Refundable Club Membership Deposits – The Economics

About 30 years ago, when golf development was booming, many new private clubs focused membership development on the concept of refundable membership entrance deposits. The idea was that developers could use these deposits to fund development, avoid the taxable income associated with initiation fees and pay out resignations on a schedule favorable to the developer or at the end of a 30 year period of membership. Unfortunately, the club membership market softened considerably, entrance fees and deposits declined, members wanted out and developers found themselves with a large liability on the balance sheet, members seeking refunds and scrambling in many instances to generate enough memberships to fund operations of the club.

While many clubs have since recovered to some degree thanks to the COVID pandemic, the Membership Refund Liability (MRL) remains an issue at many of the clubs that chose that strategy and impacts them in several ways.

Fundamentally, the balance sheet liability that exists is the root of many challenges these clubs face. Accordingly, any potential buyer sees that as a potential obstacle and a weight on market value. If, during the next 15-20 years a potential buyer is liable for millions in membership refunds it only stands to reason that the concern is significant.

As appraisers, we have developed a mathematical procedure to estimate the present value of that liability by scheduling the “maturity” of each membership, estimating a discount rate and calculating the present value of the liability associated with each membership. The sum of those values is then the present value of the refund liability, which while usually much less than the “face” value of the memberships can still make a significant impact on the value of the club. There are variables, however.

First among those variables is the membership turnover rate. In most cases, if a member seeks to resign prior to the 30 year maturity (which most do), there is typically a provision which states that for each 4 or 5 memberships sold (sometimes limited to those of the same category), 1 resignation is paid out. In theory, this protects the developer from a “run on the bank” that would cripple the club financially. There have been numerous lawsuits pursued by disgruntled members, some of which have succeeded, to recover their deposits. Another issue arises when the buyer of a club with a MRL simply decides to declare bankruptcy for the entity and wipes out the liability. More lawsuits ensue.

Many clubs have converted from refundable deposit memberships to non-refundable entrance fees. These, of course bring with them a tax burden to the developer and typically a reduced entrance fee as compared to the refundable deposit, which carries the possibility (if not the promise) of the member recovering their funds in the future.

There was a period when some looked at club membership as an investment. I once had a prospective member ask me about “ROI” (Return on Investment) to which I replied that he shouldn’t join if he was looking at his membership as an investment. The Lower priced, non-refundable memberships seem to have become more popular and as clubs take advantage of increased interest during the COVID era these funds can be used for a variety of deferred maintenance and capital improvement projects.

As clubs get closer and closer to the maturity of many memberships, funding the refunds will be a challenge for many. At lots of clubs, the money just isn’t there. At some, members are simply asked to forgive the obligation. At others, a agreement is worked out between the club and members at a percentage of face value. There’s no one right answer and the problem won’t just go away.