Historical Return on Investment

[Mike Nuzzo]

A prospective client (low %) recenly asked me what type of ROI his investors could expect.  No one has asked me before, and frankly I haven't asked that question enough over the years.  I'm way more familiar or responsible for the expense side and not the revenues.

For those on the other side or with experiences - what types of ROI are out there?

*This is for my own personal information - not any potential or current client.

Cheers

[Chip Gaskins]

It depends on what type of course/club you are measuring.

Fully private
- Ballyneal
- Sand Hills
- Friars Head
- Sebanock

Semi-private
- Prairie Club (in development)

Public
- Wild Horse
- Rustic Canyon
- Erin Hills

Resort
- Bandon Dunes
- Whistling Straits
- Kiawah

Real Estate
- Sugarloaf Mountain
- Dormie Club (in development)
- Colorado Golf Club (maybe?)

They all have different financial risks and input cost in the business model that leads to ROI.  It all depends on what type of course your client is thinking about.

In any situation though, from the folks I have talked to that have built courses, years of reading this board and my own modeling of several of these models, if your main purpose is to maximize ROI you probably should invest your money in something else.  I suppose it depends on how good of an investor your client is with his/her other ventures.

[Mike Nuzzo]

Thank you Chip.
This is for my own benefit.
I'm curious to learn of some real world ROIs - as compared to the projected ones I'm more familiar with.

Cheers

[Matt Varney]

I can add to this discussion we deal with ROI on all our projects.  I work very closely with the founder of www.raritycommunities.com and we are heavily involved in upscale real estate golf developments in Tennessee.

Chip you hit the nail on the head you have multiple business models but building a good golf course costs big money.  That is just for the golf course now you can add an additional 5-10 million in facilities for clubhouse, range house, golf maintenance.  You have to counter design, planning, building and development costs with an ROI over a 5-7 year window.  

Golf Clubs like Sand Hills, Friar's Head or Resorts like Kiawah Island or Whistling Straits have completely different models.  Residential golf course developments are popular becasue the golf course is an integral amenity to a development that adds to the value and great setting on or near water with nice views.  

Years ago, I worked with a lawyer and a commercial real estate guy to create a residential golf development.  When the project was completed the lawyer thought it was a great experience and was looking forward to the growth of the community development.  The real estate guy told me he would never build another golf course again and that for the money he spent on this project he could have made 10x the money return in retail or commercial property development.  This golf course 4 years after completion was sold to Landmark.

If you really love golf - design / building a course is a passion if you just play golf and like money then you should probably just be a member of a club and pay dues.  It costs money to design, build and operate a golf course so your heart should be in it long term.

[Mike Nuzzo]

Matt,

Thank you for your input.
Why do you think it costs big money to build a good golf course?
(yes many do - and many don't - depends on your definition of big)

How close have your actual revenues been to your projected revenues?
Can you throw out an ROI or two?

Cheers

[Mike Hendren]

Nuz,

For gosh sake don't tell him the truth!  I've been financing income producing properties for 25 years and have NEVER financed a golf course.   The real question is what ROI can the third owner expect?

ROI will be heavily impacted by the availability (limited) and cost of debt (expensive today).  I would think it would be tough to attract investors without offering a ROI in the 25% to 30% range.  Even tougher to achieve that.  Just a guess.

Mike

[Matt Varney]

Mike,

I love natural rolling golf course design that have a raw feel to them.  This type of golf course is muchmore affordable to build especially if you have great property.  What I have found is that residential courses range from $6M to $10M to build.  This is just the golf course, cart paths, irrigation system, grassing, sand, etc...

Now when you plan a development and tell property buyers you are building a golf course they also expect:

Golf Clubhouse $3M - $7M
Golf Maintenance $1M - $2M
80 to 100 Golf Carts (Cost Varies)
Turf Maintenance Equipment Lease (Cost Varies)

Infrastructure for roads, utilities, drainage, sidewalks, landscaping, etc...

ROI is a combination of finding the right property in the right location at the right price points and then doing everything you can to add value to that property.  The design, planning, architectural style, golf course designer and amenities like pools, marina, tennis courts add to the value of the project.  

the difference between a project like Sand Hills or Friar's Head is that they want a great golf course nothing more it is a retreat.  In our business models we create golf course to make more money on homesites that would be located along golf holes.  A wealthy guy or group of guys building a retreat really don't care about ROI as much as break even.  On the other hand, we would never build a golf course if operated in the red.  A golf course if done well is a very calculated investment that becomes a key component to a community that enhances the land features.  When a potential buyer drives onto the property and sees the golf course the just stop and say wow that is really pretty.

[Adam Clayman]

I'm with Hendren. His ROI is the satisfaction that comes from building owning and operating a living breathing entity which recreates, inspires and identifies character. Besides, It is totally out of your purview to speculate on such matters. All your doing is building the course. It's up to the business side to make it financially viable.

Tell him that a Nuzzo design yields triple digits when given free reign.

[cary lichtenstein]

If you are looking for ROI, run away from the golf course business.

[Chip Gaskins]

His ROI is the satisfaction that comes from building owning and operating a living breathing entity which recreates, inspires and identifies character.

It all depends on what value he puts on those (very hard to quantify) things.

A wealthy guy or group of guys building a retreat really don't care about ROI as much as break even.

These two quotes sum it up.

[Chris Garrett]

My experience is a bit limited, however, I have worked at two for-profit ventures (Whisting Straits and the TPC network).  Whistling Straits survives and most likely thrives because of the all-inclusive resort model.

I know the TPC model well.  They are all about driving revenue and getting a ROI.  And they struggle to do it.  I'm sure the struggles have been well documented on GCA.com in the past, including the sale of certain clubs, and the struggles of others.  What I learned, however informally, is that you don't invest in a golf course for the immediate payoff.  In many ways, I view golf course investment as an illiquid investment.  The real investment is the land value.  Any profits from the operations are simply a nice bonus.  And of course, invest because you love the game.

[Peter Wagner]

Mike,

I came up with an ROI of around 7% for a private non-equity model that I worked up and wrote about in this somewhat boring post:
http://golfclubatlas.com/forum/index.php/topic,34855.0.html

I think the guy you want to talk to about this topic is Bruce Katona.  Based on his comments on the above thread I would say he has experience here.

For rough planning I think you could use 6 to 10% ROI and be pretty safe.  Also, don't forget that the ROI on a business like this can be low-ish (like 7%) and still be attractive to an investor because most of the asset is real estate.

- Peter

[Chip Gaskins]

Mike-

I think what you are seeing is that the ROI in building a golf course is driven more by long term land appreciation than short term golf course operational profits (if any). 

And we know the only real way to realize that long term land appreciation is to, gulp, dig the golf course up and build housing/offices. 

See the Beechtree thread from a few weeks ago.  It is an early Doak course in Maryland.  I am pretty sure I remember reading Beechtree closing to become Condos.  What I am not sure if the operating profits were not enough ROI or that the Condos profits ROI was too much to turn down as an owner.  We all desperately hate to see a Doak course become Condos (should be a crime actually),  but in land constrained metro areas you can see how owners opt for quick payouts. 

Post #21 of this thread seems to confirm: http://golfclubatlas.com/forum/index.php/topic,34938.0.html

Everything depends on the owners financial goals.  Sand Hills, Friars Head, etc have no financial goals other than break even.

Chip

[Kalen Braley]

As a general rule for those in the know, which type tend to have the best margins?

I'm guessing its either the real-estate tracks or the high-caliber resorts.

[Mike Hendren]

As any homeowner in Florida, California or Las Vegas call tell you these days, real estate doesn't always appreciate.

A 7% return makes no sense to me when I can buy a free-standing Main at Main retail building net leased to an investment grade tenant for a twenty years term at a 6 to 6.25% capitalization rate.  Or a ten years treasury instrument yielding 8.0% a few years from now.

The exit strategy might be to plow the thing under and develop in the future, but discounting the residual sales price at 12% quickly diminishes value.

[Adrian_Stiff]

In the UK things are much cheaper. I think for $2M you can build a great golf course, we recently put up a nice maintenance shed for less than $100,000, I would recommend a smallish clubhouse as they generally lose money but its unlikely you will see much change out of $1M. You probably need around $500,000 of maintenance equipment (could be leased). It is likely you can pick up courses for sale at less than the initial build cost, I think its quite hard to make $400,000 pa, so a ROI of 10% is going some, many UK courses just scrape through and as mentioned... its often a labour of love.

[Don_Mahaffey]

Such a tough question to answer as so much is beyond the control of the GCA. As a architect I think the best you can do is try and show what a similar course or project is returning. So much is dependant on operations and other factors.

Another question. How many architects are willing to tell a prospective client that his project is a really bad ideal...if return is the goal?

I have a friend that manages some money and if I remember correctly, his number was 10% for a high risk project such as a golf development...and he is looking for income now, not promises of future success. Needless to say, he's not looking at any golf projects.

Sometimes it seems like a dreamer who is willing to roll up his sleeves can make it work and sometimes what looks like a slam dunk comes up well short of expectation

[Mike Nuzzo]

Thanks a lot fellas ---

I just changed the title to better reflect my question.

What are some historical* ROIs?



*a whole bunch of words that let the investor know that past results in no way have anything to do with future projections.....

[DMoriarty]

As any homeowner in Florida, California or Las Vegas call tell you these days, real estate doesn't always appreciate.

A 7% return makes no sense to me when I can buy a free-standing Main at Main retail building net leased to an investment grade tenant for a twenty years term at a 6 to 6.25% capitalization rate.  Or a ten years treasury instrument yielding 8.0% a few years from now.

The exit strategy might be to plow the thing under and develop in the future, but discounting the residual sales price at 12% quickly diminishes value.

yeah, but Mike, it's 7% plus all the golf you can play and beer you can drink if you own the joint....

Where do I sign?   

But Shivas, if you were one of the owners then the ROI would drop a few percentage points because of your beer and golf consumption alone.   So then you are at 5%.

[Mike Hendren]

Shivas,

As you are aware, mezzanine debt now is extremely expensive.  You should negotiate free brats along with the beer and golf.

Mike 

[Tom_Doak]

Mike:

I would be surprised if the industry-wide ROI for developing a new golf course isn't a negative number.

[Chip Gaskins]

I would be surprised if the industry-wide ROI for developing a new golf course isn't a negative number.

what do we think the structural issues are causing this negative ROI,  i have my theories, but would love to hear others. 

i will throw a few out...

- land cost too high
- permitting process too long once you have invested in the land and are paying debt service
- environmental restrictions to timely and costly to overcome (again cost incurred after you bought the land and are servicing the debt)
- too little demand for new golf courses (i.e. green fee too high to break even)
- too many new courses coming on line (related to above bullet point)
- golf as sport is shrinking (many potential reason, too expensive, too time consuming, too hard,etc)
- operational and maintenance cost too high trying to look like ANGC

basically with a negative ROI no one would ever invest.  there are but so many Kieser, Pascucci, Youngscap, and Kohlers our there looking for hobbies.

[George Pazin]

- land cost too high
- permitting process too long once you have invested in the land and are paying debt service
- environmental restrictions to timely and costly to overcome (again cost incurred after you bought the land and are servicing the debt)

These get my vote.

Given how many startups fail in any industry, the numbers for a lot of industries are probably pretty bad.

But it's the success stories that keep everyone coming back.

[Adrian_Stiff]

I would say its more a case of too much money spent on building the course. You need to work the sums backwards, how many rounds are you going to do at what price, then spend accordingly... the more success is at the cheaper end.

[cary lichtenstein]

Mike:

I would be surprised if the industry-wide ROI for developing a new golf course isn't a negative number.

I think you meant to say: I wouldn't be surprised