Peter Wagner

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Private Club governance - an alternative
« on: June 04, 2008, 02:12:15 am »
Mike Young asked two questions in an earlier thread and Iíd like to take a crack at answering them.  His questions were:

A)   Can you have a single owner private club that runs at a profit without residential real estate ringing the course?
B)   Is there a way to move away from committee governance?

In my opinion, the ownership model dictates the governance model.  Most private clubs are equally owned by the full golf members of the club and this number of member/owners ranges from say 350 to maybe 700 (sometimes more) depending on the goals of the club.  Because we have a large number of owners for our small business and because every member is equal they all expect an equal voice in running the club.   Since we canít have 400 voices on every decision we create a system of elected officials to make most of the mundane decisions for us.  Unfortunately, there are so many mundane decisions to be made that the elected officials create committees of member/owners to help them.  Big issues and policies are brought before the members on an infrequent basis, usually yearly.

So group ownership usually equals group governance (i.e the Board and its Committees).

Yes I know there are exceptions to this model but this is by far the most common found in the U.S. and probably the U.K.  You will often hear people say that the best clubs are run by a Benevolent Dictator (BD) with the best example being Augusta National.  The trick with that is a) finding a BD that is willing to work for free; b) finding a really talented and fair BD; c) finding the replacement BD when your current BD is pitch forked from office or retires, whichever comes first.  But this whole BD thing is a side track because VERY few memberships are willing to permanently vote away their management voice after paying the large initiation fee.  ďIím an owner dammit!Ē

This leads us back to group ownership producing group governance.

The problem is really rooted in the ownership model so letís break that down.  Letís build a virtual club to see how it works.  450 of us from this website are pitching in together to build Grassy Knoll GC (Cougar Canyon CC was taken) and lets say that we find that GKGC is going to cost us $20 million to build.  So if we run this the conventional way we would split this 450 ways and each of you would ante up with the $50,000 initiation fee.  We raise our 20 mil (plus a little extra for cost overruns) and we build GKGC which is nice but weíve already created a few problems.  Committees spring up like weeds because weíre all equal owners and we all have something to say, and the 50K is usually an equity membership meaning that when you retire from our club you get back some of your money.  The national average is probably 75% equity so the club would owe you 37,500 when you go.  The mindset in the past was always ďno problem, payout 37,500 and just sell a replacement membership at 50,000 making us a profit (transfer fee) of 12,500Ē.

We also mutually agree to charge ourselves $5,000 per year in dues and we have an initial operational budget of $2,250,000 per year.

Thatís the simple version of the time-honored model of membership in a private club.  This concept of mutual equity and ownership leads us to committee governance and if the goal is away from committees then we have to change the ownership model.

An alternative model
Letís try a different approach with building, selling and running GKGC.  Just for fun letís say that I put up the $20,000,000 in cash to build our make-believe golf club.  I write checks for 2 years and the club gets built and I start selling memberships except this time with a few changes.

This is a non-equity club and members arenít owners, they are licensees.  After many years when itís time for you to leave you just throw me the locker keys, we shake hands, and off you go.  In place of equity I am going to give you a much lower initiation fee, letís say 22,000 instead of the above mentioned 50,000.

From a memberís financial standpoint this is pretty attractive.  You were going to lose the 12,500 transfer fee in the traditional model plus the lost interest on the extra 28k (50k-22k) or about 7,500 in interest (28k @ 4% compounded for 7 years).  So in the traditional model your true initiation fee is really about 20,000 when you add the lost interest.  The true initiation fees end up being very close in both models.  The attractive part is that you get to join a club that feels like 50k but you only have to pay 22k.

Dues are the same and so is the operational budget.

But, as an investor, why would I be willing to do this?  Because it might be a good investment.  The lower initiation fee would most likely allow me to sell memberships at a faster pace than would be expected under the old plan.  I think I could sell the 450 memberships within the first 6 years (assumption!) with most of that being in the early years.  Some of you will say this is overly aggressive but I would have a really good product that is priced very well.

I have factored in the operational shortfalls in the first 5 years as the club isnít full yet but expenses are the same whether weíre full or not.  Iíll save you the description of my spreadsheet but instead sum it up in a sentence.  On my 20 mil investment I would generate 9.9 mil in sales of memberships but also lose a little over 2 mil in operational losses all in 6 years.  This yields an effective rate of return of about 6.5% per year on the 20 mil.  Not huge but also not bad in todayís economy.

In year 7, after weíre sold out, the rate of return drops because we have less to sell.  The national average is that 7-9% of your membership will turnover every year so in our case we will see (450*0.07=31.5) maybe 32 membership resales.  Itís debatable as to what our initiation price might go to after weíre sold out.  Tough to predict so letís stay with the 22,000 price which would yield a return of (31.5*22000=693,000) or a return rate of just 3.5% on my money.  Again not terrible but probably not worth the risk.

So I would need something in year 7 and beyond to sweeten this deal and maybe it comes from one or more of the following:
-   rent from a land lease of high density commercial that is tucked away in a corner of club land;
-   Monday charity tourneys;
-   Weddings and large parties.

I think this list plus the membership resales would get me to a return rate of 7% and maybe more depending on the success of the overall project.

Whew!  Okay I can now answer Mike Youngís original question:  can you have a single owner private club that runs at a profit without residential real estate ringing the course?  Yes, I think you could.

This in turn now helps answer Mikeís second question:  Is there a way to move away from committee governance?  Well letís look.  After all the above dust settles we have this nice club owned by one benevolent dictator (ME!) and because of that we have no need for committees or even a board in the conventional sense.  It would be the typical management staff and employees and me.

So maybe an alternative model is that of an owner/operator who has 20 mil in the back pocket of his jeans, is happy to get 7-ish% on his money, and likes the golf business.

A key concept in all of the above is moving away from the concept of equity and ownership.  Another would be getting members to see the benefits of the added freedom of being a licensee rather than an owner.  And still another is getting owners away from the thought that the sum total of membership initiation fees equals the cost to build.

There ya go Mike, thereís my answer. 

Best,
- Peter

« Last Edit: June 04, 2008, 03:23:42 am by Peter Wagner »

Bill_McBride

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Re: Private Club governance - an alternative
« Reply #1 on: June 05, 2008, 06:52:18 am »
Seems that $20 million gets a pretty cool golf-only club if the land is reasonably priced.  It's all dependent on location, location, location.

Bruce Katona

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Re: Private Club governance - an alternative
« Reply #2 on: June 05, 2008, 07:34:20 pm »
Peter: Welcome to my world !!  We go thru exactly this analysis continually when we evaluate golf assets..  Our business model operates as private non-equity clubs with the company accepting any annual operating/long term loss in exchange for 100% of the upside once the club is full and spinning off cash annually.

Jim_Kennedy

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Re: Private Club governance - an alternative
« Reply #3 on: June 05, 2008, 08:47:24 pm »
Peter,
Isn't there a huge tax difference in selling an equity vs. a non equity membership, one that's large enough to foil your plan?  ;D

Wouldn't an alternative be selling a bond, where the new member puts up 10k or 20k or XX dollars, the club gets to use the interest, and the member gets it all back when he/she leaves?   
"The surface of the ground looks like one vast irregular succession of congealed sand waves" - Caspar Whitney describing Sandwich in 1894

Mike Sweeney

Re: Private Club governance - an alternative
« Reply #4 on: June 05, 2008, 09:18:37 pm »
Peter: Welcome to my world !!  We go thru exactly this analysis continually when we evaluate golf assets..  Our business model operates as private non-equity clubs with the company accepting any annual operating/long term loss in exchange for 100% of the upside once the club is full and spinning off cash annually.

Bruce,

Have you guys ever looked at Disney Vacation Club as a model? Basically you buy points at a market rate that you spend annually. Let's say you buy 500 point for $25,000. Peak periods (Spring Break season, Christmas/New Years....) cost say 100 points for a week. September, which is Disney's quiet season, cost something like 30 points for the week.

Thus, through the pricing, you can smooth out the demand in the on and off season.

I doubt it works for a "club" but for a seasonal or vacation club, it might.

Peter Wagner

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Re: Private Club governance - an alternative
« Reply #5 on: June 05, 2008, 09:39:57 pm »
Seems that $20 million gets a pretty cool golf-only club if the land is reasonably priced.  It's all dependent on location, location, location.

Hi Bill,

Well to be truthful I don't really know if $20 mil is the right number.  I just threw that out as an example to build my little financial projection on.  Obviously a big component is the price of the raw land and how much grading has to be done.  Buildings would be next - I was guessing at an 10,000 sq ft clubhouse and a separate maintenance building and we can't forget to pay the design team.  The boys over on the "let's build a GCA.com golf course" thread are missing all of the infrastructure stuff like turf mowers, china, forks, etc.  My $20 mil guess is for a turn-key company.

The archies here would know if I'm in the ballpark at $20 mil.

- Peter


Peter Wagner

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Re: Private Club governance - an alternative
« Reply #6 on: June 05, 2008, 09:59:51 pm »
Peter: Welcome to my world !!  We go thru exactly this analysis continually when we evaluate golf assets..  Our business model operates as private non-equity clubs with the company accepting any annual operating/long term loss in exchange for 100% of the upside once the club is full and spinning off cash annually.

Hi Bruce,

When Mike first asked these questions my knee jerk reaction was no an owner/operator setup wouldn't work.  After giving it more thought I have completely change that opinion because of the non-equity thing.  That's the most important part I think.

You have experience whereas I am only guessing, am I in the ballpark at an ROI of 7% per year?  If so, then I could see this new model of ownership gaining steam in the future.

Non-equity would do away with the need for committee governance.  You would still most likely encourage the members to form a Men's Club and you would still give them the same attention as in the traditional model.

- Peter


Peter Wagner

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Re: Private Club governance - an alternative
« Reply #7 on: June 05, 2008, 10:01:53 pm »
Peter,
Isn't there a huge tax difference in selling an equity vs. a non equity membership, one that's large enough to foil your plan?  ;D

Wouldn't an alternative be selling a bond, where the new member puts up 10k or 20k or XX dollars, the club gets to use the interest, and the member gets it all back when he/she leaves?   

Jim,
Hmm, good question.  I'll have to think about that before answering.
- Peter


Bruce Katona

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Re: Private Club governance - an alternative
« Reply #8 on: June 05, 2008, 10:28:07 pm »
Guys: I'm not the tax guy, but I beleive we do get the use of the entry fee and have a polcy on refunds if/when a member leaves.  We've had the tax guys and legal team review the policy before it went out, so we know we are operating correctly.

7% ROI is ok, we try for more.  The model works best purchasing an existing club, where there is not a 24-36 month lag between expenses and the first dollar of revenue coming thru the door, as happens building an operation from the ground up.

Look at it this way....you just spent $20 million to build this great course& functional clubhouse and now you will continue to write additional checks for three years until the place returns to you the first doller of ROI.  As a rule, successful clubs run like this:
1. Year 1 - Operational break-even - writing checks to cover debt service on the money you borrowed
2. Year 2 - Overall break even - you even covered most, if not all your debt service...no $$$ for Cap Ex since things break 24-36 months after being used
3. Year 3 - you would be full and actually get some level of return on your $20 million plus capital investment.

Not many people believe this to be the best risk/reward investment alternative in the marketplace.

We do have club committees in place to share members concerns with the management....their issues are club related - pool, locker facilities, greens, bunkers, course conditions, F&B quality, staff/staffing issues, etc.

RJ_Daley

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Re: Private Club governance - an alternative
« Reply #9 on: June 05, 2008, 11:32:55 pm »
Peter, I spent a decade exploring these very issues, and once got all the way to an offering prospectus phase.   Our model was that I would lend the club X $ in a debenture with fixed rate of interest paid back to me, and then the corp would solicit intra-state common stock share offering, which left me an employment contract as the BD/club manager.  The share owners would then share after expenses in a distribution of any profits from lot sales (I know your speculative model was without housing component) and the share owner would have a considerably reduced annual membership dues.  Non shareholders could also join, at a higher annual dues rate.  It was to be a golf only club (no tennis-pool, etc.)  The homes were only on the periphery of the course, not a parade of homes down fairways.  The project would not commence until a fully subscribed share offering were achieved.  The land was on options.  We got beat to the market by a more traditionally organized Private Equity club.  We didn't pull in the required number of shares in the offering that was deposited in an escrow.  All subscribers got 100% of their $ back when we did not reach the required goal.

You'd be surprised at how close Wild Horse in NE is to my original model with intra-state offering and all.  In fact, I almost suspected they had a copy of our prospectus, which was offered in 1992-3.

But, I learned a lot.

What did I learn.  Well, first probably that if we pulled it off on a marginal success, just barely making the share offerring, I probably would have set myself up with a lifetime of headaches, or a chance to make a few $ if I sold in post opening if it was successful, and got out while the getting was good.

Next, I learned that for all that time and effort, you probably could manage or have managed your $ at as good of a return, and atleast with no greater risk than all the machinations of satisfying a golf dream sort of thing.

But, I must have thought of a dozen different financing and developement scenarios over those years and looked at a dozen properties, including general - limitted partner schemes, full 501 (c) set-ups, homesite developments, etc., and existing run down courses to remodel and do these sorts of things.

I came to the view that what Bruce is saying is the best model.  Buy an existing course that has bones.  Solicit offers of interest of prospective club joiners (on the come and hope they are solid).  Spend the money to remodel it.  Build a model of dues, with certain member benefits fully defined, that makes financial and member attractive sense.  The reason for the buying one that already exists is that new courses and facilities usually don't make it because there are so many "wasted assets" in the develpment stage.  Too much for the land, too many lost funds in shoddy or incomplete construction, too many start up costs in machinery and new facilities construction.  Let some other dreamer incur the losses in wasted assets.... The golf industry does not lack for dreamer loosers.   :-\ :'(
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Peter Wagner

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Re: Private Club governance - an alternative
« Reply #10 on: June 06, 2008, 12:31:53 am »
Bruce,

Yep, buying an existing club and 'fixing' it would be the preferred way to go.  I'm guessing you and your guys are excited by the downturn in the economy as that will lead to better deals and possibly better returns long term (?).

RJ,

You're right when you say you could probably do better by investing elsewhere.  But still this might not be a bad investment for a golf enthusiast.  As noted above, I think there might be opportunities in the short term for buying existing clubs.  Buying one right and changing to non-equity could become attractive again.

I'm sort of stuck on this idea of commercial property adjoining the course instead of residential.  I like the office building synergy because it's quiet and you pick up lunch time crowd and the demographic could be really good.  Maybe you'd have a 5 story office building on the second fairway.  Not perfect but better than houses on every hole and you as the developer are improving your investment opportunity.

I'm not convinced that committee governance is 'killing private clubs' but for those that do think that way, then switching to non-equity will allow the deletion of committees and the owner/operator model is a way to accomplish this.

- Peter


« Last Edit: June 06, 2008, 12:45:18 am by Peter Wagner »

Patrick_Mucci

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Re: Private Club governance - an alternative
« Reply #11 on: June 06, 2008, 12:43:15 am »
Peter,
Isn't there a huge tax difference in selling an equity vs. a non equity membership, one that's large enough to foil your plan?  ;D

Wouldn't an alternative be selling a bond, where the new member puts up 10k or 20k or XX dollars, the club gets to use the interest, and the member gets it all back when he/she leaves?   

Jim,

The problem with a bond is that it's just another form of debt, absent any carrying charges.

Peter,

The only way I see committee governance diminishing is through the advent of financial difficulty where a group of members finance the club in one way or another, and as a result of that, have a greater degree of control, rendering committees less significant and/or powerful.

Bondholders equal equity which equals ownership which equals a say in how the club is run
« Last Edit: June 06, 2008, 12:48:23 am by Patrick_Mucci »

Peter Wagner

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Re: Private Club governance - an alternative
« Reply #12 on: June 06, 2008, 02:17:55 am »
Peter,
Isn't there a huge tax difference in selling an equity vs. a non equity membership, one that's large enough to foil your plan?  ;D

Wouldn't an alternative be selling a bond, where the new member puts up 10k or 20k or XX dollars, the club gets to use the interest, and the member gets it all back when he/she leaves?   

Jim,

The problem with a bond is that it's just another form of debt, absent any carrying charges.

Peter,

The only way I see committee governance diminishing is through the advent of financial difficulty where a group of members finance the club in one way or another, and as a result of that, have a greater degree of control, rendering committees less significant and/or powerful.

Bondholders equal equity which equals ownership which equals a say in how the club is run


Hi Patrick,

I see debt the same way you do.  I would prefer to do something like this with cash with the understanding that the proforma expectations are subject to a million variables.  Running a club is tough enough without the added pressure of debt.  You would still have some pressure from investor expectations but this would be preferable to the pressure of debt.

Yes I agree that something at an existing club would have to be broken in order to change the governance model.  The most likely way would be to buy a club in financial distress and as part of your terms you would call for a reordering of the power of committees and the Board.  Even trickier would be to explain that they would no longer have equity.  Ouch.  But better than having your club deleted I would think.

- Peter


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