A few weeks back, I wrote about establishing a strategy for selling your golf course. Many of our clients chose to wait, seeking to find the top of the market. That time may have passed. Thus, developing a strategy for current market conditions is necessary.
I want to focus on two areas:
- Deferred Maintenance
- Seller Financing
At nearly every golf property I visit to assist a potential seller, there are items of deferred maintenance. The three most common are irrigation, cart paths and bunkers.
The American Society of Golf Course Architects publishes a Life Cycle Chart for estimating the life cycle of key components of a golf course. Often, irrigation systems have aged to a point within or exceeding the expected useful life (10-30 years) and prudent buyers are likely to consider the near term replacement of irrigation in any offer. Thus, if you haven’t replaced pumps, pipes, heads or electronics since construction of the course, or installation of the system, be prepared to hear about it.
Cart paths, especially asphalt paved paths have life expectations of no more than 10 years (concrete can have up to 30), according to ASGCA. If cart paths are bumpy, have potholes, have buckled from tree roots or are simply rough, a significant impact on sale price can be expected.
Bunker sand can be expected to last up to 7 years and these need to be replenished regularly. While some of the modern bunker systems can help, bunker rebuilding is typically a significant cost that buyers take advantage of. Along with some of the other golf course components, it pays to keep them in tip top shape when time to sell comes.
An item not often talked about and not included on the Life Cycle Chart is trees. Tree management is something often deferred in favor of balancing budgets. However, lack of good tree management can inhibit turf growth and conditions and cause safety problems as the trees get bigger and heavier.
With interest rates rising, I believe more sales transactions, especially in the under $5 million range will require some seller financing to get done. Look at it this way. Assume a $4 million sale with 70% financing. Debt service on a $2.8 million loan at 4% for 20 years would be $16,967 per month ($203,000/yr.). With interest rates now up in the 7% range, that same annual debt service would be $21,708/mo or $260,500 per year. A cash equivalency calculation shows us that to achieve the $16,967/mo debt service at 7% would only allow borrowing $2.2 million, resulting in a decline in value of roughly $600,000. In other words, the same course that was worth $4 million when interest rates were at 4% is now (at least theoretically) worth only $3.4 million when borrowing costs 7%.
Given that many banks may not even consider golf loans, sellers should be prepared to assist their buyers in financing the purchase or face the prospect of declining values. IMHO, many golf course sale transactions during the foreseeable future will include some element of seller financing, where possible.
I’ve been working with several sellers of late considering their options on how to approach marketing their properties. There is no single solution as each situation is different. Not only is the property itself a consideration but the goals of the seller are a key element of developing any effective strategy to sell a golf course.