The past 2+ months have been an unprecedented challenge in our country. As of today, there have been approximately 1.7 million confirmed cases of Coronavirus and nearly 100,000 deaths, with no clear view of the end of the pandemic. Many iconic businesses are filing for bankruptcy protection and the crisis has changed our lives, interactions and practices, in some instances permanently. These are unusual times.
The golf industry is not immune to the impact of COVID-19, having, like most other businesses, experienced shutdowns and restrictions that will most surely make 2020 a year nobody in golf will forget for a very long time.
However, golf course owners and clubs have some unique opportunities to cushion the blow. With golf an activity conducive to social distancing, after re-opening we’ve seen many golf courses and clubs experiencing tee sheets at or near capacity as those who can’t go to work have opted to play golf with their newly found spare time. This is good, not only to cushion the impact of Coronavirus, but also to introduce new people to the game, bring some that left the game back and hopefully spur long term growth in golf participation. Whether or not this occurs remains to be seen.
Regardless, even with the packed tee sheets, golf courses and clubs are most definitely experiencing negative financial impact. In some cases, tee time intervals are longer, cart usage is limited to one rider per cart and there are states where groups are limited to 2 or 3 players. Food & Beverage revenues are down significantly, if not eliminated by the restriction to take out only. Weddings and other functions have been rescheduled or cancelled and in many cases pro shops are closed to players (potential customers) severely limiting the sale of golf equipment and logo merchandise. After anticipating a successful 2020, some in the golf equipment business are signing the blues.
Golf course owners and clubs have several options to help survive the pandemic and resulting impact on business.
- Real Estate Tax Assessment: Have a professional review your tax assessment. In many instances, tax assessors will have valued your golf course or club in a manner not reflective of actual market value. Often they rely on a cost approach or use an income approach that reflects the value of the going concern, when only real property should be taxed. Even using the sales comparison approach, assessors often fail to acknowledge that golf properties sell as going concerns and the personal property has to be allocated to arrive at an appropriate taxable market value for the real property. If the club has been impacted by Coronavirus, it’s likely that there’ll be some recovery time that also needs to be considered in the valuation analysis. If your property has deferred maintenance, document it with cost estimates to ensure that the valuation for tax assessment purposes is consistent with how a prospective purchaser would evaluate the property.
- Estate Planning: Many golf facilities are owned by families, partnerships or other entities that require estate planning. Now could be the time to gift properties (of all types) to your heirs with values likely being impacted by Coronavirus. Not only can one reduce the value of their estate to be taxed upon death, but by gifting property when values are low, reduce any gift taxes that may be applicable.
- Partnership Buyouts: Now might be a good time to buyout those silent partners who’d like to move on. Most partnerships have buy-sell agreements that require appraisals that would have to consider the present state of the market. If the silent partner is eager to sell, now could be a good time to buy.
- Conservation Easements: Conservation easements offer the golf property owner a vehicle to monetize the development potential that a site may have while preserving open space and continuing operation of the golf course or club. Historically, the IRS has scrutinized conservation easements on golf course properties intensely, but a recent US Circuit Court of Appeals decision classified golf courses as a sufficiently “natural habitat” so as to more easily qualify for the deductions associated with open space conservation easements. Though a complex and costly process, it may be an attractive option for owners who can benefit from the tax deduction.
- Alternative Use: It seems quite reasonable that in these times of uncertainty, that some golf facility owners and clubs will consider ways to adapt to whatever the “new normal” brings. Golf properties, being largely inefficient uses of land and buildings will seek new ways to use the excess land some have and the often unused building space in many clubhouses. At least temporarily, large ballrooms and banquet facilities will go unused as people practice social distancing and avoid crowds. In the meantime, large spaces still require heat, light and other fixed costs. Could golf simulators use this space? For in-club dining will these larger spaces be required to achieve appropriate social distancing, if that practice endures for a long period?
To quote Forest Kerr; In sum, the advantage of investing in commercial real estate in the near-term may be two-fold. Excluding troubled retail and hospitality asset classes, low borrowing costs will attract investment and preserve value by preventing continued cap rate expansion. Second, some price disagreement between buyers and sellers may lead to slight liquidity discounts, attracting investors who perceive this to indicate more of a buyer’s market. The degree to which commercial real estate will remain an attractive investment will rely on timely and successful economic restart and short-term disruption not translating into long-term economic damage. The real question here is whether golf falls in the commercial real estate class or the troubled hospitality asset class. My guess is that it’s some of each.
Accordingly, golf course owners and clubs will need to use all the tools available to make the economics work, use their properties more efficiently and broaden market appeal.