Peter,
It is interesting to read about how you evaluate these investments. Any idea what percentage of golf courses make a profit? How much of profitability is based on number of rounds played versus the construction costs? Or are there just too many variables to easily ascertain what contributes to profitability?
Hi Ed,
I've written 3 or 4 lengthy articles on this subject but I hit the back button each time because of the sensitive nature of a club's financials. I have compassion for those that struggle and I'm trying to avoid putting salt in the wound. The details are fascinating and together would make a really good series of case studies that would prove helpful for future new projects. I just have to figure out a way write about it without kicking those that are already down.
Contrary to the many doom and gloom reports that we all read there are many clubs that are financially sound. In fact, change 'many' to most. However, there are two big issues that even financially sound clubs need to be aware of are:
1.)
Deflation. Lets say I were to buy a private club in your favorite city at maybe 10 cents on the dollar (easily possible right now) out of chapter 11 bankruptcy (sec 363). My cash investment might be 3M and I would have zero debt and I would own a club that cost 30M to build. Among other things this would allow me the opportunity to drastically lower the clubs initiation fee and dues because my overhead just dropped by a ton. And if successful then it would put significant pressure on the competitor courses in the area.
Imagine if memberships were previously being sold at 100k (equity) but under my new ownership I drop the price to 10k (non-equity). Think of the impact to a financially healthy neighboring club that might be priced at 75k. I would have a better product priced much cheaper. That forces the 75k equity club take some kind of action.
2.)
Equity memberships. The 2nd earthquake to hit a stable club is the loss of real equity in the club as prices fall. In my example above the 75k club would be forced to lower their initiation fees but if they were an equity club they could be faced with the very real chance that a members promised equity exceeds the new initiation fee. Every time an old member leaves and new one enters the club would lose money.
Now multiply points 1 & 2 by hundreds of courses across the U.S. and think about the impact to currently financially stable clubs.
This one-two punch is very real and it's beginning to happen now. Private clubs should take action now to avoid being harmed. #1 above can be somewhat avoided by a drastic cost cutting campaign and by leading the way down on price in the area. #2 can be avoided by meeting with the members to look at the problem of equity. Voluntary equity give back programs will be needed to minimize the club's exposure.
Point #1 also applies to public courses. For example, lets say I bought a real cool but expensive member for a day course in your area. Same thing 10 cents on the dollar. I'd lease half of the too-large clubhouse out as cool office space and drop my daily fee from $130 to $42. What impact does that have on the neighboring courses? It will be tough to defend against this eventual reality.
All of this is bad news if you own a club today - but great news for golfers and fantastic news for the future of our sport. Almost all fees will deflate to much lower numbers. Many unneeded luxuries will be trimmed from clubs and the quality of the golf course will be front and center. In other words, we get to go back to just golf! Pretty cool.