A little more than a year ago, I posed the question “as to whether the cost of golf was sustainable in the post “The Cost of Golf – Is it $ustainable?” Last week, Frank Vain shared with me a clubhouse project with a cost estimate of $1,500 per SF! A friend recently told me his club was planning a new maintenance facility at a cost of $8 million! At this rate, surely the cost of golf, especially at private clubs is unsustainable. Recently, I was interviewed by a writer on the topic of how golf course architects can impact the return on investment (ROI) of golf course development or improvements.
I am an enthusiastic advocate of clubs reinvesting in their facilities. I grew up at a club that didn’t and it doesn’t exist anymore. Lately, however, with the COVID spurred surge in golf and club membership, many clubs think they’ve become “bulletproof” and we know that it’s not uncommon for clubs to overspend. There are numerous reasons.
First and foremost among them is what I call “The Space Race”. Most private club members like to show off and brag about their clubs. Golf, and club membership in the US is perceived as a status symbol. Accordingly, clubs often exceed reasonable budgets for improvements and enhancements to the golf course. clubhouse and other facilities, often in search of recognition and prestige. Sometimes, this occurs because overzealous club leaders simply seek to brag about how much was spent and opt for “bells and whistles” that aren’t necessary. Sometimes, golf course and clubhouse architects sell the club on the need for over-improving the club’s facilities (more on this later). In other situations, clubs that have neglected capital replacements have to invest not only in the improvements, but also in correcting deferred maintenance.
In many of these situations, the killer is debt. With interest rates at 30 year highs the debt often used to fund these improvements is more expensive than just a couple of years ago when many projects were being planned and the cost of membership at some clubs is soaring, partially due to the excessive debt. While the average cost of club membership has tracked in a similar manner to inflation, with clubs in a recent survey we did averaging about 4% per year in recent years, there are some clubs, especially with significant debt, where the cost of membership has increased much more dramatically, with one example nearing a 40% increase in just 2 years.
The critical question, IMHO, is where does the bubble burst? Most certainly, it varies from club to club and market to market. There is no dispute that among the top earners, wealth has increased and price resiliency exists. Moreso at some clubs than others. However, even the the “upper tier” clubs could become vulnerable if the cost of membership rises to the point of the infrequent user member asking him or her self if it’s worth it. When economic fortunes decline, so does club membership.
The best architects (golf course & clubhouse) want their projects to be successful. Accordingly, they’ll be sensitive to not only the cost of the project, but also the economics. Clubs are well-advised to consider developing a “wish list” of improvements, establish a budget and defer projects that don’t fit into the budget. Often, an improvement project can be phased to allow those elements that produce cash flow to be done first allowing those that don’t to follow and be funded. This budgeting can start with an appraisal of the club, as if improvements are complete. Additionally, an analysis of the club’s culture should be made to accurately and realistically assess the appetite of the membership for absorbing the increased costs.
“How much is too much?” This question can be answered several different ways. In the appraisal profession, we subscribe to the theory of contribution which suggests no cost should be incurred that doesn’t contribute an equal or greater amount to the value. While a good place to start, private clubs aren’t always concerned with their “market value” because they’re not anticipating a sale. However, they most certainly should be concerned with the value in membership, the cost of which is likely to increase with improvements to the club.
The bottom line here is that clubs should most definitely reinvest in their facilities and move ahead in making the club better. Few (if any) clubs are immune to financial distress and excessive debt is the often the primary reason. Thus, planning those improvements with an eye toward value, not just cost is critical. How much is too much? As Warren Buffett said “Cost is what you pay – value is what you get.” Plan accordingly.
