"Anatomy of a green fee"

[Jim_Kennedy]

This is the heading of an article that appears in Supt. News' March 8th issue. It breaks down the expenses related to why it costs what it does to play.

In one example the breakdown for every $36 green fee (avg. 20K rounds per year) is as follows: Maintenance-$10.80, Pro shop- $2.00, Administrative- $!0.14, Mortgage- $11.56, Total toward expenses is $34.50 leaving $1.50 profit per golfer.

I hope this sheds some light on where the monies are really spent for those on this site who continuously blame the Pro for making too much.
If golf courses were owned by people who could afford to be in the business and not those who borrow to get in, you would be paying $11.56 less to play your next round.      

[Matt_Davenport]

WOW! That's some pretty interesting economics.  I'm not sure that many people who are overly wealthy see golf as a good investment.  Maybe with a little more publicity we could solicit the wealthy to invest in golf course development for a fixed return.  What percent return would influence more money people to make a golf development go?  10% fixed return?  12%? or more... I'm not a big number cruncher, but it would be interesting how a deal could be structured to allow those of us with shorter arms to reach into someone else's deep pockets!  It's always easier to spend someone elses' money.  

[Peter Galea]

Jim,
How many people can afford to put out CASH for a property?
How long does it take to get a return on your(cash)investment at $1.50 per player? Or triple the green fees and make $4.50 per player. Are you going to let YOUR money hang out there?

The reason muni's can do it at rates like that are that they subsidise the operation. It's like providing a park for people to enjoy. A golf course is not a park.

[George Pazin]

Anyone who thinks golf pros are the reason courses are expensive needs to spend a week doing their job. Likewise for supers & their workers.

The only club pro I know personally plays far less golf than most avid players.

I think people go into golf related careers because of their love for the game - let's face it, there are a lot of easier ways to make a living.

[Kevin_Reilly]

One point to note is the fact that the $11.56 assumed mortgage payment isn't an "expense" since part of it reduces the principal balance of the debt, thus increasing the equity in the project.  

And really the cost of a greens fee shouldn't depend on whether the project was debt financed or not.  

If I take my cash and finance the project, my cash must have some earning potential associated with it (at a minimum the amount I'd earn on T-bills; more normally it would be the amount I'd expect to earn on a similarly risky project), and I'd expect to charge the project for the fact that by putting the cash in the project I'm not able to earn my expected return on the non-golf investment.  No cash is "free".

[A_Clay_Man]

From my experiences every situation is different. So these homoginized numbers are a bit suspect.

[Jim_Kennedy]

George,
Thank you.
Pete,
a $3.00 increase, not a tripling of the green fee , gets one to the increase you suggest.  

One of the main reasons golf suffers from fees that are out of line is due to companies like AGC and others that pay too much for courses and charge people  too much to play them. You can believe me or not, I don't care one way or the other, but any time a concern comes into a business and thinks it can produce numbers that will make stockholders happy, you are going to pay the price.

Kevin,
I suppose you have taken a mortage out sometime in your life. Do the first 10 years ever retire principle?? It costs YOU. Please excuse my use of caps.

[Lou Duran]

These numbers aren't terribly meaningful, nor representative of a typical course.  Are there many courses with an annual maintenance budget of $216,000?  I know of a previously proposed course in Santa Barbara where the water rights alone would cost $3 Million and the annual water bill was projected to exceed $1 M.  Land costs can also vary greatly throught the country ($0 to $3M+).  

Anyone that will invest $2-$10 Million on a course will expect a return.  Even a mom and pop operation will expect some return on investment, and the property will not appreciate in value unless revenues (primarily green fees) exceed costs substantially.

[Jim_Kennedy]

Lou,
Nowhere is akin to Ca.. Numbers like this are typical in many places across the US. If you invest $2mil, $20k return is not too bad, compared to many places you could park your cash,  

[Peter Galea]

George,
Thank you.
Pete,
a $3.00 increase, not a tripling of the green fee , gets one to the increase you suggest.  

You are correct sir. I guess I over-reacted. I find the premise of $1.50 profit per player to be out of touch, especially in California. Business won't survive here with that type of return.

[Peter Galea]

If you invest $2mil, $20k return is not too bad, compared to many places you could park your cash,  

Jim, Check my math. Isn't 20k on a 2 million dollar investment 1%? Doesn't sound too appealing to me.

[Lou Duran]

Jim:

The P & L numbers you noted would not be representative of any course that's discussed on this site.  Much of my experience is in Texas, and I am unaware of a single regulation-length 18 hole facility of any note that operates like that.  Do you really believe that a 1% return on such a risky investment as golf is sufficient?  Heck, you can park your money in a riskless Treasury security for five times that.  Having said all this, I have no quarrel with the suggestion that the golf professional is a relatively modest proportion of the total.  I also believe that it is almost impossible to overpay a top-notch superintendent and a mechanic.  

[Kevin_Reilly]

Kevin,
I suppose you have taken a mortage out sometime in your life. Do the first 10 years ever retire principle?? It costs YOU. Please excuse my use of caps.

The example above was an average (of a bunch of projects), so the assumption is that on average, there is some principal being paid down.

My bigger point was that it was a fallacy that greens fees would be lower if a project were financed by equity instead of debt.  If I'm earning 8% on my cash, and I take it and put it in a golf course project, I'm going to expect that cash to earn more than the 8%, all things being equal.  So the greens fees will reflect a "charge" for the cost of my capital.

If instead of funding the project with my cash, I borrow the money from BofA, paying 8% interest on the loan, I'll make sure that the greens fees provide me enough cash to service the loan.

Result, greens fees are the same in both cases.

[A_Clay_Man]

Pete- When big money talks about R.O.I. (return on investment) the numbers become very small. So, a one percent return isn't bad because you probably still have your principal intact. A 3 % return is huge. The best examples are sports teams. When you lay out all that cash, if your lucky to see 1%, your not losing. I believe that for most of the sports teams owners it's more about prestige than ROI. If that philosophy were translated into a golf course, you'd have the altruisim needed to have a great place.

[Mike O'Neill]

Jim,

The $2.00 for the pro shop seems to suggest that the pro shops are not paying for themselves. I am sure in theory that a good pro shop would market itself well enough so that the green fee does not have to help shore up the pro shop. Since these are average numbers, I will assume that some pro shops are actually selling enough balls, shirts, and hot dogs to make some money. Yes? If that $2.00 goes away, there's your $3.00 profit. I guess that's why they actually give out awards for the best pro shops each year.

[Jim_Kennedy]

Pete,
That 20K should have read 200K, or about 10%. Keyboard error on my part.

Kevin,
Right you are. We probably would not be paying less due to the owners need for a reasonable return. On the other hand, we might be paying less overall if venture capital was not so easily obtained for overpriced facilities that have to charge so much to stay afloat.

Mike,
The $2 is the cost per round to staff and supply the Pro shop. No mention of sales totals were given.

[Peter Galea]

200 Large, works for me!

[Lou Duran]

Based on the figures provided, the total profit is $30,000 ($1.50*20k rounds- where does the $200k come from?).  Debt service is $231k ($11.56 * 20k).  Assuming a 9% interest rate and 25 year amortization, the loan is around $2.5 Million.  Assuming an 80% loan-to-value, the original price is around $3, 150k.  The $30k profit on the $650k investment ($3,150k - $2,500k) is 4.6%.  If these numbers are representative, then perhaps we can understand why the industry is in trouble.  For most parts of the country, quality golf and low green fees are mutually exclusive.  Fortunately, most golfers don't demand (or pay for) quality golf.   Provide them with a reasonably designed 6,500 yard course, decent conditions, and courteous treatment, and they will come.  BTW, I think that Mr. Daley in the sand hills area of Nebraska is looking for 10-20+ altruists out there who would like to provide inexpensive, quality golf to the masses.  Certainly, there must be that many out there!    

[RJ_Daley]

Lou, I'm looking for 5-25 guys and I'll match their individual experssions of "altruism" $ for $. In my scenario there would be NO debt and there would be the disbursement of acreage adjacent to the course proportionate to the original investment - back to the partners for subdivision and possibe recovery of some or all of ones initial investment.  Profits from operations of the semi-private course, if any, would be split in a limitted partnership arrangement.  Of course the golf would be free to said founders, the more they play for free, the less tee times are sold to the customers
  
AS I was reading the above, I was thinking how futile the whole exercise is, due to the non-specific and generalized nature of such numbers.  I think Lou has the example figured to that extent as I was also seening it.  In the example, the course appears to be based on 2-2.5million in debt, and about one million in the owners equity on a 3-3.5 million valued property.  I'm not sure what the figure attributed to "adminsitrative" is for $10.14?  But, it better be for things like purchase and amortizing the cost of replacing machinery and operating costs of materials to run the course.  In the example that is a little more than 200K.  The maintenance item amount would just cover a skeleton crew's wages and benes and nothing for cost of materials and machinery costs.  

And, of course it's all figured on 20000 rounds a year.  That is probably a reasonable  number where one ought to do proforma projections, but isn't a healthy number for actual rounds to target if your operation is going to be worth while even in a 6 1/2 month season of about 145 good golf days.  I think what Mike O said is true.  Food and bev and pro shop operations has to be figured as a percent of sales and if you are loosing $$ on that, you are really doing something wrong.  The bar is where the money and profit potential really is!

I see the real risk in my idea as what happened to Red Mike or other operations where the initial investment was wasted and full recovery of the initial investment in a subsequent sale is not possible due to real factors that devalues the invested cost to have built-developed the course in the first place.

[ian andrew (Guest)]

Think about the long term here. If the mortgage is cleared in 25 years (its usually much less in the proforma-we had one client clear debt in three years!), everything from that point is now profit. In your example a third of each green fee is now profit.

Golf Courses are "legacy investments", not quick returns. We expanded a course to 27 holes this year; the owners comment was that their sons will be even more wealthy for their decision.

[Lou Duran]

Ian-

No doubt there are some courses out there that are wildly successful.  However, based on the composite numbers that are the subject of discussion here, if the owners ploughed back their profits to reduce principle, they may be able to retire the debt a few years early.  But if they do this, how do they fund replacements and capital improvements?  I like the "legacy investment" concept.  I guess the Pebble Beach deal is one.  But, in my 16+ years in commercial real estate sales, I've yet to encounter a single investor who invests with a legacy in mind that does not also have a reasonable prospect for good long-term financial returns.  The Japanese bought trophy properties with negligible cash flow and they're being killed.  Over the long-run, cash flow is king.  

[ian]

Lou,
First, I personally doubt the numbers provided.

I think the key to golf is time. The investment returns are very weak in the first 5-7 years traditionally. The next phase is a dramatic improvement in revenue and profits as the business matures and the average green fee increases. The key becomes the final phase where the mortgage is retired, at this point the course usually takes on any neglected capitol improvements for tax reasons. The course is very profitable at this point. Of course this assumes that the market is there.

Your right about the debt being the killer.

[SBusch (Guest)]

The article goes on to describe the numbers for a high end daily fee course (Tattersall in Philly is shown to be the example).  Here's the numbers there:

Pro shop labor     183K
F&B labor            7K
Maint. labor        358K
Marketing labor   27K
Admin                55K
Pro Shop            64K
Maint.               452K
Marketing          50K
Admin               429K
Other                212K
Total               $1,842

Please note: the clubhouse was not open at the time, so those expenses would normally be higher.  

Total maintenance budget for the course is 810K.  Before you think that's high, remember the thread where our private club friend is dropping $1.3MM per year on maintenance and $5MM overall.  These expenses are much less.

Since the course was in Philly, where land and construction costs are higher, let's assume the course cost $6MM to build, not including clubhouse (definitely low if we're going to include land).  Assuming a blended return of 10% (also low, all of the investors I know are looking for 20% on their equity), that means you need another 600,00 to cover debt and equity, jacking your expenses up to $2.4MM.  Divide that by 30,000 rounds, and you need to bring in $80 per round AVERAGE to cover your nut.  Figure in some discounts for fall weekdays, etc., and this course needs to charge over $100 to not go BK.  The missing piece is the clubhouse, which changes all of the numbers.

Before anyone gets too excited about this, remember that this is on the high end, and the other example was on the low end.  Most fall in between.

For those of you who don't get GolfWeek Superintendent News, I highly recommend it.

[jim__janosik]

The  $429,000  for ADMIN is  the first place I would send the
auditor.  That is annual interest  on  about 4 million isn't it?