Real Estate Value of Clubs Is Often A Dangerous Illusion

By Peter J. Nanula

Rodney Dangerfield said it best in Caddyshack back in 1980: "golf courses and cemeteries are the biggest wastes of prime real estate." We love our golf, but he was right - the value of the 150 acres under a typical country club is usually much higher if the course was plowed under to make way for upscale homes.

Many Boards of clubs I meet with are interested in finding a more sustainable capital structure for their club than the traditional recipe of debt, member assessments and ever-increasing dues. The debt load burdens the club with high debt service payments that never seem to go away, and the assessments cause some members to quit. Dues rates get above market levels, causing higher attrition and impeding membership recruitment. But when the Board considers its capital options, two common challenges emerge.

First, local banks are usually happy to rely on the much higher appraised value as residential land when making their loan. "Sure, we will loan you 65% of the price that Toll Brothers would pay for this land to be turned into McMansions." Why is this a problem? Sure, it allows the club to get a sizeable loan to finance that new clubhouse addition. But borrowers tend to borrow as much as a lender will give them - which is often too much for the club to realistically support (and keep up with funding new capital projects at the same time). Now the club has a $6 million mortgage with principal and interest payments of $500,000 per year. Some combination of recessions, weather and local competition will make it hard for the club to keep up that debt service payment for 10 or 15 years in a row. At the first missed payment, the loan needs to be restructured. Eventually, the bank has to consider foreclosure; but no bank actually wants to own a country club, and a local bank does not want to anger its wealthy clientele at the club by initiating the foreclosure process. So there are now over 1,000 private clubs with "zombie loans" they never should have taken out - their local bank was willing to loan the club too much money, and now it can never be paid off, especially with a declining membership. The heavily indebted club is a club on its way to a slow and painful decline.

The second problem occurs when the Board considers fresh equity investment into the club to solve its capital issues for good. (Disclosure: this is what we provide.) Members look at that Toll Brothers inflated appraisal of the residential land value, and say "our club is worth $28 million, so why would we let new investors in at $7 million?" The simple fact is that the last 500+ private clubs have traded hands at roughly 1.0 times the club's annual revenues; to be precise, within a tight range of 0.8 to 1.2 times annual revenues. So a $6 million revenue club is worth roughly $5-7 million - if the club is to be preserved as a private club. The Board has to explain this to its membership, which is often confused by the appraisal. The Society of Golf Appraisers is now making its certified appraisals clearer, by stating whether its indicated value is based on residential development (i.e., the Toll Brothers bulldozer scenario) or a continuing private club scenario. But the damage is done when the large club mortgage was taken out based on the inflated real estate appraisal - members have trouble thinking clearly about the club's capital structure in time to save their club.

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At member town hall meetings, I often start with a show of hands: "How many members would like to plow under the golf course for new homes, and get a check?" I have never seen a single hand go up. Virtually every club member is there for the camaraderie, the golf, the drinking and dining with friends, and the culture of the club that they have created. They don't want to see it all bulldozed, almost no matter the price. An extreme version of this debate played out in 2015 at Santa Ana Country Club in Southern California: a real estate developer approached the club's Board with a serious $200 million offer for their property. (Not a typo.) Each member, who originally paid $40,000 to $70,000 to join the Club over the years, could have received a check for $450,000. You guessed it - the club voted down the proposal, instead opting to invest in some clubhouse and golf course improvements to preserve and enhance their club for the long term. The math is not usually this crazy, but the club member mindset is almost always the same.

A typical member question, given the large difference between the rumored appraised value of the club's land and the actual 1.0x revenue value as a country club, is "what happened to my equity?" The truth is, in most cases there is no equity value left after adding up the debt and the capital needs of the club. If a club with annual revenues of $6 million has a $4m mortgage and wants us to invest $3 million in capital projects on its wish list, there simply is no "equity" to be split among the members. When this reality is explained to members, though, virtually all say that (1) they never truly expected to get a check back one day or viewed the club like a financial investment, and (2) they really want their club to be preserved and enhanced forever.

Our advice to Board members after 20+ years of painful experience in club Boardrooms is to borrow less than 50% of the appraised value as a country club. This means a smaller bank loan, but a manageable one that can be paid off relatively quickly in almost any circumstances - and the debt financing will not crowd out cash needed for continuing capital improvements. Otherwise, use equity - either ours, which comes along with hospitality operating expertise, or equity from a small group of wealthy members who have the cash to contribute without necessarily expecting repayment like a bank.