Debt: The Club’s Biggest Hurdle

It’s no secret that debt can be problematic. Whether it be individual consumer debt, home mortgage debt, corporate debt or the national government debt, the requirement to pay debt service is one that often makes financial success for clubs unreachable. Yes, there are instances where debt is advisable, but with private clubs, it represents a real challenge.

At many private clubs, the recent great recession has impacted membership, revenues and budgets, often to the point where services and amenities are reduced, member satisfaction is compromised and sometimes most importantly, upgrades and enhancements (let alone normal maintenance) are passed over in favor of balancing (albeit artificially) club budgets to avoid unpopular assessments. This problem is exacerbated a few years down the road when not only has the club not kept up with the competition and requires capital improvements, but also when membership has likely declined and those that remain are often cool to the idea of further investment in a “sinking ship”.

This situation often brings about the idea that the problems can be rectified through borrowing. By the time many boards realize they need to reinvest in the club, it’s too late and there’s no money to use.

This can be avoided by the establishment of a capital reserve fund. If developed and maintained properly, a capital reserve fund will provide for the replacement of items like roof, HVAC, equipment, irrigation and equipment. It can also be calculated to ensure that money for bunker renovation, green reconstruction and even renovation/modernization is available for the next generation of club members to perpetuate the club. If this isn’t done, debt is often required to catch up – or the club goes into decline, and often fails. I know. This happened at a club where I used to belong.

According to Club Benchmarking (CBI) the median club in the US has debt of about $5,000 per member. At 6% and with a 10 year amortization, that’s $660 per year debt service, per member. Many clubs have much more debt, so you can see the effect on the cost of membership. Only about 25% of all clubs have little or no debt. Often, club debt is the result of the club’s “culture”. I classify most clubs as “owner’s” clubs or “customer’s” clubs. An owner’s club is one where the membership takes pride in the club and treat it like it’s their own. A customer’s club is one where the members act like “customers” and rather than act in the best interests of the club it’s all about the deal and keeping prices low. “Customer’s” clubs are often the ones who choose debt over assessments, often thinking about how the cost can be (at least partially) passed on to future members. “Owner’s” clubs will typically consider options such as capital reserve funds, assessments (sometimes with payment options) or other forms of financing that avoid high levels of debt.

It’s really a choice (like the old Fram Oil Filter commercial) of “pay me now or pay me later”. Often, the debt load on a per member basis will increase as the debt itself causes members to leave. Certainly, every situation is different, but if clubs can see clear to establish reserves that can eliminate future debt, they’ll be much better off in the long run. The problem is that older members (despite having used the facilities for so long) don’t want to pay to replace them. Conversely, the potential for younger members to join the club is reduced as they are reluctant to join an old, tired club, especially when there are alternative choices.

Too much debt is the downfall of many clubs, but it also bears looking into why that debt exists. If it’s because the club waited too long or never implemented replacements and upgrades, and worse, never planned for them, that’s a club that needs to consider some tough decisions. It becomes either pay up or spiral into oblivion. If a club has a positive plan, manages and structures the debt effectively (with some equity form the members) it can survive. But many clubs simply “kick the can down the road” and end up out of business in the end either grown over or as real estate developments.