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Picking up the tab
A recent study examined how golf courses are financing renovations to their facilities.
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The Mountain Lake Golf Club was boasting a new look. It had rebuilt the back nine and installed five new bunkers on its beautiful 18-hole course.
But how did it pay for those renovations? The project cost $500,000 and was financed by a combination of member assessments and a loan from the local bank. With each member assessed $1,000, the take totaled $300,000. The loan for $200,000 at prime plus 200 basis points featured a five-year term, although the monthly payments were based on a 10-year amortization period, thus requiring a balloon payment or additional financing at the end of the initial term.
This hypothetical tale is just one example of how golf courses can pay for the kind of renovation work that can be necessary to keep club members and avid golfers paying for the privilege of playing their facility. We recently surveyed 47 clubs that had gone through recent renovations to discover how they financed the work and exactly what kind of work was being done.
These renovations varied from rebuilding all 18 greens to reworking the course’s irrigation system to upgrading the caddies’ lunch area. The renovations were financed in several different ways such as using capital reserves, assessing members, using initiation fees, borrowing funds or some combination of these approaches. Though most clubs used different approaches, there are a number of commonalities.
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Lay of the land
The 47 financial executives responding to the survey, which was sent to members of the professional association Hospitality Financial and Technology Professionals who were associated primarily with private clubs, were almost exclusively controllers (77 percent). The remainder of the respondents included general managers, assistant controllers, treasurers and CFOs. Thus it appears all respondents were in a position to be fully aware of their clubs’ golf course renovations, the costs and the financing arrangements. Seventy percent (33) of the respondents were employed by country clubs, while 19 percent (nine) were with golf clubs. The remaining 11 percent indicated their clubs were country and golf clubs.
The size of these clubs based on membership (all classes) ranged from fewer than 250 members (4 percent) to more than 2,000 members (4 percent). Thirty percent of the respondents were with clubs of 250 to 500 members, and another 30 percent belonged to clubs of 501 to 750 members. The remaining two size categories were 751 to 1,000 members and 1,001 to 2,000 members, which represented 15 percent and 17 percent of the respondents, respectively. The size of clubs of respondents based on annual revenues is shown in Table 1.
Respondents were asked the amount of cash (cash and cash equivalents) and restricted cash their clubs held as some indication of the cash preparedness for these renovations. The cash held by respondents’ clubs ranged from $0 to $12.4 million. The median response was $758,000. Only 30 of the 47 respondents (64 percent) reported their clubs held cash restricted for capital projects, meaning they had cash earmarked for projects such as golf course renovations that could not be used for operating purposes. The amount of restricted cash ranged from $3,800 to $7.1 million. The median amount of restricted cash was $332,500.
These funds were invested in a variety of ways, including savings accounts, certificates of deposit and money market accounts. The annual returns on these investments ranged from a low of less than 1 percent to 6.5 percent. The median average annual rate of return was only 2 percent, which is an indication that these funds were invested very conservatively.
Clubhouse renovations
When dealing strictly with changes to a clubhouse, Club Management reported in August 2002 that clubhouse renovations done by 123 clubs cost an average of $875,000. The cost of these projects ranged from less than $250,000 to $5 million. The most common methods used to finance these renovations were capital reserves (20 percent), member assessments (18 percent), loans (17 percent), dues (10 percent), some combination of the four prior methods (19 percent) and other methods (16 percent) such as initiation fees or funds generated by operations.
Working on the course
All 47 of the financial executives who responded to the survey indicated their clubs were currently undertaking or had undertaken renovations of their golf courses in the past four years. Most of the 47 renovation projects were multifaceted, including elements such as:
• Added bunkers, reshaped tees and repaired car paths
• New irrigation system and installed new bunkers
• Renovated tees and greens and completely restored one hole
• Added irrigation heads and moved trees
• Rebuilt greens and tees and repaired car paths
Based on the details provided, the most common projects included renovating greens (a task tackled by 36 percent of the 47 clubs), installing new irrigation systems or making major repairs to existing irrigation (32 percent), renovating bunkers (30 percent), rebuilding tees (19 percent) and repairing car paths (9 percent). Other projects mentioned included bunker renovations, restorations to ponds and creeks, new bathrooms, adding maintenance buildings and moving trees.
The cost of these projects ranged from under $100,000 in 6 percent of the clubs to a high of $5.2 million for one club. The median average cost of these renovations was $1,047,000.
Footing the bill
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What method or methods were used to finance these renovations? The most common financing method, used by 28 percent of the clubs, was using capital reserves. This was followed by member assessments at 21 percent and loans at 15 percent. Nearly 32 percent of the clubs used some combination of dues, member assessments, capital reserves, initiation fees and loans. Just 4 percent of clubs financed their golf course renovation through initiation fees, and not one club financed the renovation strictly through membership dues. Table 2 contains a brief explanation of various financing methods for capital projects that include golf course renovations.
Here is a closer look at the various methods used to finance golf course renovations.
Member assessments
When member assessments were used to finance renovations, the total amount financed ranged from $60,200 to $2.6 million, with a median amount of $750,000. The capital assessment per member ranged from only $18 to $7,400, with a median assessment of $974. The installment plans offered for payment of these assessments varied considerably among the clubs. Samples of installment plans were as follows:
• $375 at inception of project, $375 in six months, and $32 per month for three years
• 3 percent discount for a lump sum or four quarterly payments, or eight quarterly payments with 6 percent interest
• Three installments up front or pay over 24 months with finance fee of 5 percent
Loans
Several clubs borrowed funds to finance their golf course renovations. The amount of these loans ranged from $150,000 to $5 million, with a median loan amount of $1,175,000. The terms of these loans ranged from a single year to 20 years, with the median loan term being 10 years. The rates on these loans varied considerably from a low of 1 percent for two clubs to a high of 8 percent for a single club, while the median average loan rate was 5.94 percent.
The cost of the renovation that was financed by a loan varied from 25 percent to 100 percent of the total cost, with the median average loan covering 90 percent of the cost of the renovation. Only three respondents indicated their club loans were secured. The amounts of loans that were secured were $650,000, $700,000 and $5 million.
Capital reserves
Seventeen of the 47 respondents indicated that the club’s capital reserves were used to finance all or part of the renovation. The amount of capital reserves used for the projects ranged from $50,000 to $2.3 million and the median amount was $500,000.
Initiation fees
Only five of the respondents indicated that initiation fees were used to finance their golf course renovation. The amount of initiation fees used for these renovations ranged from $50,000 to $1.2 million with a median amount of $218,000. The average amount per member paying initiation fees for the golf course renovation was $20,000 with the highest amount at $75,000 and the lowest amount at $3,574.
One size doesn’t fit all
Many country clubs and golf courses have renovated portions of their facilities over the past few years. The clubs have varied in size from smaller clubs with fewer than 250 members to clubs with more than 2,000 members. The costs of the renovation projects have ranged from less than $100,000 to a high of $5.2 million. The most common single method of financing has been the use of capital reserves, used by 28 percent of the clubs of responding club financial executives. Other common singular approaches include assessing members at 21 percent of the clubs and borrowing funds from financial institutions by 15 percent of the clubs. Nearly a third of the 47 respondents indicated their clubs used a combination of financing methods.
Clearly, there is no one best approach, and it appears that each club is using a financing approach that best satisfies its needs and members.