Can Things In the Private Club World Be Too Good?

Among the things many clubs rely on for capital projects and deferred maintenance is entrance fee revenues. During the past 2 years, spurred by the COVID induced surge in golf, private clubs have filled their memberships, increased dues and entrance fees and many are considering major capital projects put off over previous years. By most accounts, more than half of the nation’s private clubs now have waiting lists for membership. A growing economy, the desire for a safe haven and golf being recognized as a COVID safe activity has turned the club membership world around from just a few years back when many clubs had waiting lists to get out and in some cases offered minimal, if any entrance fee “deals”.

The problem now is that with memberships full, nobody is leaving the club. That’s right, the normal attrition that clubs experience, and depend on so more memberships can be sold isn’t happening. Entrance fee revenue is down, thereby impacting the ability of many clubs to embark on the capital projects under consideration. While many clubs have taken advantage of the strong economy, low (but now rising) interest rates and full membership to fund capital projects, project economics may be impacted by limited membership turnover, especially when entrance fees have been strong. For the longest time, we talked about membership stability being a good thing. I guess too much of a good thing might not be so good.

The math is pretty simple. Let’s say a club has 400 members and a current entrance fee of $50,000. Normal attrition at many clubs can be expected to be +/- 5% per year, or 20 members. If each of those members is replaced at $50,000, revenue available for capital would be $1,000,000 (assuming no payouts for refundable deposits). If only a few members (let’s say 5) leave and are replaced, the entrance fee revenue would only be $250,000.

Removing $750,000 from any club’s budget is significant, even if it’s a high revenue club. The picture is not unlike the current hike in gas prices. Even though some want to blame gas prices on politicians, it’s a simple game of supply and demand. More people are out driving in what they consider a post-COVID era, there’s no Russian oil in the supply chain so reduced supply and increased demand means higher prices. In the club membership world, even though demand is high and prices are increasing, unlike gas, members only buy it once. If they don’t leave there’s no membership to sell.

The thing to watch for in the future is whether attrition and turnover returns to more normal levels and if that creates the revenue for capital projects many clubs rely on. With many clubs’ average age declining, membership attrition could be impacted. However, if a recession were to occur causing inadequate demand for the existing supply, clubs could find themselves in the same situation as just a few years ago where declining demand results in less dues revenue and limited entrance fees.

The moral of this story is that clubs need to adequately plan for capital needs. The best way is through developing a capital reserve study and establishing a sinking fund (A fund in which periodic deposits of equal amounts are accumulated to pay a debt or replace assets; usually designed to receive equal annual or monthly deposits that will accumulate, with compound interest, to a predetermined sum at the end of a stated period of time.) as part of a club’s annual budget. Most clubs don’t do this and that’s why many are unprepared when club infrastructure and components wear out and need to be replaced.

As pilots are taught to “stay ahead of the airplane” club leaders and management need to stay ahead of capital reserves so they don’t get caught empty handed.