[Jeff Shelman]

It seems like we hear about these stories on a too frequent basis.

What has happened when clubs can't make ends meet? How much member liability is there? Does the club continue to operate?

Do course conditions fall off of the map?

Any examples out there?

[TEPaul]

One can't supply accurate answers to your questions in some general sense----each case has its own set of circumstances. If a bank or creditor ends up owning the entity you can negotiate the debt in all kinds of ways but if there is no satisfaction to the creditor eventually it generally ends up as a sale for financial satisfaction and after that the future tapestry for the private club and its property and accoutrements is impossible to say in a general answer to those questions.

[Anthony Gray]

  That is my home course at this moment.

  ARG

[TEPaul]

Come on Anthony, you have some Bonnie and Clyde in you, don't ya? Go rob the damn bank. Don't forget, these days that might not exactly require an old-fashioned a stick-up.

[Patrick_Mucci]

If a golf course is owned by a bank, it usually means that a resourceful developer/operator will purchase it at a deep discount.

[Steve_ Shaffer]

My former club(non-equity,corporate owned) was "owned by the bank" after the initial developer went under in 1991. The bank leased it to a golf management company for a year with an option to buy. It was purchased and the new owners protected our membership deposits. That may not happen in all cases.

[Jeff Shelman]

I guess I should clarify one thing: My club is not in this position. However, I have a friend who is a member of a club potentially facing this situation.

[Brian Joines]

My club wiill be in the situation soon as well. In our case, a group of members hopes to purchase the club via auction and keep it open and operating. Unfortunately it's no sure thing but I'm certainly hoping it will happen.

[PCCraig]

Smart Banks and Bankers don't lend to golf course developments.

Any Bank that owns a golf course through default will be forced to hire a management team, either existing or someone external, to run the golf course. Golf Courses that are left to return to nature loose the little value added to the site, as well as revenue stream, and would leave the Bank with land. And "land" is not a disirable asset for a Bank, esp. in these days.

Pat Mucci is correct in that eventually at the right price a developer will buy it eventually, but that depends on if the developer will be either of the Real Estate or Golf Course operating sort.

[John Foley]

Here in Rochester we have recently had the demise of a mid-tier country club Blue Heron Hills. As the economy has tanked people are leaving their full service CC's in droves. Some of the deals that are out there are amazing, but in an area with a wealth of very good to excellent public access courses if more of these happen, it would not suprise me.

Blue Heron is a good course architecture wise. It's hampered by housing in a couple spots & wetlands in a few others. It used to host a Monday pro event w/ local boy Jeff Sluman and everyone from Nicklaus, Palmer & Norman participated.

When it first opened it was semi-private as the membership filled in. Now moving forward it's not clear if the bank will revert to a public model. Another one (close by) Brookwoods Country Club used to be a fully private Ontario CC. The previous owner could not keep in together and was bought out (at an auction) and reopened succesfully as a public course.

WE'll wait and see what happens to Blue Heron.

http://www.democratandchronicle.com/apps/pbcs.dll/article?AID=20101260327

http://www.democratandchronicle.com/apps/pbcs.dll/article?AID=20101310362

[Adrian_Stiff]

Smart Banks and Bankers don't lend to golf course developments.

Pat - I have done TEN  golf courses and all TEN are finacially alive, one struggles but at least 5 are big yielders, so I dont think your statement is fair. Only 1 person on here works to a similar way I do and thats Bruce Katona. Most others on GCA with 'dreams' would go bust. I have some shareholders that have 40 folded their investment since 1990, many are ten baggers and out of 100, most have doubled their investment. I reckon only 3 have lost money by just buying off another shareholder at a toppy price. Smart Banks will lend to smart golf course developers, but probably not in this climate.

[Mike_Young]

I think each case of a foreclosure on a private course by the bank or lending institution is different.  If the members had signed a note to the bank then there may be some recourse...otherwise in most cases...the course belongs to the bank.
As mentioned by someone in an earlier post, if the bank receives the golf course after it has been "let go" or closed for a period of time by the owner, then the bank doesn't have much more than land.  And the issue becomes whether or not the Covenants Codes and Restrictions of the property will allow that land to be used for anything other than a golf course.....and in some cases the golf course is actually an easement with the lot lines coming to the center of the fairways...which is an entirely different scenario.
There are some deals....really good deals happening if one knows how to operate a course.
And (knowing I am not a big fan of most management companies) I think we are seeing a few bankers in the Special Asset Depts falling for two and three year management contracts that make no sense.  They are lured into these by management companies telling them that they can turn it in three years and then they will purchase it from them....and truth is they are just looking for a monthly fee..knowing the value will continue to fall.  Banks need to unload these things even if they have to give them away and even then some of them make no sense...
The deals will get much better over the next year....

[Mike Hendren]

As a banker I have financed income producing properties (primarily retail, office, warehouse and apartment properties) for 26 years and have never been tempted to finance a golf course.  With their high operating leverage (i.e., fixed expense load), their capacity to service debt is constrained.  

As a general rule, a foreclosure would wipe-out any equity the members have in the club and continued privileges would be at the discretion of the bank, which would be foolish to force the issue and forego the revenue stream from dues or daily fees. The prudent course of action would be to engage a golf course / club management firm immediately to avoid any suspension of services and maintenance with a contract that can be terminated upon the sale of the course/club.  The bank would likely pursue every liquidation scenario, including soliciting an offer from membership and interested third parties.  If unsuccessful after 90 days or so, the bank would likely persue one of two alternatives:  1) list the property for sale with a broker specializing in golf courses / clubs; or ) auction the property.  

Most banks in the current climate have little room to carry OREO (other real estate owned) for an extended period as carrying costs are surpisingly high and banks are saturated with problem assets that dampen earnings and threaten capital.  They simply can't afford to wait for market conditions to improve - as if they will.  

Very few courses will go to seed.  As others have noted, the value will simply be marked to market through re-sale at a price reflecting a market based rate of return.  4th quarter 2009 investor surveys yielded capitalization rates (the pre-tax, unleveraged return on investment) ranging from 7.57% to 16.42% for public daily fee courses and 6.25% to 15.73% for private clubs.  As a practical matter, with capital constrained (and not withstanding a very low risk-free market rate of return) I can't fathom anyone buying a course at less than a 15% return with 20% a more likely threshold.  

My $0.02

Mike

[Bruce Katona]

Adrian: Thank you.  I can add two other individuals who'se business thought process is similar, as I know and understand it first hand - Steve Lapper & Archie Struthers.  

The more golf assets come on the market, the more they will change hand for a price that is more acceptable to have the next Owner in the chain of title be financially successful.  Trust me when I say lending institutions do not in any way want to be in the chain of title for an operating asset.

Pat: Currently financial institutions are really not lending on many projetcs - golf projects are just one asset class.  I do believe, in the following example, financing would be available

GCA, LLC, is formed to acquire the asset in question which originated this post.  After much negotiation the purchase price (forget what it cost to buy the land, build and develop) is $1.0 million.  Almost any institution will lend 50%, so GCA, LLC can borrow $500,000 to acquire the asset.  The collateral involved in securing the $500,000 loan will be the subject of much debate, with the goal being th underlying asset securing the loan, not recourse back to the individuals in GCA, LLC. The second part of the equation is can the asset support itself at the operating level, servoice the debt and spin off some return to the investors of GCA, LLC?

One would think that for a $1.0 million investment this would work, but I 've run enough numbers on enough deals in the past where there was no way to make any money at the operating level for this purchase price, let alone get a return. Those assets need to be returned to permanent open space.or redeveloped to another use.

Just my $0.02

[Mike Hendren]

Bruce, non-recourse?  Forgetaboutit.

Guarantors are a must even in good times.  BTW, guarantor definition:  A fool with a pen in his hand!

Bogey

[PCCraig]

Smart Banks and Bankers don't lend to golf course developments.

Pat - I have done TEN  golf courses and all TEN are finacially alive, one struggles but at least 5 are big yielders, so I dont think your statement is fair. Only 1 person on here works to a similar way I do and thats Bruce Katona. Most others on GCA with 'dreams' would go bust. I have some shareholders that have 40 folded their investment since 1990, many are ten baggers and out of 100, most have doubled their investment. I reckon only 3 have lost money by just buying off another shareholder at a toppy price. Smart Banks will lend to smart golf course developers, but probably not in this climate.

Perhaps it's a conservative mindset but the primary reason to actually make a loan to build a new golf course would be to have an unlimited guarantee of the owner...who would have to be very very wealthy. I understand GCA dreams and all, but most golf courses aren't built because of someone's dreams, but because that person wants to make money. Once you start adding real estate in addition to a golf course operation you're looking at far more risk...regardless of the economic climate.

10 out of 10 for a portfolio full of golf courses is very nice and very possible. However, I could easily argue that if just one goes way under and you need to operate it at a loss until someone comes in a purchases it at a very deep discount it doesn't matter how the other 9 properties are doing...you just lost all your profits and then some.

Just my opinion  

[PCCraig]

GCA, LLC, is formed to acquire the asset in question which originated this post.  After much negotiation the purchase price (forget what it cost to buy the land, build and develop) is $1.0 million.  Almost any institution will lend 50%, so GCA, LLC can borrow $500,000 to acquire the asset.  The collateral involved in securing the $500,000 loan will be the subject of much debate, with the goal being th underlying asset securing the loan, not recourse back to the individuals in GCA, LLC. The second part of the equation is can the asset support itself at the operating level, servoice the debt and spin off some return to the investors of GCA, LLC?

Bruce-

This may work on a secondary investor, however I was mostly referring to someone who wants to buy land and build a golf course from scratch, with or without homes. 

As I said before, the list of Banks that have been burned on bad golf course developments is growing quickly, and those Banks are unlikely to return to the fold regardless of any pending economic recovery.

[Tim Nugent]

Pat Craig: Do you mean the Smart Bankers who had to be bailed out?  That's a pretty general statement.

Alot of lending is in small markets by local banks who know the players and local climate.  I recently did a project where a small town club decided to remodel.  The club pres was also pres of a local bank.  His insight was the club was a necessary entity for the business community.  The town also had a regional hospital and guess what, having a country club wasa big selling point to get Drs to relocate. So, there are times when it isn't just a bottom line decision but a synergistic one.
PS  - after the remodel, memberships (which were declining) are up - even in these trying times.

[Bruce Katona]

Pat: Not very much real need to start from scratch these days, when you can by something already up and operating (it may need a redo for fixing, but that's much less expensive and time consuming than starting fromscratch).

Bogey: 50% leverage non-recourse, even in this market, is not unheard of.  Pat Craig hit it spot on: local banks working with local businessmen who have standing relationships can still get this type of loan closed.

[PCCraig]

Pat Craig: Do you mean the Smart Bankers who had to be bailed out?  That's a pretty general statement.

Alot of lending is in small markets by local banks who know the players and local climate.  I recently did a project where a small town club decided to remodel.  The club pres was also pres of a local bank.  His insight was the club was a necessary entity for the business community.  The town also had a regional hospital and guess what, having a country club wasa big selling point to get Drs to relocate. So, there are times when it isn't just a bottom line decision but a synergistic one.
PS  - after the remodel, memberships (which were declining) are up - even in these trying times.

No Tim, regardless of your general and snide remark, we're not talking about the same Bankers. Community Bankers and Regional Bankers are smart not to lend to NEW golf course construction. Your example is great and all, but it's closer to the scenario that Bruce gave. In all reality your local community Bank could of made a loan to your project, then the President of the Bank's club can't repay, and that one loan could of ruined the small cute local Bank's balance sheet...effectively crippling their lending practices making money more expensive to their other borrowers.

I never said that Banks can't lend to Golf Courses in general, just that it's not smart to make a practice of it. Because eventually one will come to bite you in the butt and there goes your entire portfolio's profits.

[Tim Nugent]

Pat - snide? what, for stating a fact?  are you a banker?  Most bankers I know are in the business of analyzing risk.  It wouldn't be a smart banker who would make a loan that, in and of itself, could cripple the banks balance sheet  if it went south.  The point I was trying to make is that those who don't look at and understand the overall economic health of an region, can make dubious decisions.  Golf isn't alone in the world right now, banks are leary to lend - period. If bankers perceive the risk being too great for the low interest they MAY get, they will just sit (with their cash) on the sidelines (which many seem to be doing).

While you ammended your statement to include "NEW" developments, I gave my real-world example to highlight how a regional banker looked at things.  And this particular bank took-over another failed bank earlier this year - so I would put him in the category of Smart Banker.  For another insight - said bank president just retired and moved to TX.

[Adrian_Stiff]

Pat - The 10 are different golf course projects and not linked. The model I use to develop continually works, but it is at opposites as many would do on here. I believe in a good climate ALL banks would lend to this model and primarily it involves raising cash from indivduals say $1 and borrowing another $1 yet again something BK touches on. I have no projects on the go at the moment but I do have some land in Bulgaria 250 acres, the upside is massive but the time is currently wrong.

[Tim Nugent]

Adrain, I looked at a site outside Sofia about 5 yrs ago as part of a reclaimatiion project but didn't see where the golfers would come from.  Has the demographic changed?

[Adrian_Stiff]

Adrain, I looked at a site outside Sofia about 5 yrs ago as part of a reclaimatiion project but didn't see where the golfers would come from.  Has the demographic changed?

I think for Sofia its changed a bit, certainly 5 years ago its was a definite no, its probaby getting closer now to working though I still think its a no. Sofia becomes more and more like a big time European city as time passes. Sites nearer the coast will work eventually and quicker than Sofia or the interior because of the tourist inks, though the country has taken a huge backward jolt with the economic situation. I was at one course near the Black sea coast a year ago and there was maybe 50 staff and zero golfers and it was a lovely day, they almost need more courses, hotels etcso it becomes a destination for golf, the land is very nice and capable of producing some great courses, the hospitaity, food, nightlife is all good an inexpensive, a lot but not all the boxes get a tick.

[Mike_Young]

This entire golf business and banking business is out of whack and I am sure there are some smart and dumb bankers...I know there are some smart and dumb golf architects
But let's don't make the golf courses out to be the only bad deal for the bankers....I mean the basics to me are:  There is not enough profit margin in the golf operation for the banker to lend the money for a new course.  Right???  Yes, if it is built as they have been led to beilieve is proper.....
But at the same time a guy would come in and purchase a million dollar home with nothing down and  not enough income to pay the mortgage?  What's the difference..could it be that the mortgages were being sold off and were gone in a matter of days?
BUT the biggest financing scam in golf courses was the proforma by the BIG BOYS that could show Wall ST how they could give them a 20% return on these courses and they would advertise that they had "$300 million to purchase courses"( sure ...we all do if we can show a 20% return to Wall ST)......remember Golf TRust and all those deals?  A lot of pockets were lined by SMART WALL ST types..while golf ends up taking the blame....I think private funds and Insurance funds financed more golf courses than banking...and will continue to do so...even though baks did their share.

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