Member owned private clubs rarely focus on the market value of the club in favor of a focus on balancing the budget. Despite what many think, private clubs often sell, for a variety of reasons good and bad, ranging from members seeking outside management, investors looking to realize their profit, a lack of funds for reinvestment, declining membership or possibly alternative use of the property. However, even clubs with a high likelihood of operating into the future should be concerned with market value as it dictates both their ability to borrow funds for capital projects and their real estate tax assessment.
It’s not uncommon for those who may be unfamiliar to view private clubs as unlikely to sell, and thus difficult to value being operated as not-for-profit entities. This leads to confusion on the part of lenders, who because there’s often limited, if any cash flow perceive limited value and high risk. Conversely, the local tax assessor sees a property and facility of high cost, often with wealthy members that might be a good “target” for an excessive real estate tax assessment. The key is that in both situations, market value is the determining factor and having an accurate and realistic estimate of same can be most beneficial to a club’s planning.
Inherent in the concept of market value is the presumption of a sale, as per the definition of market value, stated as: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated.
- Both parties are well informed or well advised and acting in what they consider their best interests.
- A reasonable time is allowed for exposure in the open market.
- Payment is made in terms of cash in U.S. dollars or terms of financial arrangements comparable thereto; and
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
With respect to private clubs, what this means, combined with a legitimate market for acquisitions is that those who maintain that they don’t sell frequently and that cost is the only way to estimate their value aren’t consistent with the presumption of a sale.
Why is this important? In calculating a club’s real estate tax assessment, the local tax assessor, because he/she has thousands of parcels to attend to and limited experience with private clubs or access to data will often employ a cost analysis which rarely reflects how a private club might sell. Typically, the clubs that do trade are often sold to for-profit investors who evaluate the acquisition on the basis of cash flow potential and who develop pro-forma projections in determining what they might pay. Since many of the clubs that sell are operated not-for-profit, an indicator often used is gross revenue history and a multiple of gross revenues determined from analyzing those clubs that have sold and are considered comparable to the subject club. Understanding the market value can help a club determine whether their tax assessment is fair nor not.
Banks often make lending decisions based on cash flow available for debt service. This one reason alone can discourage a lender’s interest if they don’t perceive cash flow as sufficient, which at a not-for-profit club can often be the case. However, many lenders base approval amounts on the value of the club. Thus, if a club is considering borrowing for improvements, knowing value is a key component for future planning.
Since clubs typically sell as going concerns, including both real and personal property, it’s also important to understand how much of the value is allocated to each. Tax assessments are based on real property only (land and improvements) and different states treat these allocations in different ways. Sometimes banks will only lend on real property, or at the very least seek to know an allocation of those components.
Most (if not all) clubs cost more to develop than their potential value in a sale transaction. Knowing the club’s true market value can be a critical element for leadership and management in planning future club financial strategies.