In the “High Pointe won’t open – what does this mean?” thread references were made to operating courses in Michigan. I think it is a matter of service to share with anyone considering buying or operating a course in Michigan my experiences and observations over the last 16 years, 14 of which have been in golf. To do this fairly, you all need to know that none of the courses I was involved with were in union centers (Detroit-metro, Flint-Saginaw-Bay City, Lansing or the like). This is an important factor as the micro economies of these areas is very different from West Michigan, Northern Michigan or the Southern border counties. Michigan is nothing if not diverse in its local needs and approaches. You also need to know that my education comes with a degree in Accounting and I started out as the controller of the first course. I have always had the financial duties of each of the clubs as well as an operational management roll that not only included clubhouse but grounds responsibilities as well. That said, you can have all the facts in the world, but not every owner will be willing to accept them.
The courses I have been active with include a well established semi-private lakeshore semi-tourist facility, a CCFAD Palmer Signature Course new construction project, a local affordable based community course new construction, and a well established private club. Both of the new construction projects included a residential component. I have seen each of these facilities fall prey to the data from the NGF and the illusion of easy money on the part of investors, owners and developers. I’ve said it a hundred times and I’ll say it again; every course is its own living operation subject to its specific economic environment. Gross generalizations or methods will not result in a successful outcome and anyone who wants to go into golf needs to be aware that everything you ever learned, regardless of how knowledgeable the original source is just a starting point. Good course operators need to be as functional and adaptive as good farmers, utilizing a variety of flexible engineering, mechanical and horticultural options to various seasons and conditions.
One of the old sayings in Michigan golf is that no golf course makes money until it has its third owner. Depending on the location of the course in the state there are a number of reasons for this, but a common thread is always property tax levels. One of the problems is that golf courses don’t fit into the tax valuation model. A new seasonal course or recreational facility can’t be treated like a factory and expected to carry the same burden proportionate to its construction or development cost(s). The book in Michigan says that something is worth some factor of its capital construction / development cost. With regard to recreational facilities, this approach does not work.
So why the third owner bit? Well, once a course has its initial value established based on its construction costs, it fails since taxable value paired with the seasonal revenue stream exceed the operations carrying capacity. So the first owner goes out of business, sells the property, and the taxable base is adjusted to the sales price. It should be noted that at this point one must also take measures to insure that the purchase can not be qualified as a distressed sale. Rarely at this point do the buyer and seller take advantage of the options they have at the time of sale. By options I am referring to the conditions of transfer. Often times a buyer will not take advantage of allocating portions of the purchase price to trade names, advanced marketing etc… and rather try to put as much of the purchase price into facilities and equipment thinking that they will be able to take advantage of depreciation in the near term. The impact this has on the valuation of their new personal property and the subsequent tax is almost always disproportionate to the benefits of accelerated depreciation. Property taxes are the ultimate gift that keeps on giving or in this case taking.
Again, the second owner operator can’t carry the load and so loses the business to the bank or sells out. The difference this time is that the third owner buys the course at a price that, when applied to the taxable value, works. The reduced price results in reduced debt and moreover a 70-80% reduction in tax burden from the original owner. This tax burden is still to high as I’ll point out in a second but the reduced purchase price makes it work as long as the third owner doesn’t read to much general data from NGF and the like. Some will say that the NGF data can be broken down into regions but it is not specific enough. For instance the golf season in Kalamazoo is a good six week longer on average than the season in Traverse City, yet they are both in the same “region”.
The next point is the great double dip. Consider a development where a builder digs a pond to put home sites around. Is the pond a taxable item? It is basically worthless, yet it had cost to construct. In these situations the pond is allocated to some “common area” status and its cost / value is transferred to the sites around it. No one would ever think of taxing the pond particularly given its positive effect on the land surrounding it. Yet in golf properties with a residential component, the course is taxed on its construction cost AND the sites around it are also taxed based on there value being adjacent to the course. This is a classic double dip.
Now before anyone thinks that I think courses should be exempt from taxation, I don’t, but I do dream a little. Wouldn’t it be nice if the mom and pops could compete on a fair playing field against their municipal tax exempt neighbors. Sorry ‘bout that, its another subject. I have been asked in my career to do valuations on companies. Given all of the options, I can only think of one that works for seasonal recreational facilities, ski lodges, golf courses, etc… That approach should be a income or revenue based calculation.
Each with proportion to their ability. Consider this, how can a course with a valuation of 3.6M and a resulting property tax bill around 75k make it? That course would have an annual revenue stream of approx. 800k. Those are real life numbers there. To make it even more interesting consider that the course only cost 1.8M to build, but that the valuation on same was done based on, get this, its total yardage, number of tees, square footage of greens and fairways and that this valuation does NOT include the clubhouse. This is not an equitable or pro business approach and left unchecked will result in the failure of an operation but the decreased value of the neighboring properties thereby eliminating the total revenues of the taxing authority.
Now, let’s talk about SBT. As a young accountant, the first question asked of me by all of out of state bean counting buddies after college was, “now just what the hell is that SBT you got up there any ways?” That was a very hard question to answer for the first few years of plying my craft. Sooo I looked into it. The SBT was a consumption tax, which not only included labor, but materials as well. Now I don’t know of many businesses that are so flush their first few years that they can absorb an additional consumption tax. This tax was established to discourage competition from new business in the state of Michigan and heavily supported by the Big Three Automakers. What it did was discourage anyone from building a plant in their backyard and taking their captive labor force. Although I am very pro business, I must day that in this case the Big Three and the Unions deserve each other. Granted the SBT has been discontinued in Michigan, but the new system is even more complicated and still doesn't encourage any new business in the state.
Michigan also has a use tax. Which it could be argued might even be a reasonable thing. The problem is that every business in the state would fail a use tax audit due to the complexity of the code.
That’s just a start. Consider how many successful courses are within twenty minutes of the state line. None, Zero, Nada, Zilch. Why? The customer base can drive just across the border to better facilities that benefit from a fair tax structure.
Two cents,
JT