[Bill_McBride]

A friend of mine who is really into demographics, trends, etc, told me today that "1500-1600 golf courses" will go bankrupt in 2002.  He cited the USGA and National Golf Foundation for this foreboding statistic.  I remembered his remarks after reading the thread about the cost of constructing approaches.   Can anybody confirm this bankruptcy statistic?  What type of courses? (I assume privately owned public access courses, perhaps many which were built by RE developers and turned over to homeowner associations.)  This is a dangerous trend given the current economic situation and high discretionary cost of CCFAD golf, and could lead to reduced demand for design.  At the same time, minimalistic, lower cost design could become more important.  Comments?

[Tommy_Naccarato]

Bill, great topic!

If this isn't something that we should ALL being looking at, then, we aren't the embodiement of the game we think we are.

The game is in some serious financial trouble right now. the economy has slowed way down. Cats and dogs are living together.

All the more reason to celebrate minimilist design and for architects to still enjoy a very good success. This is one of the BIG things I think the ASGCA has missed out on. Promotion of minimal design for the lean times.

This has everything to do with moving less and relying on nature, which is what they should be doing in the first place!

the courses that will be going banlrupt are the ones that have over-built, thus over-extended themselves. they just had to have that clubhouse or ________ Signature design so they could properly market the experience.

[Tim_Weiman]

Bill,

For the sake of those directly involved, I hope the statistic you quote is exaggerated.

Nonetheless, I agree with Tommy that things had gotten out of control in recent years with for too much money being spent to build golf courses.

Like the Dot Coms coming down to earth, many CCFADs are probably due for some form of "correction".  And it certainly wouldn't be bad if minimalist ideas of design and construction became far more prevalent.  People want to enjoy the game, not take on another mortgage.

Tommy:

How are the Orange county CCFADs making out?  Is there any news on their fees schedule?

[ed_getka]

I think there are plenty of golf courses that are struggling in the NorCal area and when they go under will deserve their just desserts. So many second rate courses opened in the last 5 years and were charging $75 and up for a $25 golfing experience. They got away with it for a while thanks to the corporate outings and such, but now the economy has them sinking under their own greed. It brightens my day to see all the coupons in the paper with discounted green fees nowadays.
I think there will certainly be less work to go around for the architects, but the cream will still rise to the top and good architects will still have all the work they can handle (assuming they are doing the work themselves, which I've learned isn't always the case with the big boys).

[Tim_Weiman]

Ed,

As a consumer I'd be delighted with all the coupons.  But, what about the investors' perspective?

Was their problem greed or miscalculation?  Would the project economics on the second rate courses you referred to permit $25 green fees?  If not, what could they have done different?  Could they have created a $25 dollar product and still be profitable?  Do you think it is possible in your market?

[Jeff_McDowell]

There have been a number of courses being sold for pennies on the dollar in Minnesota. The courses aren't closing, they are just changing hands.

I can't see a trend in terms of what type of facility is most likely to fall on hard times. An older, private course in southern MN was just sold. I think their facility wasn't keeping up with the new courses. At the same time, a 5-10 year old CCFAD in WI was recently purchased. They had an extremely steep site that caused terrible drainage and erosion problems that the owner was not willing to fix properly. Finally, a brand new CCFAD in Wisconsin was sold, because they overbuilt and charged too much money.

I have seen a lot of interest in 9-hole additions to existing 9-hole facilities. Many of these facilities recognize that golfers want to play 18-holes, and even their most loyal customers will switch to the new 18-hole facility nearby.

[Jeff_Brauer]

Jeff,

Iquiring minds want to know!  If you aren't comfy putting out in public, then email me.  I know Giant's Ridge experienced a downturn in play of about 5% this year, but with all of May a washout due to rain, they were not unhappy with that.

This is (I think, but I may be biased) a good example that pure price doesn't drive play, but percieved value.  Giant's Ridge costs about $75 to play, including cart, and the hotel night stay is about equal.  In Brainerd, they were trying to get $125 each per golfer and hotel room, and neither is percieved as superior for the additional cost.  But GR is percieved as a worthwhile two day resort experience often enough to stay full.

I have heard there are 30 or more courses in Myrtle Beach up for sale, and also know that the big management companies are putting up their weakest performers.  These would be good candidates for a mom and pop operation (if they could get financing) where a $100,000 profit (in essence, buying yourself a job) may suffice without paying a GM that, and sending a chunk to a corporate office.

Tommy,

Not to start a fight, but for the record, ASGCA on a number of occaisions has tried to promote affordable golf, and continues to do so.  That it fell on deaf ears in the roaring 90's is for reasons beyond our control.  I will admit that in a "debate" sponsored and reported by golf course news a few years back that I tookt the unpopular position of "NO" You can't cut back on construction costs.  Generally, I believe that with interest rates at historic lows, it really makes sense to build it right, as the debt cost is the same (and fixed) as operations costs (which go up with inflation every year).  This includes, where necessary, part to part sprinklers, more drainage, etc. that are great tools in the hands of a sensitive super.

[John_D._Bernhardt]

I am hearing and seeing several good properties for sale at very attractive prices. I am also of the belief that corporate owned golf over a large geographic area does not make good business sense. If you have enough of a cluster to save on mainteneace then yes. But the layers of management never did and certainly do not now make sense. Jeff, How can construction costs not come down as well as consulting fees. Labor and equipement are not going up in cost and the construction costs of courses ran more than doubled in the last 10 years.

[ed getka]

Tim,
 I am not saying the courses should have charged $25, that is what I perceived their worth was to me based on the quality of the course. A course in our area should certainly be able to get by on $45 green fees except in the most desirable areas of land. My problem with these struggling courses is their CCFAD approach which seems to typically add on $20 or more for no added value in my opinion. I don't need someone to take my clubs out of the trunk, clean my clubs, etc nor do I think many others care about that. I go to these courses and see employees standing around waiting to cater to needs that don't often arise. I just want someone to take my money and point me to the first tee.
When I pay $125 at Pasatiempo I don't have a problem. When I go to generic CCFAD's and they want $125 for what I consider a so so course I do have a problem.
I guess the point I'm trying to make is that I need to perceive some value for my money. For me the emphasis is on the quality of the course and the rest is fluff. In this area Stevinson Ranch costs $45-65 and I perceive it to be good value for my money even though it is in the boonies. The positives are a fun, challenging course of what I consider to have architectural merit. They have an awesome practice facility which is included in the cost of the green fee. The course is practically empty mid-week so pace of play is not an issue.

[John_Conley]

How are you defining BANKRUPT?

The reason I ask is that the connotation is usually much more severe than the reality.

"A person (in this case a business is an "artificial person") legally declared unable to pay his debts:  the property of a bankrupt is administered for the benefit of his creditors and divided among them."

In Orlando, we have seen a ton of courses change hands, each time for less money than the time before.  Jeff is alluding to this happening in the state with the highest participation rate.  As I've said, posted, and written about - it is going to get REAL UGLY... no matter what the economy does.  Rounds played are not going up and the supply is incredible.  Macroecon 101 tells us that the price will go down when the supply curve shifts right.

That said, it doesn't mean that all of these courses would close.  There are three parts to the picture.  

1- The cost to build the course is irrelevant once it is open.  Defined as a "sunk cost", it matters to the owner/investor but not to the viability as a going concern.  

2- As long as the revenue coming in is sufficient to cover the fixed costs (maintenance, staffing) it can stay open.  

3- Unless, of course, the third part deems it possible to close the course.  "What is the value of this site for a use other than golf?"

This is why you seldom see courses close even if they come in way below projected revenue levels.  What else can we do with it?

[John_Conley]

Another point...

There are quite a few courses owned by the two golf REITs.  When they "lost" money they weren't stiffing creditors.  The owners - all of the shareholders of the companies' stock - saw inferior returns.  

[A Clay Man]

John Bernhardt- I understood Jeff to say(mean), don't spare on the expense during construction because in the long run it will be worth it.

[Jeff_McDowell]

John,

Your point three cracks me up. I work closely with a financier, who says the same thing all the time. He goes even further by saying putting a golf course on raw land devalues the land, because if the course fails a new owner is going to have to deal with irrigation, wells, bunkers, etc.

The flip side of the coin can be used to your advantage. I have two friends that have bought three par-3 courses in the suburbs of the Twin Cities. I asked if they are making any money, and they said, "no, but we just want to break even". Since I don't have their head for business, I asked them about this.

Their plans are to have the courses cover debt and expenses. Then when the adjacent land is completely developed, sell it at an exhorbitent fee to desperate developers. Man, I wish I was that smart.

[Jeff_Brauer]

John,

My experience has been that with the golf boom, contractor's margins were way up, specialty labor (ie shapers and foreman) were way up, and specialty products (ie irrigation supplies were way up) offsetting stagnant costs in more mainstream areas, like earthmoving, concrete, and drainage.

I was referring to the fact that once you have a fixed rate loan, whatever you spent on the course costs you $X per month after opening for play.  Annual maintenance expenses, etc. are likely to go up 1-3% each year, making debt an ever small portion of your budget.

[John_Conley]

Jeffy Mac:

The term for that is "land banking", and it is very often the reason you see driving ranges in populated areas.

If you aren't busy tonight, go catch Patrick Henry v. Cretin in the finals of the St. Thomas Holiday tournament.  Or the final of the hockey tournament at Xcel with Roseville fresh off a 10-1 killing of Hill!!

My post wasn't meant to be funny.  That's the reality.  Glad you find it so amusing.  Perhaps Joel Goldstrand wouldn't see the humor in it!!  

[John_Conley]

Oh, I forgot.   Don't know if it'll happen and they can't meet in the state tournament, but it'd be worth standing in line for two hours to see Henry play Hopkins this season.

[Jeff_McDowell]

John,

Those hockey games do sound good. Too bad Jeff B. is stuck watching transplanted pro hockey, and can't get the good stuff.

I'm thinking of going to a Tartan girls game. They got beat 20-1 the other day, but then settled the score when the players and parents started a mass brawl in the lobby.

[jim__janosik]

John,

Thank you for your  input.  I was myself going to define bankruptcy.  You did it much better than I could.  To add to what you said,  it is usually  the debt structure that hurts the golf course not  the ability to  cover operating  expenses.

I  firmly  believe that  (especially  here  in the West) that
overhyping revenue  expectation is what sours  investors.

[Lou Duran]

John:

As a small shareholder in National Golf Properties, I've seen the value of my stock go down about 2/3 in the last few months.  I haven't heard that they're cutting the dividend, but with only a few of its properties making profit targets, I am sure that cash distributions will be greatly reduced.  As you know, REITs are great for the sponsors and managers, but once again, investors appear to be getting shafted.

One thing that might hold up the industry better during this down cycle is that more equity was put into deals.  Many lenders required the land to be put into the golf development "free and clear" and then loaned 70-80% of the construction/development costs.   Bankruptcy will allow some owners to restructure their debt, and in some cases, the lenders will eventually take title to some properties (The Creeks at Beechwood, a relatively new Norman course in Fort Worth and an adjacent luxury hotel, I believe under the Westin flag, were recently acquired  through foreclosure by the lender- total loan value of $50+).  It will be interesting to see what new type of ownership emerges.  Personally, I hope that the influence of the large corporate owner/managers is greatly curtailed.  

BTW, warehousing land in high growth areas generally only works if the cost of the improvements are minor relative to the value of the land.  The owner of the land obtains some income, usually to offset holding costs, and the operator of the enterprise, say a driving range, flea market, parking lot, or outdoor festival, makes a large enough return on his investment to offset the uncertainty of a short term lease and the inconvenience of having to move or close the business.  I've never heard of a golf course being built to warehouse land.  And the comment that lenders look at the alternative use/value of a golf course with suspicion is one that I have heard a number of times.  

[John_D._Bernhardt]

John C. I agree if you paid cash for the construction of the course this is not an issue. But for many of the courses you are describing, ie those in trouble, that is not the case. Many of these companies started with significant cash then started leveraging the portfolio. The fact situations i am seeing are the result of inadequate equity available to them and declining values which make refinancing not available. Many started trying to reduce cost to improve the spreads when a tough winter and a small decline in play occured. This has not been enough. The sad part is poor businessmen who over leveraged with only increase in play and rates allowing for their models to work. It should be obvious that life does not work that way. This is really good for the business in the long run. I just hope the business attracts good people who can make a solid return and provide great golf on a great course at a good price.

[John_Conley]

John B.:

I'm sure we agree about this, but let me clarify so I'm not misunderstood.  I'll use round numbers to simplify.

Assume I'm a REIT.  "PAR" since GTA and TEE are already taken!  I "leverage" my portfolio, which is a fancy way of saying I borrow against assets I have.  I take out a loan for $10,000,000 to buy a course and project that I need $75 and 50,000 rounds to make a go of it.

Two years pass and I realize I have to discount and still don't get the rounds we thought.  $45 average and 40,000 rounds is the actual.  We clip costs anywhere we can, allowing turf conditions to deteriorate and letting tires on golf cars go bald before we replace them.  No matter what we do, we can't service the debt.

The lender has the option to work it out one of two ways.  Accept less back or take the course.  Even though it is on their books at $10M, they couldn't reach the projected numbers either.  So in reality it might be worth $5M.  Either way they need to take a write-down.

My main point was that the $10,000,000 isn't really relevant to the decision for whether or not to keep it open.  It could have been 5, it could have been 20.  An owner will want to sell the land for another use if it is allowable by zoning and worth more dead than alive.  If you can cover your fixed costs - not sunk costs - it will remain open.

This logic is alive and well in Orlando.  I can only imagine what is going on in Myrtle.

[ed getka]

Interesting economics lesson guys. :)Every day on here is a learning experience for me.

[John_Conley]

Ed:

The irony of this is that every additional course makes it harder for all pre-existing courses to make their numbers.

You mentioned that you don't perceive any additional value at the CCFADs that are trying to charge the extra $20.  If they couldn't have projected getting that extra $20, NONE OF THEM WOULD HAVE BEEN BUILT!!

Bottom line:  No one has successfully increased the number of rounds played.  For every new golfer, another quits out of frustration.  Frustration over cost, time, and/or difficulty.

The world clearly needs more low end courses like the one I played 9-holes on tonight for $13.  However, if you run projections off a green fee that low you couldn't ever cover the acquisition and development cost for raw land close enough to a populated area.  So the projects that did get approved were "upscale".  One problem - not every golfer can be upscale, just like the ballmakers found that they couldn't really increase the size of the "premium" ball market.

There will always be demand for $15 a dozen Top Flites and $20 courses.

Unfortunately for the developers, most of the lower-end courses in my area weren't intended to be!!

[John_D._Bernhardt]

Yes I am with you John. I work hard not to be on the wrong end of these discussions personally. I prefer assets which increase in value and were either bought right to begin with or planned and constructed at a cost to withstand market issues which while many did not forsee, I work sure try too. Any business which depends on climate and/or commodity prices has big bumps in the road.

[Mike_Young]

John and John,
Interesting discussion....while I in no way claim to know much about the financial industry, I have observed several issues, items, over the last 15 years that I think have gotten us to the point we are at with CCFAD's.
1.  We have seen so many large management/owner golf companies merge, fold, sell etc. over the last 4 years and it seems they were all just swapping paper.  It seemed like musical chairs where no one wanted the paper when the music stopped.  The paper originated when these guys would place a cap rate on a golf course of 8 to 10.  They would walk into an operating facility...see where it was bringing in 1.4 or 1.5 mill....see where they were operating before debt for 800,000.... think that they could cut another $100,000 off of the expense end.....show a present profit of around$600,000...set themselves up with a sweet management contract...go to Wall st. and promise a 20% ROI and all of a sudden we have a $6 million dollar golf course.  ( I saw one go for 14 mill in Atlanta) It may have only cost the owner 1 mill or less but he is grinning unless he got in one of the "stock swap" deals.  DID NOT WORK.

2.  Seems majority of feasability studies that came back would always show between 35000 and 40,000 round avaiable.  NOT

3.  Even the $75 to $100 green fee courses were averaging much less per round than the advertised fee.

4.  The big smooth operators knew from the start( around the Callaway IPO) that CEO's in banking, stocks, manufacturing etc all played golf and were suseptable to doing golf deals that they would not touch in their normal businesses. ( you know golf came a close second to the stuff they say is more powerful than the atomic bomb)  It became one of the toys.  But people tire of toys.

5.  Accounting was showing some of the REITs stock increasing based on appreciated asset value when what they really had was a "golf business" and the real estate was worth no more than the value of the business generated.

Golf was used as bait and Wall St. bought it in many cases.

ALL OF THE ABOVE IS JUST IMHO.
mIKE

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