HOA’s and the Golf Course – Developing a Strategy

Of particular interest to us at Golf Property Analysts recently are community golf courses and clubs, where the golf course or club are integrated within the community and where homeowners have often purchased homes at a premium price based on the concept of having the golf course amenity there in perpetuity supporting the value of their property.

Some of these golf facilities and clubs are owned and operated by the Homeowners Association (HOA) or Property Owners Association (POA), some are managed by third parties and others are owned by investors.  Still others are owned by the members, who may be homeowners or not.  In each and every case, regardless of ownership, there are multiple economic interests in the financial success of the golf course or club.  The investor seeks a profit.  The members (if not-for-profit) want to control costs and avoid losses.  The HOA/POA desires to operate profitably, or at least not at a loss and preserve the amenity that supports surrounding property values.  A long term strategy is necessary for all interests.

We’ve observed a number of community golf facilities owned by investors struggling financially.  When clubs struggle, maintenance budgets are often reduced and golf course conditions decline. The very amenity that residents often paid a premium for becomes a liability, potentially impacting the resale value of the surrounding homes.  In two instances, we observed investor-owners seek subsidies from the HOA in the form of monthly payments to be applied to the maintenance and improvement of the golf course.  Such an arrangement is frought with uncertainties and potentially creates motivation for the HOA/POA to acquire the club.  If so, what’s it worth?

The definition of market value includes the phrase “assuming that neither (buyer or seller) is under duress”, which seemingly indicates that if an HOA/POA becomes atypically motivated, it could be considered a purchaser under duress.  For the HOA/POA to avoid or minimize this disadvantage requires being fully informed to facilitate negotiations on as level a playing field as possible.  Knowing market value is one element, along with completely understanding the physical condition of the property.

Among the items often neglected by financially stressed golf courses are the visible ones like:

  • cart paths
  • bunkers
  • parking lots
  • building components (roof, HVAC, kitchen, etc.)
  • swimming pools
  • tennis courts
  • turf conditions

and the invisible ones like:

  • irrigation
  • drainage
  • pond issues
  • equipment condition

These and other issues, including a comprehensive understanding of the competitive market dynamics and the operating economics can be critical in making informed decisions and understanding exactly what is being acquired and what surprises may be in store.  In some cases this knowledge may even assist in negotiating a purchase price.  At this point, the focus may turn from market value of the club to investment value for the HOA/POA.  Investment value is defined as: The value of a property interest to a particular investor or class of investors based on the investor’s specific requirements. Investment value may be different from market value because it depends on a set of investment criteria that are not necessarily typical of the market.  Certainly, the HOA/POA has a potentially more significant interest in the club than other buyers due to the impact on home values.  The simple math is that if decline or demise of the club will reduce home values by an average of say, $50,000 and there are just 200 homes in the community the loss in value can amount to $10 million.  Would it make sense for each homeowner to invest $20,000 ($4 million) to preserve that value?  Even if the market value of the club is $2.5 million?

Every HOA/POA needs to develop a strategy related to the community golf course/club.  It could simply involve encouraging membership in or use of the club, subsidizing the club to preserve property values or acquiring the club as an asset of the HOA/POA.  Having full control of the club ensures that decisions relevant to its operation will always be made with the preservation of community property values a primary consideration.  Informed decisions are best and assembling the right team of advisors is the best way to formulate an effective strategy.