With many clubs embarking on aggressive capital improvement plans, now is probably a good point in time for the golf industry to consider the differences between cost and value.
As stated in The Appraisal of Real Estate, 15th Edition: “Some people use cost and value synonymously, but appraisal practice requires more precise definitions. The term cost is used by appraisers in relation to production (development), not exchange (buying or selling). Cost may be either an accomplished fact or an estimate. The construction cost of components or of an entire building normally includes the direct costs of labor and materials as well as indirect costs such as administrative fees, professional fees, and financing costs. Development cost is the cost to create a property, including the land, and bring it to an efficient operating state. Development cost includes acquisition costs, actual expenditures, and the profit required to compensate the developer or entrepreneur for the time and risk involved in creating the project.”
Further, the 15th Edition states: “Value can have many meanings in real estate appraisal. The applicable definition depends on the context and usage. Value is commonly perceived as the anticipation of future benefits. Because value changes over time, an appraisal reflects value at a particular point in time. Because value is an economic concept, the monetary worth of property, goods, or services to buyers and sellers is an expression of value.”
Why is this relevant to golf courses and clubs?
At member-owned private clubs, members or their boards often make decisions on capital improvements based entirely on the anticipated costs of the improvements and the membership’s willingness to pay for them. Since the club may be unlikely to be sold, whether those improvements contribute an equal amount to the club’s market value may not initially be considered. However, the impact of those improvements on the club’s market value could be important. There are two reasons for this.
When significant capital improvements are made clubs are typically issued a building permit which usually lists the cost of those improvements. Accordingly, tax assessors use those costs in re-valuing the club with little or no consideration as to whether the club enhanced its income/expense position (market value) and/or by how much. If the improvements made don’t add to the market value (value in exchange) the assessment shouldn’t change, assuming it was accurate to begin with. Since most clubs reinvest at costs exceeding the contribution to market value, this can have a significant impact on the real estate tax assessment and resulting tax liability.
This dynamic is also important if the club is considering debt financing for improvements. Again, if the improvements don’t contribute an amount equal to or greater than their cost, it can impact the club’s ability to borrow using the property as collateral. In the case of an investor-owned club or course, this is even more important since the investor requires a return on and return of capital invested. The member-owned club may not have such a requirement, but it’s ignoring that cost/value relationship that has caused many a club to fail and ultimately be acquired by investors, often at steep discounts compared to cost.
Golf courses typically cost more to build (or improve) than the value created. Since cost and value are NOT synonymous, it’s important for the club or the investor owner to understand the differences as they relate to their real estate tax liability and borrowing capability.