Your Club’s Tax Assessment in an Evolving Environment

Next month (February 16th), I’ll be presenting a webinar on club real estate tax assessments for the National Club Association. Club tax assessments figure to be most interesting in the post-COVID environment we’re all navigating right now.

Over the past (almost) 3 years, we’ve observed the fortunes of clubs, and golf in general, improve dramatically as participation has increased, many private clubs now have waiting lists and revenues have increased. We’ve also experienced high inflation in the past year which has resulted in dramatically increased interest rates as well as higher operating costs. Despite, in many cases, enhanced revenues some clubs are still striving to maintain positive cash flow and many have borrowed to complete capital projects delayed by the sustained club recession from about 2002 to early 2020.

What does this mean for your real estate tax assessment? While a club’s tax liability may or may not have gone up, there are many factors that would suggest that it could be unfairly over-assessed. Most (not all) states employ an equalization rate system which is designed to relate the property’s assessed value to actual market value, since assessments don’t change frequently. Therefore, as property values (generally) have increased dramatically in the past few years, the equalization rate, which is normally calculated from actual property sales and their assessments has likely decreased in many instances. This means that the market value implied by a property’s assessment is higher, maybe higher than the actual market value. In other words, the value on which your property is assessed may have gone up even without an increase in your assessment, exclusive of any changes in the tax millage rate that may or may not have occurred.

Many clubs have undertaken capital projects which could also be targets for increasing assessments, which are often based on the cost of those improvements, but may not contribute to the market value of the real estate.

Even though revenues may be up and play or membership increased, two other elements contribute to a proper ad-valorem tax assessment valuation;

  • Capitalization Rate (and Gross Revenue Multiplier)
  • Allocation of Real & Personal Property

With any appraisal of an income producing property, once the revenue and expenses are analyzed, they have to be converted into an indication of value. This requires capitalization (of Net Operating Income) and multiplying the gross revenue by an appropriate Gross Revenue Multiplier (GRM). With golf properties, there’s one more step.

Since real estate taxes can only be levied against real property value, and golf courses and clubs are analyzed, bought and sold as going-concerns, the personal property (tangible and intangible) that is included in golf property sales (equipment, merchandise, fixtures, etc.) must be allocated to develop an estimate of value for the real property only.

In the current environment, interest rates have increased dramatically which produces upward pressure on capitalization rates and downward pressure on GRM. Combined with an allocation of real and personal property, this could produce an opportunity to contest the tax assessment.

It probably goes without saying that should the club have considerable deferred maintenance, such as deteriorating cart paths, bunkers and dysfunctioning greens or drainage, and if the irrigation system is at or nearing the end of its useful life, this can enhance the potential for contesting an assessment.

Knowing your assessment, what it means and understanding market dynamics can save a club significant dollars. Whether corrected or not, knowing the cost of and having reliable cost estimates for all items of deferred maintenance can aid tremendously in this process.