By Steven Ekovich^*

Is the “Bank” becoming Golf's new “four letter word”?

Remember the golf joke, “why do they call golf, golf”? Answer: “All the other four letter words where taken!” After talking to hundreds of owners over the past several years, it is clear that owners are bewildered, upset, discouraged outraged and any number of adjectives to describe what they are saying about Banks.

The term Bank seems to be the new “four letter word” for many of these owners. Rightly or wrongly, the sense out there by owners is that they put their blood, sweat, money and tears into these courses and they are loosing them due to a financial crisis beyond their control. To the owners, banks are becoming the villains, again, rightly in some cases and wrongly in many others. It is the bank’s/lenders responsibility to protect their share holders. If you can’t make your loan payments and can’t pay off your loan, they are forced to foreclose. We will mention this again later in the article, but the most important advice we can provide, is not to surprise the bank. Have open and honest communication before you are in trouble.

In this article, we will discuss four strategies to satisfy a bank/lender if you have access to equity or debt and four strategies if you don’t.

What do you do when the term on your loan is up and the financing on the course is higher than the market value? What do you do when you have never missed a payment and the lender calls your loan because you are in technical default? (Technical default can occur for a number of reasons, your debt coverage ratio falls below that stated in your loan documents, your financial statement looks worse than when the lender made you the loan, your financial statements for the course, as determined by the lender, puts their security in financial risk, or they just want to get rid of your loan). What do you do when you want to refinance to pay off some debt? What do you do, when you want to purchase more golf assets at today’s depressed values?

In the last year, every one of the following bank/lender issues have struck our clients. Without debt, the grease that lubricates investments, things get stuck. Debt makes everything easy to purchase, refinance, and operate. What do you do as an owner, if you are stuck? We will examine a number of strategies from the point of a seller, who needs debt to continue to run their operation but the lender has called the loan, the loan term is due, they are in technical default or the lender just wants to get rid of your loan. What do you do if you can’t make your loan payments?

Option 1: The easy solution is to come up with equity to pay down or pay off your loan. In many cases, the lender will keep the loan on the property, but they want lower leverage, more security for the lender, which means they have less of their funds at risk. In most cases a lender will allow you to pay down the loan with equity and will extend your loan even if your loan term is up and you can prove there are no other financing options available. Why would they do this? No institutional lender wants to foreclose. Let me repeat, they are not in the business of foreclosing on golf loans. We work with banks all over the US with their non-performing or REO loans, (REO is when the lender has foreclosed on the asset) and most banks believe taking a golf course back in foreclosure is like accepting leprosy. They don’t understand golf, they don’t understand how to run golf assets, they haven’t had to foreclose on golf assets over the last 15 years like they have with apartments, retail and office, so they are just not familiar with them and they know it is nearly impossible to refinance them.

Option 2: Another course of action is to pay off the loan in its entirety. Many banks are offering discounts to pay off the loan early from 15% to as much as 35%.

Option 3: Find a local lender to refinance the course. This strategy will not help you if you can’t make your loan payment, but can help if your loan is being called. The big three, Textron, Capmark and GE are all out of the market, leaving the local banks as the only real source for financing. In order for that to work, an owner needs to live with low leverage, in the 50-60% range and find a bank that believes in both the asset as well you, the operator. If you are acquiring a golf asset, the local lender will most probably require you to open an account and put a significant amount of cash in the bank and will only approve the loan if you have a great financial statement. In addition, they will also require full recourse on the debt, since there is little to no conduit financing in the market.

Option 4: Finally, there is finding a partner, an equity partner to infuse cash for a percentage of ownership. This is very low probability because the equity source wants his equity contribution to be based on today’s value, which means in many cases the equity contributor would become the major share holder, unless you have a lot of equity and low debt on the asset.

But what do you do if the lender has called the loan, because the term is up, or for technical default and you can’t come up with more equity, (cash) or a partner to satisfy the lender/loan? In addition, your loan principle is higher than the loan amount? (This happens a lot since banks, who would consider lending today, only want 50-60% leverage. With the fall in values of courses nationally, your existing loan to value may well be in the 80%-99% range, consequently refinancing is not an option. ) What do you do when you can’t make your loan payments?

As an owner, if the loan must be paid off and you don’t have access to a loan or equity, you have four options: deed-in- lieu of foreclosure, go through the foreclosure process, file bankruptcy to forestall the foreclosure process or sell/short sale. Again, banks/lenders for the most part are good people, just like us, they don’t want to foreclose, but they have to do their job for their clients, which are their shareholders. Again, have open and honest communication before you are in trouble and you will have both more options and a more open minded bank.

Option 1: Deed in lieu of foreclosure: This is an option when you have tried other options to no avail and you have been both transparent and cooperative with the lender. If you do not have equity in the property, this option may make sense rather than to wait for or fight the foreclosure process. You may be able to negotiate some concessions from the lender for being a willing participant. If a lender goes through the foreclosure process, they have to file judicial proceedings; they have court costs, carry costs, costs of hiring a receiver and the process could take 180 days or so. You may be able to negotiate with the lender to both deed them the property and to give you some forgiveness of some or all of your deficiency judgment, in lieu of foreclosure.

The advantage for the bank is a big savings in the bank’s foreclosure costs, and expedited process which in a market with values trending down, could also save the bank a significant amount of money. This seems like a win-win for everyone. However, the downside for the bank is that they now hold a property as an REO in their portfolio and REO properties usually sell at a discount because they are distressed assets. The owner should seek competent legal council to make sure that this is a strategy that works for them and when the deed is transferred to the bank through a quitclaim or some other deed the owner receives some rights in return, i.e. some forgiveness of the deficiency if there is one.

Option 2: Straight Foreclosure: This is not a recommended method. If you are personally liable on the loan and the lender forecloses, you could be liable for the difference of the sales price and the loan balance plus any penalties and back interest. As an example, if the market value of the property is $3,000,000 and the lender fire-sales the property at $1,000,000 or less because it is expedient, you would owe the difference. Furthermore this could trigger a taxable event called mortgage relief. You would be liable for the gain on that mortgage relief.

We had a lender tell one of our clients, that “if you don’t come up with equity, we will foreclose and if we sell this sucker for $50,000 at a fire sale we are coming after your partnership for the rest, so pay up now, or you will pay a hell of a lot more later”. Ouch! This client put the property in bankruptcy as advised by his council.

Option 3: Bankruptcy: Bankruptcy provides an owner two strategies: liquidation, (Chapter 7) or a reorganization plan to emerge from bankruptcy, (Chapter 11). In a bankruptcy, the court will determine if the owner’s post bankruptcy plan moving forward can satisfy the lender’s payments on the loan, and some negotiated amount for the unsecured creditors. A nice advantage of chapter 11 is the debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. The chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization.

However, Chapter 11 is not without costs. It is expensive to file bankruptcy, pay attorney fees, court costs etc. The lender or the judge may not approve your plan, and you still have all those costs. Each owner should seek legal advice from a competent bankruptcy attorney to determine if this is a strategy that will produce your desired results.

Option 4: Sale or Short-Sale: Of all the methods discussed this is the best solution for a number of reasons. If you have equity, you can sell the property at a non- distressed price, with proper marketing, packaging and pricing and you receive what equity is left after the lender is paid off. If you have no equity left, a short sale will net the lender the most money and leave you with the least financial liability.

A short sale works like this: You offer the property for sale through a recognized golf broker at a price the broker believes a willing buyer will pay. If that offer is less than the loan amount, that offer goes to the lender. The lender’s special assets group will make a business decision whether this offer will provide higher net proceeds than going the foreclosure rout where properties tend to be sold at more distressed prices. Again, this is a win/win strategy because the lender usually nets more at closing than in an REO sale, which can be proved out in comparable REO sales vs. market sales.

In conclusion, we have discussed four strategies for satisfying a loan when it is called and you have equity or lending options and four strategies when neither equity or replacement debt is available.

Steven M. Ekovich is Director of the National Golf & Resort Group of Marcus & Millichap. He and his partner, Chris Karamitsos, a PGA professional have been involved in over $3.5 Billion in sales over the last 25 years. http://www.nationalgolfgroup.com

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Credits

Originally posted by StevenEkovich on 31 Aug 2010.
All contributors: MarleneStone, StevenEkovich,

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