Last week, I had conversations with two veteran golf industry friends who’ve bought numerous clubs over the years about how they evaluate acquisitions. Both conversations began with me asking how they (as frequent buyers) treat the anticipated capital costs required when a property has capital expenditure needs (capex) like deferred maintenance or aging infrastructure (irrigation, cart paths, bunkers, roof, etc.). As appraisers, we’re often taught that deferred maintenance (as per the Dictionary of Real Estate Appraisal) is “Items of wear and tear on a property that should be fixed now to protect the value or income-producing ability of the property.” Though it sounds simple and appears to mean that the cost to cure is deducted directly from the value conclusion or price, it’s not that simple in the real world of golf property purchases and sales.
In the sometimes theoretical world of appraisal, if an irrigation system, for example, was past its presumed useful life it would indicate a straight deduction from value of the replacement cost of the irrigation system. However, an appraiser’s job is not to dictate value based on theory, but rather to interpret and reflect the actions of market participants. According to my experienced friends, not only do different companies/investors treat such conditions differently, but the specific circumstances also dictate decisions, which can vary with market conditions.
The economic analysis of any golf property usually starts with a compilation and analysis of historical gross revenues. Depending on what is being valued and how the appraisal is being used, gross revenues may or may not include membership entrance fees (private clubs). Some instances call for only operating revenues while others require all revenues to be included. For instance, if only real property value is sought (like in a tax assessment valuation), membership entrance fees might not be included, as they are not necessarily considered as income attributable to real property. Gross operating revenues for a golf property typically include Golf (dues, green fees, carts), Food & Beverage, Pro Shop, Other Sports and “Other” Revenues. At clubs where members can be assessed, we typically include those assessments in the calculation of dues, which can include capital dues.
Inherent in the analysis of any property is the determination of whether market conditions at the time in question are more favorable to buyers or sellers. In a buyer’s market, sellers are likely to be more flexible and willing to acknowledge their property’s shortcomings, depending on the level of their desire to sell. Conversely, in a seller’s market, buyers are more likely to accept certain conditions to make a deal. Like the example above on an aging irrigation system, one of my buyers indicated that (in a seller’s market) they would be more inclined to repair as necessary in order to avoid the up front cash hit of replacement, but would budget more annually for repairs and maintenance and for the annual contribution (reserves) to capital expenditures for replacement in the future.
Since we often hear the terms EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) and NOI (Net Operating Income) it’s important to understand what goes into each (and what doesn’t) since those numbers (either historical or anticipated) are usually the basis for estimating value of income producing properties. Importantly, they are NOT synonomous.
Fundamentally, the difference between EBITDA and NOI is that EBITDA typically does not include expense allowances for management or reserves, while NOI does. Thus, if a buyer indicates that they’ll pay a multiple of EBITDA for acquisitions, the multiple of NOI is likely to be a bit higher, because NOI is typically less than EBITDA, having had deductions for management and reserves. If, as suggested above, expenses include a higher number for repairs and maintenance and/or reserves both EBITDA and NOI would take a hit.
In addition to management and reserves, it was emphasized that some buyers do not include an allowance for the cost of equipment replacement or leasing in either calculation while some might include it in their maintenance budget as opposed to in their reserves. The bottom line is that not everybody calculates EBITDA and NOI the same way and that the multiples of each used for conversion to value can be impacted. The first question to be asked needs to be what is included and what isn’t.
On the expense side of the ledger, there can be many inconsistencies between how clubs list their operating expenses. In addition to what is or isn’t included in maintenance budgets, General & Administrative (G & A) often has a wide variety of expenses “buried”. For private clubs, the Standard System of Club Accounts attempts to standardize these terms but clearly we’re not there yet.