[Mike_Young]

Interesting view on the renovations of the last few years.  Next few years are going to get interesting for participation as well as remaining facilities.
http://www.nxtbook.com/nxtbooks/pellucid/perspective_201812/index.php?utm_source=newsletter_414&utm_medium=email&utm_campaign=18-12-15-tpp-grp#/6

[Tom_Doak]

I think you put the wrong link for this one; I didn't see a story about renovations.

[Mike_Young]

I think you put the wrong link for this one; I didn't see a story about renovations.

Tom,When I open it shows the article on interest rates and water rights etc.  In that article he uses renovation cost in an analysis. 

[Jeff_Brauer]

Mike,


I got the right story, think it was right there if TD read down a bit.


It does contain some interesting points, 500 renovations in last 4 years, or 125 a year (less than 1% of courses annually), 55% to 45% public/private, which mirrors some other data I have seen, and the (duh) idea that courses should pay off the previous construction loan before entering into a new one.


From personal experience, renovations can be tough sells.  I know one business advisor who says you can never repay more than about $4.5 Million in costs, but the recent surge in construction costs makes a total renovation closer to $7M or more these days, even in Texas where labor rates are low.  I have no doubt that targeted renovations, solving only a course's worst problems will be a thing this coming decade.  Irrigation replacement will continue (see the first part of the article) and golf renovations may scale down to greens and tees only in many cases.  Those can still be done in for under $2.5M, with another $1.5-2M in irrigation to keep debt levels reasonable and repayable.


As always, just MHO.

[Tom_Doak]

I know one business advisor who says you can never repay more than about $4.5 Million in costs, but the recent surge in construction costs makes a total renovation closer to $7M or more these days,

Seems like there is something wrong with this equation . . . perhaps some of these new standard practices are not really affordable?

[Tom_Doak]

I think you put the wrong link for this one; I didn't see a story about renovations.

Indeed, I didn't read far enough, as the title of the piece was about interest rates and water rights.


I guess interest rates have been a factor in many of these renovations we're seeing; I remember the financial guys at one club saying that they wanted to lock up as much money as possible at low rates, so they could spread out the payments over time.  I can't really imagine very many of the clubs we work at defaulting on their loans, but I shudder to think about some of the other places I see that are borrowing millions to try and improve their bottom line.

[Mike_Young]

I know one business advisor who says you can never repay more than about $4.5 Million in costs, but the recent surge in construction costs makes a total renovation closer to $7M or more these days,

Seems like there is something wrong with this equation . . . perhaps some of these new standard practices are not really affordable?

Equation- a statement that the values of two mathematical expressions are equal....Equations were removed from the golf business a while back    

[Jeff Schley]

I know one business advisor who says you can never repay more than about $4.5 Million in costs, but the recent surge in construction costs makes a total renovation closer to $7M or more these days,

Seems like there is something wrong with this equation . . . perhaps some of these new standard practices are not really affordable?

Equation- a statement that the values of two mathematical expressions are equal....Equations were removed from the golf business a while back

Yeah that is the truth.  For a club or course to borrow the money because the interest rate has been cheap with the Fed keeping them artificially low for the last decade,  will create added stress with debt service for 2018/19 and beyond rates.  Just because a bank says they will loan you 7 million USD doesn't mean a club should do it.  It is like buying a house, buy what you can afford in a downturn scenario.  Not the worst case, but you need to have stress test scenarios.  You lose 20% of your membership over the next couple years, your capital reserves are spent and need a new roof on the clubhouse.  You get a flood and your flood insurance won't cover the expense for repairs or your premium gets raised.

These are common finance questions that is factored into the interest rate offered by a bank to hedge their risk. Capital reserves IMO are too low in many mid-low tier clubs and in the case of public courses or municipal courses they simply don't run a positive net profit to justify the cost.  In municipal renovations you basically get a subsidy paid by the public in many cases, which is OK for it is for the public good.

A good recent test case will be the new Jackson Park project.  We are hearing astronomical numbers because of the infrastructure costs needed to reroute roads, traffic patters, pedestrian access, utilities etc. However if you did a business case and took out the infrastructure, let's say the renovation costs 10 million, which I think is very low.  If you were a business, you would have to project all future free cash flows, discount them back to the net present value and see if that 10 million will make sense from a profitability standpoint.  Will it?  I very much doubt it, however this is a public good and not all parks/recreation need to be profitable or neutral.  Most are cost centers for the public good, this project I think will have value in other ways (PR, future tournament revenue, etc.) that can add to it's intangible value in goodwill.

[Jeff_Brauer]

Many, if not most, of the golf biz consultants I work with report revenues exclusive of debt, for reasons I never understood.  I had one client accept a full renovation scenario without really realizing he was only making $100K before debt, but losing over half a million after debt.  Obviously, his fault for not checking more carefully, but is there any other biz model that doesn't evaluate debt as so many in the golf biz do (don't)?

[Anthony_Nysse]

Mike,


I got the right story, think it was right there if TD read down a bit.


It does contain some interesting points, 500 renovations in last 4 years, or 125 a year (less than 1% of courses annually), 55% to 45% public/private, which mirrors some other data I have seen, and the (duh) idea that courses should pay off the previous construction loan before entering into a new one.


From personal experience, renovations can be tough sells.  I know one business advisor who says you can never repay more than about $4.5 Million in costs, but the recent surge in construction costs makes a total renovation closer to $7M or more these days, even in Texas where labor rates are low.  I have no doubt that targeted renovations, solving only a course's worst problems will be a thing this coming decade.  Irrigation replacement will continue (see the first part of the article) and golf renovations may scale down to greens and tees only in many cases.  Those can still be done in for under $2.5M, with another $1.5-2M in irrigation to keep debt levels reasonable and repayable.


As always, just MHO.

Id be wondering where these numbers are coming from. A lot of full renovations, irrigation included, are being done in FL for under $5m and Id say we are probably the renovation capital of America.

[Jeff Schley]

Many, if not most, of the golf biz consultants I work with report revenues exclusive of debt, for reasons I never understood.  I had one client accept a full renovation scenario without really realizing he was only making $100K before debt, but losing over half a million after debt.  Obviously, his fault for not checking more carefully, but is there any other biz model that doesn't evaluate debt as so many in the golf biz do (don't)?

The revenue is not the net income (profit), it only represents the money taken in from activities.  An advantage of a loan vs. paying in cash is you can deduct the interest part of the payment for debt service, while you put the cash you would have paid to work as an investment earning a return. So in recent times, the interest rate is not only low, but you can deduct the interest payment from the loan.

If you were operating a course as a stand alone business for a profit, the renovation costs would have to come from the capital reserves or a loan obviously. In the case of a municipality for example, they are using taxpayer dollars as part of the parks department or recreation budget etc. The aren't pressured to turn a profit for they don't have to show a net profit as the local government sees the course as a public good and part of the parks and recreation, thus it is subsidized in many cases. Do they want to be at least neutral yes, but when you throw in debt service for a renovation I doubt the courses operating income is covering their own expenses in addition to the debt service.

As a taxpayer, this is why local/city governments debate giving subsidies to build a taxpayer sponsored stadium for a baseball/football team.  There are great PowerPoint presentations about how this will help the community economy will be stimulated and the benefits it will produce. For a golf course (as in the case of the Jackson Park project in Chicago) you could view it similarly in that a professional tournament will be attracted and produce an economic benefit to the local economy, while also providing a championship course for the golfing public to play.

Renovations at private clubs or privately owned public courses have to be more pragmatic without the municipality backing with tax dollars.

[Jeff_Brauer]

Jeff, yes, should have said profit, or EBITDA, Revenue minus expenses, taxes, depreciation and amortization.  I guess they used it as a fair comparison, just because some courses have to cover debt, while others (i.e., municipalities) do not.  In my experience, most cities do try to cover debt to avoid subsidies, with the days of maintaining an iconic facility for the city to be mostly over.

Anthony,  perhaps some of the lower cost in FL is attributable to sandy soil, with no need for USGA greens, topsoil strip and replace, etc.? 

The cost of my last total blowout did surprise me.  It seems like after holding steady for so many years due to a slow market, prices have exploded.  Put another way, since the 2006 recession, they may have averaged CPI about 3%, or about 33% for a 2017 construction start, but construction costs actually rose about 0,0,0,0,0,0,1,2,4,6 and 20%.  (slight exaggeration, but not much.)

I did the Superior National job, about half way between a full blowout and tee and green only, with some re-routing and new irrigation, in labor intensive short season for just under $5M in 2014-and 2016, which I felt was a bargain.  My estimate (and second bid) was about $5.4M.  We recently spent over $8.5M, albeit, including $1.5 Mil in sod as an insurance policy which probably put the apples to apples cost for a total blowout with re-routing at about $7M.

Obviously, the scope of work in every renovation varies quite a bit, explaining the range somewhat.

[Ira Fishman]

Does anyone have the economics regarding the return on investment of new/renovated clubhouses?  I know it varies depending on club, but something general would be helpful.  I have been trying to convince some people that investing in the course (better maintenance and some minor renovation) will pay off better in terms of new members and usage of club than a relatively expensive clubhouse upgrade.  The counter made to me is that a better clubhouse not only helps attract new members but substantially increases food and beverage profits.  I am highly skeptical that in a suburban area with tons of dining options that we will ever return to the old days of the club being a primary dining choice.


Thanks,


Ira

[JMEvensky]

Does anyone have the economics regarding the return on investment of new/renovated clubhouses?  I know it varies depending on club, but something general would be helpful.  I have been trying to convince some people that investing in the course (better maintenance and some minor renovation) will pay off better in terms of new members and usage of club than a relatively expensive clubhouse upgrade.  The counter made to me is that a better clubhouse not only helps attract new members but substantially increases food and beverage profits.  I am highly skeptical that in a suburban area with tons of dining options that we will ever return to the old days of the club being a primary dining choice.


Thanks,


Ira

I'm betting the under that your club has any current F/B profits to increase. And I'll bet that argument is being made by members/directors who spend a lot of time drinking and eating at your club.

[Jeff Schley]

Jeff, yes, should have said profit, or EBITDA, Revenue minus expenses, taxes, depreciation and amortization.  I guess they used it as a fair comparison, just because some courses have to cover debt, while others (i.e., municipalities) do not.  In my experience, most cities do try to cover debt to avoid subsidies, with the days of maintaining an iconic facility for the city to be mostly over.

Anthony,  perhaps some of the lower cost in FL is attributable to sandy soil, with no need for USGA greens, topsoil strip and replace, etc.? 

The cost of my last total blowout did surprise me.  It seems like after holding steady for so many years due to a slow market, prices have exploded.  Put another way, since the 2006 recession, they may have averaged CPI about 3%, or about 33% for a 2017 construction start, but construction costs actually rose about 0,0,0,0,0,0,1,2,4,6 and 20%.  (slight exaggeration, but not much.)

I did the Superior National job, about half way between a full blowout and tee and green only, with some re-routing and new irrigation, in labor intensive short season for just under $5M in 2014-and 2016, which I felt was a bargain.  My estimate (and second bid) was about $5.4M.  We recently spent over $8.5M, albeit, including $1.5 Mil in sod as an insurance policy which probably put the apples to apples cost for a total blowout with re-routing at about $7M.

Obviously, the scope of work in every renovation varies quite a bit, explaining the range somewhat.

I always like to get the whole picture thus you would want net income, not EBITDA.  EBITDA is not a standardized accounting measure for US GAAP.  It is misleading for debt service and capital expenses are decisions which are exposed with net income but shielded with EBITDA. In our case example here, we are talking about capital expenses, thus EBITDA wouldn't be fruitful, but it would show profitability from operations isolated from capital expense decisions.
If I was looking to acquire a business based on operations separate from how it is presently financed or the local/state tax circumstances are, then EBITDA is useful.

[Tags:]

Tags:

[Tags:]

Tags:

Call to undefined function theme_linktree()