Mike Young asked two questions in an earlier thread and I’d 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 can’t 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. “I’m an owner dammit!”
This leads us back to group ownership producing group governance.
The problem is really rooted in the ownership model so let’s break that down. Let’s 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 we’ve already created a few problems. Committees spring up like weeds because we’re 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 “no problem, payout 37,500 and just sell a replacement membership at 50,000 making us a profit (transfer fee) of 12,500”.
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.
That’s 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
Let’s try a different approach with building, selling and running GKGC. Just for fun let’s 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 aren’t owners, they are licensees. After many years when it’s 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, let’s say 22,000 instead of the above mentioned 50,000.
From a member’s 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 isn’t full yet but expenses are the same whether we’re full or not. I’ll 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 today’s economy.
In year 7, after we’re 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. It’s debatable as to what our initiation price might go to after we’re sold out. Tough to predict so let’s 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 Young’s 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 Mike’s second question: Is there a way to move away from committee governance? Well let’s 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, there’s my answer.
Best,
- Peter