Debt – The (not so) Silent Killer – A Case Study

A few months back, I wrote HERE about how much debt is the right amount for clubs. As I said then, there’s no magic formula, but if history teaches us anything, we know from the long golf industry recession that those clubs saddled with excessive debt were among the first to fail between 2000 and 2020, before the COVID surge in Golf and club membership. There are numerous examples of clubs being sold for the amount of the debt, being repurposed for alternative use or simply closing their doors. Recently, Golf Property Analysts provided litigation support consulting services in a bankruptcy case that exemplifies the danger of excessive debt at private clubs. While unable to identify the club involved, the facts of this case should serve as a warning for all clubs of the dangers of excessive debt.

The tune is not unfamiliar. The club, in this case then led by a bank executive built a new clubhouse about 15 years ago, financed by that bank. Like many new clubhouse projects, each of the member factions had their pet projects and a large, elaborate clubhouse was built and the club, generally highly regarded, marketed themselves as “the best in town” and set out for the future. Over time, the excitement faded, and as the membership aged and numbers declined, the club found themselves in a negative cash flow situation, unable to service their debt without “cutting corners”.

As is often the case, assessing the membership wasn’t an option because they needed to attract more members. The club, once legitimately considered the premiere club in the market began a decline, first by cutting the golf course maintenance budget and then by not establishing capital reserves to replace not only the clubhouse items that were beginning to wear, but also finding themselves in a predicament where numerous other major items were coming due for replacement, such as the golf course irrigation system, paving of cart paths and parking areas and replacement of personal property items like furniture and equipment. The club’s debt was nearly twice its gross annual revenue. They stopped making payments on the loan and addressed some of their “required” capital needs. Even the COVID surge in membership didn’t help despite the rest of the clubs in the market being full with wait lists. Revenues (even including PPP funds) declined from 2018 to 2021 and despite fewer members than 2018, revenues only recovered to approximate 2018 levels in 2022.

With several firms in the market focusing on distressed club acquisitions, they figured one of them would save their club from extinction. Problem was, even after aggressive marketing, with revenues at only 60-65% of debt and significant capital requirements, none were interested at any price the bank was willing to walk away from. The property is not suitable for development, so that option isn’t available. Thus, the club filed for bankruptcy protection. While the remainder of the story is yet to be written, there are several lessons to be learned from this situation. Hopefully, there’s a solution that preserves the club.

At some clubs, a “well heeled” member or group of members sometimes enter the picture as a “white knight” and rescue the club from extinction. If the debt can’t be renegotiated that may not be an option.

There are some who’ve hailed COVID as the savior of golf and club membership. For sure, COVID has been a benefit to golf participation, but it’s still too early to tell how long lasting and sustainable the impact will be. I’ve actually heard one pro say that “COVID did for golf what Tiger Woods couldn’t do.” What we’re seeing with the 2022 decline in rounds played could be very similar to the Tiger Woods effect. Golf has always had trouble maintaining players. Will that occur again with a similar decline?

We’ve observed numerous clubs embarking on aggressive renovation plans and incurring substantial debt in the process. Let me reiterate that I am strongly supportive of clubs enhancing and upgrading their facilities – intelligently. I’ve said this many times. However, being too aggressive and incurring too much debt requires only a slight change in economic conditions to cause trouble. It’s like eating too much or driving too fast. Both can be dangerous.

The cost of golf and club membership has increased dramatically. Is it sustainable? Adding significant debt to the equation only exacerbates the problem. If the increasing cost is not sustainable and golfers/members resist, the lean times of not so long ago could return quickly. The debt incurred by many clubs 2 years ago is now much more expensive with rising interest rates. Members seek value in their club membership and no matter how prestigious a club is, when membership no longer perceives good value, many will either go elsewhere or drop golf altogether. It’s happened before and clubs need to respect and acknowledge that it’s the marginal member, who may not use the club that frequently that is the difference between success and failure. Even though we all enjoy the recreational privileges and amenities our clubs provide, like any other business, the club needs the members (customers) more than the members need the club.

Just because one has $20 in his pocket doesn’t mean he should buy a case of beer and drink it all at once. Enjoy it over time. Enhancements and upgrades can be planned and done in phases as the economics permit. Do it smart. Debt kills and no club is bulletproof.