By George Logan^*

It’s a Mark to Market World: We Just Work in It

By Hilda Allen & George Logan, Hilda W. Allen Real Estate, Inc.

The economy: there’s no shortage of forecasts and analyses from impeccable sources but consensus seems elusive to us. At the risk of sounding as if we know more than we do, we think it’s a frail recovery. Until housing sales recover and a structural unemployment rate goes down, all the good news comes with an asterisk. That may take years.

Our core business is marketing golf centric real estate by sale or auction. We think it’s going to be a good year for realistic sellers and a good year for buyers who know what they want and have the resources to close. Barring the unforeseen as well as the clearly foreseen (Federal Budget, Federal Debt, Fannie Mae and Freddie Mac, looming state and municipal bankruptcies, Moody’s threat to downgrade America’s credit rating) this moderately positive trend should continue through 2015.

We see a number of golf properties every year which affords us the opportunity to meet the people who own and operate them. We’d like to share highlights of what we learned from them in 2010 and from marketing their properties.

Whether you’re selling, buying, or staying put these folks had some interesting things to say. Their best ideas recognize a time tested truth that America’s best retailers know by heart:

Every Retail Strategy Eventually Fails

Golf: It‘s a great game. Millions of people enjoy playing it. But like retailing it requires a complex bundle of systems to create and deliver a satisfactory player/customer experience. Some operators haven’t figured out how to do that in the face of profound social and technological change. The business model needs to be updated or new models developed, perhaps in ways we haven’t imagined yet.

If the great Bobby Jones walked onto most golf courses today he would find the delivery systems haven’t changed much since the 1920s. Think about the changes in retailing since then. If he walked into Macy’s today he might recognize a vestigial resemblance to a 1920s era department store but what would he think of Target or Wal-Mart or Publix or Whole Foods? The great retailers have evolved aggressively and continue to evolve because they live or die by doing it faster, better, cheaper, or alternatively, faster, better and “money is no object where happiness is concerned”. Models fail when the corporate culture fails to adapt (Korvette’s, Aim For The Best, Zayre, Circuit City) or get overtaken by technology (Barnes and Noble, Blockbuster).

Over time all rigid models fail, even those that appear most successful. Over time the systems for delivering golf have remained pretty much the same. The game isn’t dying, but perhaps the business model is less relevant than it should be.

As we’ve said before, a full line golf property is really four or five businesses: entertainment, food and beverage, retailing, personal services, agriculture and golf. Is that the best model for the future? Maybe pieces of it are but in order to survive it needs to be more flexible and work better. It’s not enough to build it and think they will come. While they are coming, not enough of them participate.

· There is a total of about 16,000 golf properties in the U.S., and some analysts estimate that at least twenty percent of the existing clubs need to close their doors.

· The game is not attracting enough younger players or enough women to move the needle. Some properties run programs for juniors and group teaching especially for female players. Both are vital to the future of golf. We need an industry wide strategic partnership between manufacturers and operators to market to these players. Think junior tee boxes; par three courses; partnerships with local schools; sponsorship of school golf teams; rental plans for golf equipment; working with manufacturers to recycle used equipment; marketing campaigns to reinstate golf in the minds of potential players.

· Note to all governments; municipal, county, state and federal: Privatize ownership and management of public golf courses and permit them to find a market if one exists. Governments cannot innovate.

· Make golf properties family centric. Younger families recreate together. Women are “the deciders” about when and where family recreation dollars will be spent. That’s why a first class fitness center with clean, clean, clean showers and dressing rooms reinforce “the decider’s” sense of added value when she pays the initiation fees and monthly dues.

The Competition: The entire digital world, DVDs, cell phones, plus soccer practice, ballet, karate, pilates, tennis leagues, book clubs, car pool, varsity and junior varsity sports, homework, choir practice, Bunco Nights---it’s a long list and you have to break through the clutter. If you can’t break through your best bet is to sell while you have a viable business.

Who Should Be Selling? If your sales are flat or declining, consider selling unless you can quickly develop a strategy to reverse the trend. In the absence of a fix, a negative trend will just accelerate. You will probably have to take market share from competing properties by improving or adding value to the customer experience. You can cut expenses but you can’t cut your way into the black if you degrade that experience. Do not reduce prices to grab market share. Local price wars are mutual suicide pacts. If you decide to sell, consider offering owner financing to a qualified buyer. You will increase your pool of prospects.

Keep Good Records: If you decide to sell, you will need to show accurate historic and current financial records. This may be obvious but it’s surprising how many financial statements that we see resemble a case study in forensic accounting. Moreover, we know it’s a cash business but you still have to record and report the income; if you don’t you will get hammered on the sale price. In most cases, there are exceptions for lower and higher gross income multipliers, a golf property’s value is calculated on a multiple of 1-2 times the gross income (GIM). As Hilda says to the owners with a cigar box under the counter, “If you can’t prove it you can’t bank it”. If you don’t sell, you will at some point need to pay for say, capital improvements which will probably require a loan and you’ll need accurate financial records to show your lender.

Refinancing Although we are seeing some reports of increased lending, it’s still hard to get and its absence can trigger a sale by necessity. The smaller banks, both regional and community, have big problems (at this writing around 860 are on the FDIC’s Watch List). These institutions hold most of the bad commercial paper (largely retail and office but your golf course is probably in there too). In the period 2011-2013 about 1.6 trillion dollars worth of these loans will come due. A few banks are starting to recognize losses and take mark downs, which is beginning to attract private equity groups. If one of these entities acquires your loan in a package deal with your lender, your loan’s future and yours could become unpredictable.

You and your bank may be better off trying to work together on a refinance or a sale even if the bank has to take a mark down. They might get more from you than what they would realize in a bulk sale to a private equity group. It can be a win- win.

What Is A Successful Business Model? Apart from the truly elite private clubs, we have seen three that work and one that may. (Note to innovative entrepreneurs: come up with something better.)

A big part of the future will belong to the chains. They own multiple properties in different markets and earn initiation fees, dues, greens, and cart fees from a combined membership that can number in the thousands. One such operation has more than 13,000 dues paying members who can play at any of the chain’s properties. Overhead and management costs are shared by every property. The objective is to make every facility a profit center with a lower than average cost center.

A few well run companies that develop exclusive golf communities will tap the higher end of the market. It’s a market that’s smaller and richer than it has ever been. Since the crash of 2008 accelerating a long term trend, twenty-four percent of the wealth in America is now owned by one percent of the population. A fraction of that one percent holds the majority of the wealth, creating a narrow and very deep market for those with the skills to serve it.

These people tend to play a lot of golf. The future also belongs to the entrepreneur who can run a boutique property. He or she is the star of the property; like the owner of a great restaurant success is central to their personalities.

We recently looked at such a property, located on a beautiful 200 acre lake. The owner and his wife are a handsome, engaging couple who crunch numbers. They know most of their members by name. They are involved in the community and the community is involved with them. Members get a continuing barrage of personal notes from them and reminders based on their interests which a computer program tracks. The staff is trained to be “Ritz Carlton” proactive in greeting and serving members and customers.

Twice a month they hold complimentary wine and cheese parties for members and a broad spectrum of potential prospects who are invited to drop by and take a look at the club. There’s no sales pitch. Their members often sell the club for them. They have close to six hundred members plus a couple of hundred regular players. The community power structure meets there. It’s a place to be seen and yes, the food and beverage service is very good. They have a profitable wedding and banquet business which uses that beautiful lake as a backdrop, a feature they showcase in a variety of ways.

For twenty five years this couple has managed a successful and profitable business. It’s a business model that transcends some capital costs and downplays exclusivity while getting the best demographic in the market to participate. If you have the charisma and drive and a supportive spouse or partner you can do it.

It’s counter intuitive, but despite a surplus of golf properties there may be a potentially under served market. We think that there is a market for a lower priced facility geared to middle income families. It could be a no frills chain or independent property, maybe a Par 3 course. “No frills” does not mean indifferent service and deferred maintenance.

These are some of the ideas we have picked up from our clients and customers in 2010. We think some of these folks may lead the market out of its current problems. We believe they are where the excitement is and where the great future of golf lies.

Note: Our credit and deep appreciation go to Doug Main, Director at Deloitte FAS, for his great work as our editor on this and many other written pieces we have done. This article first appeared in the Society of Golf Appraisers Winter 2010 issue of The Drive. We also want to thank and credit Doug and the SGA for supporting us and encouraging these articles. GL/HA

________

George Logan is a ten year Hilda Allen veteran. He began his real estate brokerage career with Adams Cates Company (Grubb & Ellis) in Atlanta, later joining Fickling & Company of Macon, Georgia where he engaged in commercial brokerage and developed retail and multifamily properties in Macon, Atlanta and Columbus, Georgia markets. On the final day of America’s Bicentennial he sold the historic Macon INA Building inspired by Philadelphia’s Independence Hall, to Mercer University for the Walter F. George School of Law. Prior to real estate he worked in sales and editorial for Doubleday & Company in New York, Phoenix and Atlanta. He is a graduate of Middlebury College. Call 478 747 4122; email sentry939@yahoo.com

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Credits

Originally posted by GeorgeLogan on 15 Feb 2011.
All contributors: GeorgeLogan, MarleneStone,

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