Build a new golf course?

[John_Conley]

In crowded golf markets, it actually may work to build a new course in spite of the lethargic state of the golf industry.  Borrowing from the hotel industry, a new course in a down market can make it by exacerbating the problems for others.

I don't know if we'll see this phenomenon or not in golf, but I see it in other industries.  I think commercial real estate is another I'd add to golf.  Ditto restaurants.

[JWinick]

John,

You raise an interesting point, but I'm not sure it is applicable to the current state of golf except in some unusual circumstances in which a market lacks any meaningful golf courses.   

Hotels & other commercial real estate properties contain an important age component.   An aging hotel becomes too expensive to maintain while people prefer staying in newer products.  Class A Office, Industrial, Medical and other CRE property types are similar and you can often build a product based on the needs of a large tenant.  In downtown Chicago, for instance, many of the newer projects that have come online stole market share by landing an anchor tenant from an older building.

Especially since the ruling bodies have slowed down the technology, golf courses are living beings that don't depreciate.  Certainly, periodic capital projects must be undertaken, but a golf course can always stay relevant if it is the land.   

[Charlie Goerges]

I'm curious about the idea of oversupply of courses. Many times it has been mentioned on this forum (somewhat seriously) that the third owner will make a profit on a golf course. And it's been mentioned that right now it is cheaper to buy one than to build one.

But it seems to me that if the project wasn't well-conceived enough to make a profit for the original owner then it wasn't worth being built. And what's more, I wonder if the third or fourth or fifth owner would be able to make such a project work. Pennies on the dollar won't make much difference if it costs a fortune for upkeep or in fixing mistakes. In other words why buy someone else's mistake and try to make it work?

If all the "mistake" golf courses are allowed to whither, then we'll see new construction pick up. And I'd wager the game would be better off for it. Sure those of us who are playing CCFADs for $30 will lose our deals, but a sustainable course to replace it will be better even for us in the long run.

[Adrian_Stiff]

I'm curious about the idea of oversupply of courses. Many times it has been mentioned on this forum (somewhat seriously) that the third owner will make a profit on a golf course. And it's been mentioned that right now it is cheaper to buy one than to build one.

But it seems to me that if the project wasn't well-conceived enough to make a profit for the original owner then it wasn't worth being built. And what's more, I wonder if the third or fourth or fifth owner would be able to make such a project work. Pennies on the dollar won't make much difference if it costs a fortune for upkeep or in fixing mistakes. In other words why buy someone else's mistake and try to make it work?

If all the "mistake" golf courses are allowed to whither, then we'll see new construction pick up. And I'd wager the game would be better off for it. Sure those of us who are playing CCFADs for $30 will lose our deals, but a sustainable course to replace it will be better even for us in the long run.

Charlie- The scenario goes a bit like this:
Owner 1 buys land, hires top designer, high standard construction, builds big clubhouse costs $10M but achieves lower than expected revenues, membership levels, borrowings increase but eventually bank foreclose with debts of $6M
Owner 2 buys at $6M, with $2M idownpayment and business plan that supports a $4M borrow + invests a further $1M he achieves better revenues, membership levels but still not quite enough and bank foreclose with debts of $4M
Owner 3 buys at $4M and the revenues are okay too make a profit of around 4%, just enough for sauce on your chips.

The moral of the story is that perhaps a golf course costs about 2 and a half times what you should really spend in order for it to be commercially viable. There are always exceptions to this, but quite often the b ig loss is in a big building. A few years ago the UK failure rate for new golf courses was 86%, of which 86% where blamed on the house and unrealistic food prices and tarrifs. In the UK around 30% of golfers actually use the clubhouse on a regular basis.

[Charlie Goerges]

Adrian,

I think I more or less understand the mechanics, I just wonder why the second or third owners even bother. If the first owner built an enormous clubhouse that needs to be maintained, and built a course with a zillion acres of turf that needs to be maintained, and put in a bunch of other things that cost a lot of money to maintain, it seems like a losing proposition for the second or third owner.

Even if it would cost them more money up front to build their own new course, rather than buy an existing course, the prospective second and third owners could have control over what gets built. They could make sure it's the smallest clubhouse that will do the job. The fewest acres of maintained turf and other accoutrements possible. Minimal disturbance to the native vegetation etc. Then they won't be saddled with operating costs that can't be made to work.

I understand getting a good deal, but why buy someone else's problem?

[Richard Choi]

Charlie, I don't think you are quite getting it...

Let's put it another way. The 1st owner builds a course for $10 million, and for argument sakes, borrows the entire amount. Let's also say, in order to pay that money back, he needs to make $1 million/year (for this argument I am going to ignore the maintenance cost). He figures there are about 1000 golfers in the area who will play about 10 rounds a year at $100/round. It turns out that those 1000 golfers can only afford to play only 3 rounds at $100/round a year. He only generates $300k/year and he gets foreclosed.

The 2nd owner buys the course for $6 million. He thinks if he lowers the price to $80/round, you can get 2000 golfers to play 5 rounds a year and make some profit. However, he finds out that even at $80/round, he can only get 1500 golfers to play 4 rounds a year ($480k revenue) and he gets foreclosed.

The 3rd owner buys the course for $4 million and gets to keep it because the course already generates enough revenue to cover the mortgage.

You are not necessarily buying someone else's problem if you buy the course that already generates enough revenue to cover the maintenance cost and the mortgage. The first 2 owners couldn't because they spent too much money building the course or improving the course, but if you can buy it so that you are cash flow positive, there are plenty of people who would be happy to buy that "someone else's problem".

[Charlie Goerges]

Richard, I realize I may sound totally daft, but I do get it. My thought wasn't that there was no point at which a course couldn't be made to work, but that each subsequent buyer was saddling him or herself with a crappy situation. Even the third buyer in your scenario, while making a profit, is likely putting a ceiling on future profits because of the issues mentioned previously.

So basically I'm saying that many of those second owners might be better off building a new course with more austere accoutrements/maintenance and putting the failing CCFAD out of business. Bear in mind, I know that this isn't necessarily the case, and the situations out there are more complex and difficult than I can probably comprehend. I just think there is more than one way to think about the current slowdown in the construction of courses.

[Adrian_Stiff]

Charlie,perhaps the simpliest way to explain it is golf courses are not great business' as a general rule. Everyone has an idea that their's will do 40,000 rounds at $150 and there are millions to make. Some golf courses will but they are rare.
Plenty of golf courses will do 40,000 rounds provided they are in good locations but the unit rate maybe nearer $40. Quite simply there are a lot more customers at $40 than there are at $150.
Remote location courses are often doomed from the start, quite often they look to exist on much lower round numbers but their 'take' is often no more than not so great courses with better walk up.
I would say a client would almost always get a better product by buying a course 'third hand' at $4M (that had a $10M initial spend) than he ever could by starting from scratch and building out his own. You cant get much of a course new build, with car parklots, equipment, maintenance sheds, house build plus ofcourse the land costs, if you have $4M.
To a large degree that is why in this climate with the distinct possibly of lots of  distressed or partly distressed courses coming to a market it would seem unlikely that a developer would want to start one new, but there will always be a rare situation that might work.