Michelle Tanzer is a partner with the law firm Nelson Mullins. She’s practiced for 30+ years focusing on the private club and related hospitality industry. I had the chance to speak with Michelle about some of the most prominent problems facing private clubs and solutions to those problems. Her approach to the challenges of the club industry is both well-informed and emphasizes outside the box thinking. She understands the club culture, the unique cultures of different clubs and the goals of the various parties involved. Tanzer started by identifying two areas as most prominent membership issues in the private club world today:
- Membership Refund Liability, which drains capital that the club could use for deferred maintenance, expansions and upgrades;
- Social change, which has motivated different behavior at clubs from the traditional decorum that was expected, such as dress codes, cell phone usage and less restrained behavior.
Both of these issues have resulted in more clubs being sued by members, sometimes those seeking refunds and in other cases disgruntled members resulting from disciplinary issues. It’s safe to say “It’s not your father’s country club” anymore and that there can be a clash between different generations of club members expecting different things from their club.
As anyone in the club industry knows, the 30-year refundable deposit membership programs of the 80’s and 90’s are coming due. Often pricing has declined and in many cases clubs have modified their membership programs to a less costly, non-refundable entrance fee. Many clubs are unable to meet obligations to resigned or tenured members. Lawsuits have resulted. Tanzer has developed what she calls the “Hero” program which she describes as everyone (the club, the members and if relevant the sponsor) making a little sacrifice in the interest of perpetuating the club’s future. She emphasizes that all situations are different and that there is no “one size fits all”. The idea is to free up capital to allow the club to move forward and provides incentives for both resigned and existing members. Among the concepts are receiving less money today versus the (unlikely) possibility of more at a later date and recognition for the “heroes” who by making that sacrifice helped perpetuate the club.
One of the more perplexing questions in the sale of clubs is what happens to the refund liability that may exist. Tanzer emphasizes that club membership documents are the starting point and dictate the “rules”. Negotiations ensue and Tanzer says that buyers absolutely must have a plan for satisfying exiting and resigned members. Otherwise, lawsuits result. Once common ground is reached, the idea is that the old club is protected, the new club is protected and the members are protected. Everyone involved knows the plan.
Tanzer refers to member-owned clubs as “equity” clubs and sponsor (investor) owned clubs as “non-equity”. First and foremost, equity means both an ownership interest and the right to vote. Tanzer uses the term “Transferrable” memberships when referring to memberships that may be transferred to successor members. However, she cautions that if the membership can be sold without going through the club, it likely becomes a security and subject to securities law. Those clubs without transferrable memberships can be equity clubs even if there are no transfer rights. Equity Memberships with refundability are known as equity memberships, but they are losing popularity because clubs seek to maintain those funds for capital projects rather than preserving for the payback of membership entrance fees.
The impact on the value of a club from a refund liability can be significant. Even if there are a number of years left on many of the memberships until the 30 year maturity, in some cases, especially the high value memberships, the net present value of that liability can impact the transaction pricing in a big way.
Finally, I asked Tanzer about the challenges in unwinding the membership when a club closes and is repurposed. These situations bring with them issues like zoning, entitlements, the interest of neighboring property owners and public opinion. She quoted a saying from her father that “If a situation can be solved with money, it’s not a problem it’s an expense.” She shared with me the case of one club with an older membership population that sold to a developer with a 10 year moratorium on development, which gave the membership all the time most needed to conclude their playing days.
I came away from this conversation refreshed from the emphasis Tanzer places on avoiding litigation and from solving problems by working through the issues. She’s even written a book called “The Club Litigation Book – Keeping Clubs out of Court”, along with well known club tax advisor Mitchell Stump.