[Dan Moore]

Can anyone point me in the direction of how one would go about determining the current market value of an exisiting golf course.  I assume it would need to be a combination of land values in the immediate area, zoning restrictions, potential alternative uses of the property and cash flow the property yields as a golf course.

Thanks in advance.   

[Dan Herrmann]

I think you need to be of environmental restrictions on the property as well.   Are wetlands present that need protection?  Is there a reservoir nearby that could be subject to runoff?  Things like that could have an impact.

A club to which I used to belong (that's losing members in large numbers, but that's another story) is in pickle because they're located directly above a drinking water reservoir.  This makes selling the land for housing nearly impossible.  They're grandfathered, but any development would be subject to 2008 restrictions.

[John Moore II]

I have heard that the value of a GOLF COURSE, to be used as a golf course, can be determined by taking average gross revenue and multiplying by 7 (as in 7 years). Of course, property value really does not factor into that. Cheviot Hills in Raleigh, NC sold for $30 million because it was prime real estate property. As a golf course, I would say the value was not more than $5-6 million.

[Eric Smith]

i've seen where generally, and i emphasize generally, golf courses were trading at somewhere between 8 to 10 x ebitda (earnings before interest, taxes, depreciation and amortization)

[Kevin_Reilly]

I don't know golf course valuations, but 7x revenues is stratospheric...I don't know how that would ever pencil out to any sort of reasonable return.

I imagine that 8-10x EBITDA multiples have come down quite a bit as well.  I'd also want to know about capital expenditures, to derive free cash flow, because capex is not part of EBITDA but we all know that golf courses require capex.

[Bruce Katona]

As devil's advocate, if EBIT or EBITDA were negative or just slightly positive (as in a new course or one which requires repositioning membership) this wouldn't give a fair value.  On the flip side, you can't pay for "blue sky" (potential future earnings) either.  Given the current market 6x EBIT is the maximum one can play and still service the amount of debt required to leverage the deal (if one can find a lender willing to give about 50% of the negotiated sales price).

Buying a golf course asset to reposition it to another use is land speculation, not even land evelopment and is risky for all but the most seasoned or iron willed investors.

Run the numbers on what reasonable expected revenues would be, what it would cost to operate the facility annually, then throw in real estate taxes and long term equipment leases costs.  What is left is Net Operating Income (NOI), of which you can use about 70%-80% of to service your debt, which tells you how much the bank will lend you and how much equity (your money) you need to put into the transaction.  If everyone is comfortable with the numbers, you can make the deal, if not keep looking, its real estate, there's always another deal out there.

[Mike Benham]

Are you buying or selling as each side of that discussion will have different multipliers ... and the rest is negotiation.

If you are buying the entity, the NOLs, if any, can be of great value ...

[Greg Tallman]

Seller would shoot for as high as 12x and the buyer would aim for 5 or 6x.... now hammer it out. Assumes a solid operating plan in place and no distress on the property or other assets.

[Chip Gaskins]

Value is determined by what you plan on doing with the golf course after you get it.  If you plan on running it, then 4-6 x EBITDA is probably a good rule of thumb (assuming there is no major capital expenditure you have to do to keep it running).  AND If you plan on using it for housing real estate you can look for $ per acre comparables in the vicinity.

[Don_Mahaffey]

I leave all the talk about EDITA, multiplies, demographic studies and all that to industry experts like Bruce. But IMO, one of the largest and often overlooked (or not accurately measured) hidden costs in course acquisition is deferred maintenance. If you are looking at a course that has had troubles, most likely you'll find deferred maintenance that you will have to factor in to the purchase price and cash you'll need to "fix" things.
As we all know golf courses and buildings need regular, routine maintenance as well as some capital investment on an annual basis to replace equipment, repair roofs, parking lots, maintenance buildings....on and on.
When these items are ignored or put off, there is a price to pay somewhere down the line. A smart buyer will not pay for the sins of the seller no matter the common industry multiples that supposedly tell us what a course is worth.  

[Adrian_Stiff]

The method in the UK until recently was based on 3 main ways of valueing.

12 times profit
2 times annual turnover
potential profit

Often a combination is used.

Somewhere in there you will find the right value, as Bruce eluded some course's that are just a break even wont score any good on the P/E ratio, equally there is a value to the land/ machines/ course construction/ buildings that will have a natural hold up value, though sometimes you can buy a course that cost £5M for £3M. Courses that sell for good money are more likely ones that have a good trading record. I suspect with the current economic gloom, sales will be at a lower figure and price earning deals may be more cautious.

[Mike Benham]

When these items are ignored or put off, there is a price to pay somewhere down the line. A smart buyer will not pay for the sins of the seller no matter the common industry multiples that supposedly tell us what a course is worth. 

That is why due diligence is important, escrow and holdbacks.

[Greg Tallman]

I leave all the talk about EDITA, multiplies, demographic studies and all that to industry experts like Bruce. But IMO, one of the largest and often overlooked (or not accurately measured) hidden costs in course acquisition is deferred maintenance. If you are looking at a course that has had troubles, most likely you'll find deferred maintenance that you will have to factor in to the purchase price and cash you'll need to "fix" things.
As we all know golf courses and buildings need regular, routine maintenance as well as some capital investment on an annual basis to replace equipment, repair roofs, parking lots, maintenance buildings....on and on.
When these items are ignored or put off, there is a price to pay somewhere down the line. A smart buyer will not pay for the sins of the seller no matter the common industry multiples that supposedly tell us what a course is worth.  

Sure works in theory but I would say virtually every buyer will "pay for the sins of the seller" in various ways including deferred maintenance... particularly when any of the large management companies were in place previously.

[Kevin_Reilly]

If you are buying the entity, the NOLs, if any, can be of great value ...

Section 382 would say otherwise.

[Bruce Katona]

You'all are correct about deferred mainetenance and silly things like new equipment  and cart leases for completely worn out items...both of these are very costly and can break a transaction.....these issues are used as a negotiating tool after the bones of the deal are in place and due diligence has begun, so adjustments can be tracked if the deal is going to close.

The best deal is where neither side is very happy but the deal closes, thus it was fair to both the buyer and seller.......if someone walks out of the closing with a big smile, either he/she has a good poker face or the other side got the short end of the stick.

[Kalen Braley]

.......if someone walks out of the closing with a big smile, either he/she has a good poker face or the other side got the short end of the stick.

Or he/she is a sucker and just got took and doesn't even know it..

I hear all the time that over half of new car buyers pay sticker or higher, I guess the world is full of suckers.

[cary lichtenstein]

I wonder what percent of courses actually return to the operator a decent return on investment? I'd bet it was less than 50%, mabe as low as 33% and this is just PURE SPECULATION.

[JWinick]

In a typical real estate appraisal, there are three approaches to value: cost, income, and sales comparison.   As a golf course only, I would rely on the income approach since a golf course is an income-producing property like a hotel.   If you have the Net Operating Income (NOI) on the property, you can then assess a market cap rate.   A golf course should trade at a cap rate higher than just about any other property type due to the riskiness of the collateral.   So, if it generates $1MM in NOI and the market cap rate is 12%, you're value is $8.3MM.

Alternatively, an appraiser can also consider the property as land to be developed for residential real estate.   In that scenario, only the cost and sales comparison approach are valid.  It is absolutely critical that you study the zoning to see if the property can be converted to residential use.   In Long Island, the club my parents belong had difficulty selling the real estate because the town put a moratorium on developing golf courses to preserve open space.   

Recently I looked at a refinance on a private club in the Chicago suburbs.   The property was worth 3X greater as developable land than as a golf course.   This is not uncommon and it is inevitable that many private clubs in urban areas will be bulldozed.   As a buyer you don't want to pay a premium for a golf course that you find out later can't be developed. 

[JWinick]

Bruce,

On a new property, you would look at a stabilized value based on reasonable projections.   If it is a failing golf course, you'll then have to look at alternative uses.

However, most banks are not making new loans right now, especially on commercial real estate.   As a banker, golf courses are one of the least desirable property types.   If you're going to get a loan in this environment, you better have strong operating history on an existing property or deep pockets on a new development.   Even then a bank would be crazy to finance a new development.  The FDIC is all over banks to reduce and manage their commercial real estate concentrations.

As devil's advocate, if EBIT or EBITDA were negative or just slightly positive (as in a new course or one which requires repositioning membership) this wouldn't give a fair value.  On the flip side, you can't pay for "blue sky" (potential future earnings) either.  Given the current market 6x EBIT is the maximum one can play and still service the amount of debt required to leverage the deal (if one can find a lender willing to give about 50% of the negotiated sales price).

Buying a golf course asset to reposition it to another use is land speculation, not even land evelopment and is risky for all but the most seasoned or iron willed investors.

Run the numbers on what reasonable expected revenues would be, what it would cost to operate the facility annually, then throw in real estate taxes and long term equipment leases costs.  What is left is Net Operating Income (NOI), of which you can use about 70%-80% of to service your debt, which tells you how much the bank will lend you and how much equity (your money) you need to put into the transaction.  If everyone is comfortable with the numbers, you can make the deal, if not keep looking, its real estate, there's always another deal out there.

[Clyde Johnston]

Dan,

If you are serious about this, you really need a professional to determine the course's true value. I can put you in touch with someone who's good at this stuff. He's a former banker who got into golf course feasibility studies many years ago. I'm sure he would be glad to talk with you and answer some questions.

Clyde Johnston
clyde@clydejohnston.com

[Phil_the_Author]

Well I guess we can see which members of GCA are in the financial industry... and like me, those who are not!

[Tiger_Bernhardt]

I say talk to Don M for those issues are the key. Greg and others understand current cash flow vesus current management and market etc.

[Rob_Waldron]

The analysis of golf course value can become very complicated due to the fact that there are no standard finanicial formats. Some P&L's put cart and equipment leases above the line, while others put them below the line. I was trained to underwrite golf by the Lending Industry. Using their approach which caps cash flow after ALL operating expenses including a managment fee and capex reserve makes sense since typically all course acquisitions are financed

Don is spot on with his comment regarding deferred maintenance. There is a reason that courses are put up for sale and that is that they are underperforming. The easiest way for an owner to save $$ is to withhold maintenance expenses and defer capital repair and replacement. This should be accounted for when evaluating a courses value.

10X historical cash flow is generally a good starting point.   

[Adrian_Stiff]

I wonder what percent of courses actually return to the operator a decent return on investment? I'd bet it was less than 50%, mabe as low as 33% and this is just PURE SPECULATION.

Maybe 1% Cary.... if you call decent giving you a 10% return on investment.

[Rob_Waldron]

That is the beauty of leverage!

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