As I wrote last July, Homeowners Associations (HOA’s) have a vested interest in the financial success of clubs and golf courses which often surround their communities. At Golf Property Analysts we seem to be hearing more and more from HOA’s concerned about residential property values that can and are declining as fiscally stressed golf and country clubs exhibit more and more depreciation and become less desirable as community amenities.
Various studies, as discussed by Wyman and Sperry in the Spring 2010 Appraisal Journal suggest a wide variance in premiums for golf course lots ranging from 21% to 75% with the most relied upon study reporting a premium of 39%. Furthermore, private clubs seem to provide as much as twice the premium as daily-fee and semi-private clubs.
Why is this important? Especially with those courses and clubs run by for-profit operators, budget cuts become likely as revenues drop that diminish the quality of the golf course. The quality of the golf course is observed to have a direct impact on the premiums for adjacent properties. Thus, if a modest home of $400,000 experiences a 10% decline in value, that’s a loss of $40,000 to the property owner. If there are 200 homes in the community, the total loss in value is $8 million! Since the (possibly already declining) golf facility may not be worth $8 million, the HOA has a vested interest in stepping in.
The challenge for HOA’s is how to preserve the club, which may still be owned by the developer, especially in communities not yet built out, or by a for-profit operator who may want to sell, hasn’t been maintaining the club, has the community in a compromising position and may want an unrealistic price. Some owners threaten to close the course, which could be a disaster for the community. The HOA needs to do its homework. There could be a third party owner solution but often the HOA needs to step in and acquire the club.
In many situations, especially those with deferred maintenance, the value of the property is depressed and there is a limited universe of potential buyers. The HOA needs to do its due diligence and present itself as the only option for the owner seeking an exit. This is best accomplished through understanding not only the market value of the property and the limited buyer pool, but also the extent of the deferred maintenance. In some cases, the golf course site represents storm water detention field or even a sewage area. These also require maintenance that is often overlooked.
It is critical to examine the golf course infrastructure. If revenues have declined, cart path maintenance, irrigation updating and rebuilding of greens, tees and bunkers is likely not to have been accomplished. Equipment may be old and tired and the capital expenditures required can be significant. Additionally, these situations often see further declining revenues from limited marketing investment and poor conditions.
The HOA should retain the services of a team of experts, including:
- An experienced golf course appraiser/market consultant to estimate the value of the property and to explore its market potential and market positioning;
- An operator/management firm to estimate costs of operating the property;
- An agronomist to evaluate the golf course infrastructure
Once their work is done, the HOA can make informed decisions and negotiate with ownership on a more level playing field. All situations are different, but here are some ideas that may help:
- Establish your goals and objectives
- Educate homeowners about the impact of the club on property values
- Develop a plan for acquiring control
- Have financing in order
- Be prepared to operate the club, either by hiring professionals or by retaining third party management
- Explore the possibility of partnering with professional management in ownership
All of this can result in a situation with both a motivated seller and a motivated buyer. There is likely no way to avoid the dynamic of ownership holding the upper hand given the large potential impact on property values in the community. This could result in the HOA having reason to pay in excess of market value for a course. However, in some situations, the HOA is the most likely buyer, and if there is reason to believe that the pool of potential buyers is limited, the HOA can level the playing field. Knowing where the “skeletons are” can help.
Golf courses and clubs are great amenities and clearly enhance the value of adjacent homes. However, when those golf course decline, the damage can be significant. Do your homework.