area since the beginning of last year, and Better Business Bureau officials suspect others may have closed their doors without anyone officially reporting it.

A glut of inexperienced, overly optimistic businessmen trying to cash in on the fitness craze and a lack of consumer protection legislation have heightened the riskiness of memberships, which cost anywhere from $49 to $700 a year, according to state officials, spa owners and customers.

Without a professional registry to keep track of health clubs, state and local officials say, it is impossible to keep accurate figures on how many clubs are in operation or how many have shut down.

"Nobody has a good handle on this universe. They're unorganized and unregulated," said Jeff Fuller, deputy attorney general in the legislative division of the state attorney general's office.

Many Left Out in Cold

According to current estimates, more than 1 million Californians have purchased memberships at 2,800 clubs throughout the state, he said.

The Better Business Bureau and the state attorney general's office estimate that more than two dozen clubs have closed down in the Los Angeles area alone in the last two years, leaving tens of thousands of members out in the cold.

"There is a hefty percentage of members of clubs that pack it in who just don't bother to file a written complaint with us because they figure it's futile. In most cases, they're right," said Guy Wirsig, director of operations for the Los Angeles and Orange County division of the Better Business Bureau. "We can advise them about how to take their case to small claims court, but, even if you do win a judgment, what's the chance you're going to collect? Very slim, if there aren't any assets left."

Nothing Left

In most cases, there is nothing left by the time a club folds; the unscrupulous businessman cashing in and fleeing is rare, consumer protection experts said.

"High-volume club operators are often inexperienced or over-extended, or they guess wrong as to the neighborhood's flow of traffic," said Herschel Elkins, who oversees the attorney general's Los Angeles-based consumer law section. "Sometimes they'll have a competitor come in with new equipment or the latest work-out sessions, and that draws away their customers."

Elkins said the market for health clubs has been saturated in urban areas like the Valley for two or three years, creating fierce competition.

"They will sign up individuals for the first couple of years for a big chunk of money, and then they'll begin to run out of customers, and they will have spent all the money that was meant to pay for those people for the long term," Elkins said. "So they try to get more and more people in for less and less money and, all of a sudden, it becomes a chain, and they've got an overcrowded facility but not nearly enough income . . . and, wham, they've got to call it quits."

High Overhead

Longtime club owners in the Valley area said overhead for large work-out studios can run as high as $20,000 to $40,000 a month. Fees for one- or two-year memberships often are spent within a few months and, without a steady influx of new members, many operators discover they can't keep their doors open.

"Human greed comes in, and that's what these speculators count on," said Frank Vandernagel, owner of North Hollywood Health Club for the last 15 years. Customers "see all these amazing deals and they don't even stop to think, 'How could they possibly run this multimillion-dollar operation on so little income?' They don't realize that these high-volume guys are hoping they will pay the money and then not come in to use the place."

When a club closes its doors, members are considered lucky if the old owners have tried to convince other studios to assume the memberships for a "transfer fee," which is usually hefty.

But the promise often rings hollow:

In the case of Nautilus Dynamics, owners Scott Beardsley and Gilbert Lo left a note in the window telling members that "all time commitment remaining and dollars paid" would be honored at the Sherman Oaks Galleria Fitness Center, more than 10 miles away.

But the Galleria Fitness Center's manager, Jeff Moorhouse, said the club would only subtract the current value of the Nautilus Dynamics membership from its $249 annual fee. For many Nautilus customers who had used only a few weeks of a $100, one-year membership, that meant shelling out at least another $100 to travel to a distant club.

Besides, many members who lost out at Nautilus Dynamics refused to join up at the Sherman Oaks facility because it is owned by the same management that last May closed down another Woodland Hills spa, Nautilus Works. Some of those left in the cold by that closure signed up at Nautilus Dynamics, only to experience the same high-and-dry sensation.

Moorhouse, manager of the Sherman Oaks fitness center, characterized the closing of Nautilus Works as a consolidation into the Sherman Oaks center's "bigger and better" facilities.

When Nautilus Sports Center in Van Nuys closed last November, members were told they could either pay an extra $39 to transfer their memberships to a racquetball club in North Hollywood or travel as much as 50 miles to use affiliated clubs in Huntington Beach and Long Beach.

And when Camp Granada in Granada Hills closed suddenly last October, the owner of nearby Olympia Health Club agreed to pick up the memberships only if the member would pay $120 for an additional year's worth of work-outs. Fun-N-Fitness Ladies Health Club in Northridge offered to take in the members if they would purchase a two-year extension for $50.

"Most times people end up with nothing--no refund and no membership somewhere else," said Timothy Bissell, chief investigator for the Los Angeles County Department of Consumer Affairs.

Few laws provide protection for consumers who put their money on the line to purchase a multi-year club contract. The existing state law regulating "health studios" only says that a club may not sell a contract that lasts more than three years or that requires a payment plan lasting more than two years. And a club may collect no more than $1,000 under a single contract.

But state legislators, said by some observers to be smarting from the closing of four health clubs in the Sacramento area late last summer, are scurrying to place heavier regulation on the studios.

State Sens. Art Torres (D-Los Angeles) and Joseph B. Montoya (D-Whittier) have authored two bills that would require health clubs to post a bond before being allowed to do business. Administrators of the state Department of Consumer Affairs say they will ask a legislator to carry the department's own bill, which would require health club owners to place all prepayments in trust until services can be delivered, a technique similar to the way California requires funeral directors to protect prepaid burial plans.

Torres introduced a similar bonding bill last year, but it died in committee.

Comprehensive Measure Sought

Officials hope all three of the bills can be melded into a comprehensive regulatory measure for the industry before the end of this legislative round.

"What we're trying to do is cover all the problem areas but give the health studio operator a number of options to work with," said Tom Cecil, deputy director of the state Department of Consumer Affairs. "They can either put the money in trust or post a $50,000 bond that members can draw off of if things shut down, or get some sort of an insurance vehicle that adequately protects the consumer if you go out of business."

Cecil said the regulations are needed as much to protect inexperienced club owners from their own lack of business know-how as to protect customers.

"We're not dealing with crooked individuals who deliberately set out to fleece the public. I would imagine those instances are rather rare," Cecil said. "What we are usually seeing is the case of the overly optimistic entrepreneur."

Month-to-Month Basis

In order to survive, Cecil said, health clubs will have to start operating on a month-to-month basis, accepting payment only as service is provided and not locking members into long-term contracts. (Any club that adopted such financial arrangements would not have to comply with the bonding requirements being drafted in Sacramento.)

The pay-as-you-exercise concept has caught on in some areas. Nautilus Plus Aerobics, a chain of 17 health clubs in Los Angeles and Orange counties--including facilities in Northridge, Encino and Studio City--now operates under a payment plan requiring a $49 registration fee and payments of $7 each month. The club collects the money through automatic payments out of its members' bank accounts, said Northridge club manager Joe Cendra.

Like many studios trying to attract new business, Cendra said his club will honor the remaining time on memberships from all defunct clubs if the consumer pays his club's $49 registration fee.

"Helping out the people who got caught by the closure of someone else's club lets us get a stronger hold on our place in the market because it helps rescue the entire industry's reputation," Cendra said.

"Because these people who close down clubs are usually poor business people who are undercapitalized and who didn't run their clubs right, those black sheep can ruin it for everyone."

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