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May 2021

Rethinking Space - Where Best to Capitalize on Capital Improvements

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By Scott Kauffman

By most accounts, U.S. golf facilities in 2020 experienced one of the greatest rebounds in rounds played and course capacity in memory. And so long as the Covid-influenced environment continues to affect the mindset of how people spend their precious time these days, the socially distanced-outdoor nature of golf positions the industry for yet another robust year of business.

The game’s revival notwithstanding, one lingering question remains for course operators and club owners: How do we best leverage golf’s revitalized interest and continue to grow golfer participation and/or club membership levels in the coming years?

For many courses, this will mean a continued focus on deploying capital in some of the non-golf aspects of the facility, including “alternative” tech-oriented golf experiences driven by the “TopGolf” phenomenon and more health-and-fitness, aquatic and dining-related amenities that today’s golfers and/or members increasingly desire in their multi-generational club lifestyles.

To be sure, for many golf properties the course itself and fundamental maintenance issues will remain paramount, whether it’s upgrading outdated irrigation systems or regrassing aging green complexes. For ownership groups facing these capital improvement crossroads, however, what appears to be the wisest return on capital expenditures?

If the latest “2020-21 Trends in Private Clubs” report by tax consulting firm RSM is any indication, capital commitments continue to pour into those aforementioned non-golf clubhouse-related components as much as ever.

For instance, based on information compiled from the company’s audits of more than 200 Florida clubs through Dec. 31, 2019, roughly 49 percent of the clubs featured in the report were planning what they consider to be “significant projects within the next 12 months, with an average spend planned in excess of $5.7 million.”

And the lion’s share of these capital commitments is dedicated to new clubhouse facilities or completely renovated or reimagined places. In the aggregate from 2017-19, these Florida clubs spent in excess of $1.2 billion on capital improvements with a “further $461 million aggregate planned spend in 2020,” according to the leading consulting firm, who plays host each year to the PGA Tour’s RSM Classic at Sea Island Golf Club in Georgia.

Of course, there easily was another $1 billion-plus in clubhouse-related capital commitments over the same period in other prime private club hotspots in Arizona and California throughout the Carolinas and Northeast. Naturally, it’s still too early to tell the impact Covid-19 had on so many of America’s planned projects until a “sense of normality returns to the economy in general and club life in particular,” RSM went on to note last August when it released their latest annual report highlighting operating and financial trends of more than 200 clubs throughout Florida—the state with the highest concentration of private clubs.

While many club owners believe these various debt-fueled non-golf capital improvements are the path to financial sustainability, is there any one investment that can most certainly improve the future value of the asset? Or, is building one of these non-golf amenities the equivalent of a homeowner building a $30,000-$50,000 pool, for example, something most residential real estate brokers and appraisers agree usually never grows the fundamental resale value of a home.

When leading golf industry appraiser Larry Hirsh of Golf Property Analysts was asked if there is a similar residential-like real estate rule that correlates to golf facilities,  the avid golfer and private club member says, “We don’t really know yet.

“The reason I say that is because if you look at a lot of club performances last year, they increased memberships and they blew the top off rounds played,” added Hirsh, whose Pennsylvania-based firm completed more than 3,000 golf course assignments in 45 states over the past 20-plus years. “Clubs are doing in some cases 30 percent more rounds, it’s very hard to get a tee time and the food and beverage and banquets and all that stuff got killed (during the pandemic). So, the real answer to that is it really depends on the club’s culture and the course.”

However, if there is one bit of advice on how to grow the future valuations of the course or club as owners consider future capital expenditures, Hirsh says he would look at changing the nature of the large traditional 300-person banquet facilities and event rooms.

“I would look at that space and I would say, how can I make that space more versatile,” Hirsh said. “Because those things have been dark for a year and more importantly, I think there’s a chance, and nobody knows this yet, but I think there’s a chance that our society is going to take a very long time before we start going to 300-person events again. … All those bar mitzvahs, wedding parties, graduation parties and super-spreader events.

“Anyhow, I think that those spaces are going to have to be reimagined. And I think in general, a lot of clubs are going to have to be reimagined. And the reason I think that is because especially private clubs, food and beverage doesn’t make any money.”

Ultimately, Hirsh will tell you, it comes back to golf and everything between the irrigated turfgrass lines itself. So don’t lose sight of improving the overall golf experience, he adds, despite all the glamorous non-golf amenities that keep getting built from coast to coast.
“Golf is more profitable than ever, and still more profitable than tennis and swimming and all that stuff,” Hirsh says. “But I really can’t answer that (valuation) question universally.”

Nevertheless, Hirsh believes there is “one kill all” solution when it comes to capital improvements.

“The one thing I do think makes sense are building enhanced practice facilities and more learning centers,” the avid lifelong golfer says. “Not only does it increase capacity of the club, but in turn, it increases memberships at a far better rate of return (than the other relatively costlier non-golf amenities).”

So in a bit of golf business irony during this strange new pandemic world we live in, the fundamental nature of the golf course is as valuable as ever.

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