While golf courses and clubs have benefitted during the past three years from the “COVID surge”, since early 2022, the Federal Reserve’s rising interest rate policy has impacted not only the cost but the availability of debt financing for many golf courses and clubs, despite strong performance in many cases.
Prior to 2022, many golf property loans were available at interest rates of 6%-7% or less. The 2022 year-end survey of the Society of Golf Appraisers indicated an average interest rate of 9.2%. Additionally, it had been generally understood that loan to value (L/V) ratios, which had been often as high as 80% are now averaging 65% of appraised market value (or less) and many banks that had exhibited renewed interest in golf loans are taking a pass.
Combined with the renewed scrutiny on banks and their lending practices, it stands to reason that all clubs and golf facilities will require either debt from alternative sources to commercial banks or significant equity, which to member-owned clubs means assessments of the members. Never a popular thing.
This can have a significant impact on those clubs and courses implementing master plans, addressing deferred maintenance or otherwise reinvesting in their properties as a result of less debt capital being available. None of us knows what the future will hold. My sense has been and continues to be while some of the surge is sustainable, that aggressive improvement plans are best considered with limited debt. This typically (at member-owned clubs) means assessments. Assessments typically involve a vote of the membership. Many club boards can spend without member approval by borrowing, but not if there’s an assessment. This means boards can implement their “pet projects” whether they make sense or not.
How do clubs, especially those with deferred maintenance move forward? Some improvements are “required”, and have already been deferred for some time. In some cases, recapitalization is translated to a sale of the club. While members often resist this idea, it can be a savior of the club and include the implementation of necessary (as well as some “desired”) capital improvements. There are several firms that have made acquisitions of these clubs their primary focus. While the members may no longer own the club, they still have their “playground” and there’s not only no debt, but also typically no assessments.
As interest rates have increased on adjustable rate mortgages, the debt service clubs have planned for has dramatically increased and some clubs have pumped the brakes on future plans in favor of paying down the existing debt where possible. This is most advisable in many cases. As I wrote several months ago debt is a (not so) silent killer. However a club calculates what is an appropriate amount of debt, the fact is that it must be manageable and the membership should “buy in”. If not, the club has a bigger, long term problem that could impact even the best and seemingly strongest of clubs.
As a former member of a club that failed and closed because they resisted doing capital improvements, I’m a strong proponent of continued enhancements. I’ve also seen (first hand) clubs invest considerable sums in improvements, sometimes leaving the members asking “where did all that money go?” As an appraiser/consultant, often serving as the lender’s “eyes and ears” on improvement project or the club’s advisor, it’s often my job to advise on the “go-no go” decision on an improvement project. I see clubs with limited or no capital reserves, unprepared for future improvements and I see some with elaborate capital reserve studies and plans that sometimes seem not only excessive but also unrealistic.
If, for whatever reason membership declines, the club could be “under water” quickly from the debt.
Funding club and golf property improvements is an ever changing and complex landscape. Projects need to be thoroughly planned, vetted and monitored. There are often cost overruns, unauthorized “hands in the till” and missed deadlines. All of these expand the project cost