Evaluating Golf Courses - Not Easy
As readers of interest in this subject, please circulate this article to those you feel have an appropriate need to evaluate a golf course. What is a golf course worth? An important question for any golf course seller or buyer – and county assessors.
I remember a conversation I had with a county assessor who asked me to help him make sense of two golf course sales transactions (in Tampa, Florida). Quite similar but they sold for two vastly different prices. One for $2.3 million, the other for $8.5 million – a $6.2 million dollar difference. The assessor was puzzled because the two golf courses appeared so much alike and located less than eight miles apart in the same county.
The two golf course sales transactions occurred only a few months apart. Both were 18-hole residential development type golf courses, with similar middle-class neighborhoods. They had similar size acreage, similar clubhouse sizes, grasses, irrigation, etc., etc.
The lower priced golf course did not show as nicely (pretty) as the higher priced course (but the assessor did not physically see the properties). The lower priced golf course had a few deferred issues, but certainly not $6.2 million worth. However, the lower priced golf course had a valuable piece of developable acreage which could be developed based on its zoning – and very quickly.
The truth was, a buyer was willing to pay $8.5 million for the higher priced golf course. The evaluation was a negotiated price between the seller and the buyer. The lower priced golf course at $2.3 million was a negotiated price between the seller and the buyer. That’s how golf courses have been trading – particularly over the past fifteen years. However, the unwary buyer who comes from outside the business is more likely to pay the $8.5 million than the savvy golf business buyer (more or less the ‘fell off the turnip truck’ theory).
Back when the golf courses were ‘profitable’ they were trading on multiples of net operating income (NOI) – often referred to as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). In 1995 a golf course with annual earnings of $500,000 may have traded for a multiple of 6 to 12 times EBITDA. The predators – mostly the experienced golf companies – aimed for the six multiple. An individual buyer who planned to be an owner-operator might pay up to a ten multiple because a couple of those multiples were going into his pocket as management anyway.
Annual rounds (attendance) were also a price-driving factor in the 90s. For instance, daily fee golf courses in Florida during the 90s became much more valuable when annual round counts rose above 50,000 over 18-holes. In 1995, for instance, it was more or less accepted that it required 35,000 annual rounds for a daily fee golf course to break even on cash flow. Therefore, a 50,000 round golf course was a money-maker.
I’ve said for many years that when food and beverage (F&B) makes up more than 15% of gross revenues, then it’s non-income in my view because very few golf course F&B operations earn more than 10%. In fact, most golf course food service loses money.
The revenue to look at is income from green fees, member dues, cart fees, and range fees. In my view, an ideal revenue picture should show 80% of all income coming from fees. When the dust settles, as the golf course operator you should hope that 30% of all revenue, including merchandise and F&B, is profit.
Another factor that can more or less support a buyer’s comfort level in the valuation of a golf course is whether or not a financial institution (bank) will finance any portion of the purchase price. Based on what I was told by an executive with a major bank, a golf course loan was regarded as a business loan and not a real estate property loan – even though it was secured by the real estate asset. Therefore, the loan was primarily based on the ability of the business to repay the loan. In fact, I was involved in several successful golf course mortgage loan applications while working with Hayward and Associates, mortgage brokers in Tampa, Florida.
Actually, recently a golf course property in Florida was valued in two separate ways by the bank: One value was based on the golf course as a business, the second was the value of the property as pure, raw real estate land. The golf course as a business was worthless in the eyes of the banker. The land as an asset, which still retained most of its original property rights was actually attractive as a financeable collateral asset.
We know the banks were rather liberal in the 90’s. That’s partly why Bill Hayward, and I successfully financed several golf courses between 1994 and 2005. My job was to help the buyer (loan applicant) write the bank-required business plans. I prepared the Excel forecast statements showing one-year and five-year forecasts.
During the positive EBITDA/NOI times, bank loans were generously running sometimes greater than 80% loan to value (LTV) based on the purchase price. Rates were often over 10% - some as high as 14% - with 20-year amortizations. However, with solid earnings, many golf courses easily earning over $1/2 million, as long as annual debt service costs were forecast to be no more than 83.3% of EBITDA/NOI, the finance application was likely to be approved. In fact, in many cases, two or more banks competed for the loan business.
In 2017 the rules have changed. Many golf courses are not showing profits and cannot be financed. Sellers are telling buyers that the earnings will return, but smarter buyers are saying they won’t pay now for tomorrow's profits. With the banks gone, the only golf course finance source may be the seller.
Appraising golf courses in 2017 the way they do residential and commercial appraisals are all but impossible to rely upon. Golf course appraisals are difficult to trust because the three standard methods of appraisal – replacement cost, comparable sales, income approach – cannot apply at a time when golf courses in recent years, for instance, have been trading well below replacement cost. Or the $6.2 million difference I referenced in the third paragraph. In fact, I estimate that 90% of golf courses selling in the past ten years were for a price less than it cost to create them. Attempting to evaluate a golf course based on comparable sales is simply baffling. Then, how do you value a golf course that loses money - especially if it sits on land with no other redeeming value?
Articles published about four years ago indicated that golf courses were trading on multiples of gross receipts – spread from .6 to 1.6 times gross revenues. They adopted that approach because there were no earnings (EBITDA) upon which to calculate the multiple. However, if the golf course land use is restricted to remain permanent open space, meaning no development rights, and the business was not earning a profit, how can it have any value?
In my experience, golf courses created after the early 1970s were probably permitted as permanent green space, which meant all other land rights were relinquished as the permitting condition. It means the land can only be a golf course or an open field. If the land is inside city limits it may not even be used for grazing or even general farming.
I warn a potential golf course buyer this, “If a golf course on your radar is a residential development golf course you could be imprisoning yourself into a perpetual money pit!” You'll need to clearly understand the CC&R docs as part of your diligence.
We help people evaluate golf courses. We are not certified appraisers. We bring combined 100-plus-years experience in the golf course business. We've had the experience of CC&R restrictions, bank battles, failing irrigation systems, mutating grasses, mole crickets, fire ants, cedar moths, washouts, declining membership rosters, and weather disasters. We know what to look for, and how to explain things. It all comes from intimate knowledge of every type of golf facility - in snow, or under palm trees.