One of my Complimentary Consultations
I always appreciate my postings being forwarded to your friends and colleagues with an interest in their local golf course.
February 10, 2017: In one of my complimentary consultations I spoke with a golf club member (in Wisconsin) who was trying to make sense of his country club's plan to increase its bank debt (mortgage) by over $1/2 million. It's a 1925 built golf course with a 2003 rebuilt clubhouse (from insurance money after the original clubhouse burned to the ground). The new money was to be used to redecorate the clubhouse.
The member was a little confused with how debt service ratio (DSR) was applied, which the member read about on my website (www.golfmak.com).
The Debt Service Ratio is determined by the amount of net operating income (NOI) divided by total annual mortgage debt expense including principle and interest.
If NOI is $150,000 and annual mortgage expense is $100,000, the the DSR = 1.5
It has always been my advice not to allow the DSR to dip below 1.5.
During our conversation, the member indicated the club, which is non-profit, and member-owned had annual debt payments amounting to $70,000 (rounded). The club had a $70,000 (rounded) net after paying the mortgage. So, the club's net operating income (NOI), or often referred to as; earnings before interest, taxes, depreciation, and amortization (EBITDA), was $140,000, and their current DSR is 2 - very healthy in my experience.
The bank was offering to increase the principle by $500,000 and change the amortization to 25-years from 15-years at a lower interest rate, which kept the payments still at $70,000. So, the $1/2 million cash to spend on the clubhouse came from lower interest rates, a solid DSR, and extending the AM by ten years.
So far, it seemed OK to me, but I asked whether the club had a contingency fund, which the reply was uncertain.
The golf course, built in the 1920s, is a 'core' course (no streets and homes inside the perimeter of the golf course), and likely retains all its original land rights (most golf courses built after 1970 gave up all other land rights during the permitting process). Therefore, the club's land was probably highly valuable as development land, which (I assumed) gave the bank enough comfort to increase principle by $1/2 million.
I did inquire about the current membership and learned it was aging - probably averaging near 70-years. So when you think of it, the (older) member couldn't care less about the long-term ramifications about the club's debt principle as long as the cost to use the club did not go up.
Although several factors concerned me, I could not criticize the club for increasing its debt at this 'iffy' time. It appears to be a lateral move that won't affect the club's financial health - at least in the short term. I wasn’t sure the money is best spent remodeling the clubhouse when the building is only 15-years old.
My question: What about the golf course?
The area I wanted to review in more detail was the condition of the rest of the property. What are capital requirements anticipated over the coming five years? For instance, how old is the irrigation system (figure a 20-year life span)? What is the condition of the parking lot? How about cart paths? What stage of life are the main maintenance machines - fairway unit/s, greens mowers, trap rakes, tractors, sprayers, and top dressers?
After my complimentary consultation, the club member was ready to go back to his board with highly pertinent questions.
As a golf course business consultant, I have experience in so many matters, I can answer all kinds of questions. I can help with decisions on virtually any golf course related issue - from maintenance to the kitchen, and from the pro shop to the budget. If your golf course or country club needs advice from a third party with over 60-years in golf, give me a call: 941-739-3990, or email: email@example.com.
If you bring me aboard to work as your consultant, you also get my associate, Bill McIntosh, Golf Specialists, Inc., who brings his 50-years in the business with him.
Mike 941-739-3990, or firstname.lastname@example.org