Among the challenges confronting private clubs are the membership rights and obligations of both members and the club. Dennis Hillier, a partner at the law firm of Greenberg Traurig has focused his practice on the legal issues of club membership programs and designed membership programs for over 1,800 clubs throughout the US, Caribbean, Europe and the Pacific Rim. I had a chance to talk with Dennis about some of the prominent issues facing many private clubs today.
Number 1 on Hillier’s list of membership issues is obsolete documentation. He says that documents that do not have the right kind of membership categories and proper (market based) pricing and refund policies that do not work are prominent. Equity and non-equity club provisions rarely address the club’s need for capital, which with most clubs after a period of just 15-20 years or more is significant. Equity clubs have governance issues dealing with voting requirements such as quorums and approvals. Most clubs are doing non-equity, non-refund programs now to avoid the refund liability. Now, “Dues Payers” are the focus, rather than entrance fees, though entrance fees have recovered somewhat of late. With so many clubs experiencing substantial deposit liabilities Hillier says that those clubs trying to rectify the situation have often been able to work things out. Those clubs that have ignored the obligation are the ones getting sued. Hillier recommends using a “funnel concept” separately placing and accounting for entrance deposits to accumulate proceeds from deposits. He emphasizes that communication and transparency are the keys to successful resolution. Sometimes, reorganization, often through bankruptcy is the only option.
With 30 year refundable deposits, one element that has changed is that formerly only 7-8% of the membership will last for 30 years. Now that number is more like 12-15% as people live longer, play golf later in life and continue their membership. Membership documentation is now being developed to turn the deposit into a demand note at the end of the period and fund repayment for 30 days after resignation. One club he mentioned got the members to vote to extinguish the refund deposit liability in order to preserve the value of the surrounding homes.
I asked Hillier why equity clubs haven’t been as popular in recent years. He said that in the case of development clubs the turnover becomes difficult because of club facilities often needing updates and capital improvements. Only when developers really want out of the club business to avoid the upgrades and the potential operating losses.
With respect to new membership structures where a member can recover their investment, Hillier says: “The basic problem with refundable deposit programs is that the refund obligation is really debt. It has to be debt in order to get the favorable tax treatment. As a result most owners are going with non-refundable initiation fees which is taxable income when received. This is the norm but some hybrid models proved for repayment under certain circumstances. In that case the owner gets a tax deduction when repayment occurs. It is important to have deflation protection. One possible option is to give members a non-voting interest in the Club entity, which gives the developer more flexibility in structuring refunds. If the club isn’t sustainable, non-property owners (those living outside the gate) don’t want to own the club.” Hillier recommends redoing membership categories that make economic sense to members. He estimates that 50% of members’ decisions relating to the club membership related to is preservation of home values. To many, especially older members, their home is their savings account equal to maybe 5 years of living expenses.
What I took away from my conversation was (not surprisingly) there is no “one size fits all” solution. Some clubs carry operating deficits, don’t have enough members and may be structured incorrectly in their membership categories. Often the facilities haven’t been updated and they don’t have any capital. Sometimes, the members don’t trust the board or the club owner. The solutions can be anywhere from a “soup to nuts” upgrade to ceasing operations, or anywhere in between. Some of the considerations are zoning and restrictive covenants, environmental issues or getting enough votes to do something. When the members have a say, they want to know what they get out of the deal.
Clubs and especially the sale of clubs can be a very emotional issue. Understanding the challenges, hurdles and most importantly the options to move forward is critical. Lawyers like Dennis Hillier help develop that understanding and guide clubs and members through the process.