According to The Appraisal of Real Estate, the principle of contribution states that: “The value of a particular component is measured in terms of its contribution to the value of the whole property or as the amount that its absence would detract from the value of the whole.” To reiterate the famous Warren Buffet quote, “cost is what you pay and value is what you get.” The value of an item does not necessarily equal or exceed its cost. As this relates to golf courses and clubs, improvements like an irrigation system upgrade, the addition of a practice facility or pickle ball courts or upgrades to a clubhouse don’t necessarily contribute to the value of the property an amount equal to their cost. Rather, the improvement’s dollar contribution to value is measured in terms of its benefit or utility in the market which can be converted to market value.
When the golf property in question is investor-owned, simple economics dictate that this principle be applied in the decision-making process on renovation projects. In many cases, it’s a question of preserving value as competitive clubs around you upgrade and remaining competitive is primary to staying in business. In other cases, it’s a desire to upgrade and improve the property and enhance revenues. In the golf course business this can be a challenging problem when considering the costs of various renovation projects and how much they can contribute to the property’s financial performance. Upgrading irrigation, rebuilding bunkers & greens, repaving cart paths are not always elective and sometimes fall under the category of deferred maintenance, which requires immediate attention. How each of these situations, along with many others are addressed can be the difference between a renovation project’s success or failure.
First, let’s separate the two categories of improvements, mandatory or elective, which I like to call “required or desired”. Many golf course renovation projects begin with a need to update irrigation systems, cart paths, bunkers, greens and other golf course or building components like roofing, HVAC and decorating. If these are in a state of disrepair, dysfunctional or otherwise require capital, they would typically fall under the “required” heading and be considered deferred maintenance, which is defined by The Real Estate Appraisal Dictionary as: “items of wear and tear on a property that should be fixed now to protect the value or income-producing ability of the property”.
Conversely, “desired” items might include adding or expanding a practice facility, modernizing the golf course with new tees, redesigned bunkers and greens or the addition of amenities and facilities like a fitness facility or pickle ball courts, which are elective and most certainly subject to consideration of the principle of contribution.
While often the “required” items cannot be further deferred, there’s really no choice about doing them, so while the cost may not seem like it contributes adequately to value, not addressing deferred maintenance in a timely manner can most certainly diminish value.
The analysis of “desired” or elective items can be more complicated, depending on a club’s ownership, tax status (for-profit or not-for-profit) and most importantly, its goals. When an investor-owned, for-profit facility analyzes improvements, it’s imperative that those improvements contribute to value an amount greater than or equal to the cost. This is elevated in importance when a potential sale of the property is planned in the foreseeable future and ownership is developing an exit strategy. For member-owned or not-for-profit clubs, the analysis is more complex and requires consideration of whether or not the existing members are willing to pay for the improvements desired, or if the club can generate the necessary additional revenues through dues increases, additional membership development, or a combination thereof to cover the additional cost associated with the improvement. In that case, it becomes an analysis of how much more can be charged and/or how many more members having the enhancements can generate. Can the proposed improvements be self-sustaining from the realistically expected additional revenues?
The answers to these questions often come down to what the market will support, which introduces the principle of substitution to the discussion. According to The Appraisal of Real Estate, the principle of substitution states that: “when several similar or commensurate commodities, goods, or services are available, the one with the lowest price attracts the greatest demand and widest distribution. This principle assumes rational, prudent market behavior with no undue cost due to delay. According to the principle of substitution, a buyer will not pay more for one property than for another that is equally desirable.” While there are most definitely factors golfers consider besides price, the perception of value to the consumer (member or fee golfer) is always present. In the golf world, given that it’s a hospitality business, the quality of the golf course, playing conditions, access and amenities are only part of the equation. As Will Guidara says in Unreasonable Hospitality, “nobody will remember what you said or what you did, they’ll only remember how you made them feel.” That is very true in the golf business as well. Even if in some markets “feeling better” is the simple fact that a given option is less costly, that can be cause for substituting with an alternative. The principle of substitution implies that it’s critical to make members or customers “feel better.”, whether that be a reduced cost, enhanced quality, exclusivity or some combination thereof.
Next Tuesday (1/21/25) at 1:25 PM, along with Ben Blake of Kemper Sports, I’ll be presenting on this topic at the NGCOA Golf Business Conference and look forward to a spirited discussion resulting in golf course owners, and me, learning new ways to enhance golf property values, either for potential sale or long term operations.
