By Jerry Hinckley*
Get a Loan That Drives Revenue
As a golf course owner, you have a vision. Maybe you want to build a new clubhouse with a restaurant and a pool or tennis courts. Perhaps you want to upgrade the course, lengthen holes or rebuild your greens. Or maybe you want to acquire another course — or buy land to build a new course. Your plans may be designed to take advantage of the challenges that impact other golf courses. However, your “vision” or strategic plan must also clearly address how you intend to finance
your vision and how you will be successful in this challenging economic environment.
Chances are you have equity in your golf course — the value of your course and related property is probably greater than the amount of your mortgage. There are a number of loan products that give you the ability to tap into that equity and pursue strategies that can help you drive new revenue. This article guides you through the process to find and acquire the loan product that best meets your needs.
Specifics for Golf Course Financing
If you’re considering financing to access equity in your golf course for projects to improve cash flow, or if you are thinking about buying land or an existing course, here is a basic checklist of things to help the process go more smoothly for you. The remainder of the article will go into more depth on these checklist items.
Articulate your vision.
Think about what you want to accomplish and put a plan together. It doesn’t have to be long or infinitely detailed. Just use words and numbers to paint a picture of where you are now and what you want to accomplish.
Share your vision.
Find a lender with meaningful experience in the golf course industry and share your business plans with them. Focus on what you plan to do and how it will generate a strong, positive cash flow.
Check your credit history.
Acquire a copy of your credit history and check it for errors. You can correct errors through reporting bureaus — and you can even get creditors to amend their reporting for a variety of reasons.
Gather key documents.
Start building a file that contains key documents, such as drawings, financial records, a course description and short biographic summaries for you and any partners you may have.
Certain required third-party items, particularly real property surveys and environmental site assessments, can take a significant amount of time to prepare. Make sure to start these as early as possible to avoid unnecessary closing delays, and to prepare such reports in accordance with your lender's requirements in order to prevent unnecessary re-work.
Two Keys for Golf Course Owners
Choosing the right lending product is critical, because you want to be able to leverage your equity to bring your vision to life, but you also want to protect your cash flow. The right lending product should allow you to do both and position your business to succeed when others are struggling.
Golf course owners have tremendously varied backgrounds. Doctors, farmers, attorneys, accountants, car dealers, homebuilders and people from many other professions are drawn to golf course ownership. Some owners bring a deep understanding of finance, some bring almost none. If you have good financial knowledge, you know the terms of your loan can influence your cash flow and your ability to grow. Too often, people who do not understand the lending process feel like they have few options. They look to one or two sources which may provide a loan, but not with loan terms customized for the golf industry. The terms of these more generic loans frequently reflect risk profiles that are too rigid, simply because the lender views golf courses as “special-purpose” real estate. So, if you’re not an expert in finance and risk management, what are the most important things to know when you go looking for a loan?
1. Golf-specific lending products.
Look for lending products that are developed specifically for golf course owners or small operating businesses. Off-the-shelf lending products, such as the ones offered by local banks that work for restaurants, shopping malls and car dealerships, are generally not ideal for golf course owners. A golf loan should be structured as a real estate loan that extends more than a few years and has features that provide for payment plans that reflect the seasonality of the business.
2. Talk directly to a lender — and find one who actively listens to your vision.
If the lender does not make a concerted effort to understand your strategy and vision, there is little chance he or she will be able to configure the best possible loan for you.
Where To Go For Solutions
Many golf course owners acquire mortgages from the same banks they use for cash management and related services. Often times, the banker may be a friend or a club member who is willing to provide a loan. Despite this willingness and familiarity, the banker generally has to work within the risk management rules set by the bank, which typically do not reflect a deep understanding of golf. While a local bank is a good place to get a point of reference, a local lender with extensive golf industry knowledge and experience, as well as the flexibility to design a customized loan product that meets your particular expectations, is essential to help ensure your long-term success.
In difficult economic times, it is critical to establish more than one banking relationship, so that if a lender decides it cannot lend to golf businesses or on real estate in general, then operators have other options to keep their business running. In a difficult credit market, good businesses can suffer if lenders call their loan (ask to be repaid) and owners cannot find new sources for debt – the classic liquidity problem we now see at many companies
In the current lending climate, national specialty lenders have largely vanished from the market. The local and regional banks are likely the best choice for owners seeking financing of $10 million or less. Larger loans will have more difficulty with refinancing or for new purchases, because smaller banks may have loan limits that do not allow a concentration of capital in an asset such as a golf course. In this case, larger loans will be shared or “participated” with other lenders in a co-lending arrangement.
Using Capital to Grow Your Business
Frequently, a golf course owner knows the facility better than he does his own home. You know exactly what kind of improvements would transform them from good to great. With a home, the question is, “How much will I enjoy the improvements, and will I get my investment back if and when I sell?” With a golf course, the question becomes, “If I invest in improvements, how will it affect my cash flow?”
The right lending product allows you to use equity in your course to finance improvements that reduce operating costs, increase patronage, or create additional revenue streams. Ideally, you would be able to make these improvements, increase revenue, and secure a mortgage payment that actually improves your cash flow. Typically, an off-the-shelf mortgage product — which is serviced by a bank or finance company and is not designed with golf courses in mind — does not allow you to achieve this. Instead, you need a lender with experience in the golf industry and an ability to configure and administer lending products based on your vision and your particular financial circumstances.
Improving Cash Flow — An Example
Also, having a loan that provides a short-term line of credit can be critical to allow for temporary changes in cash flow and will allow owners and managers to take advantage of purchases at steep discounts on equipment, repairs, or perhaps buying a new golf course.
Three Common Scenarios for Seeking a New Loan
- Refinancing an existing mortgage. Think back to when you obtained your current mortgage. Chances are you contacted just a few lenders or possibly just one source. You were probably happy to get the loan, happy to get the process completed, and fairly confident you got a good deal. Chances are things have changed since you obtained your golf course loan. Rates have changed, new lending products have come onto the market, and your financial position has probably changed. Therefore, although exploring new mortgage scenarios may not top your priority list, doing so could result in a better mortgage product to improve your cash flow and finance your vision.
- Acquiring new courses or property. One proven growth strategy for golf course owners is to leverage existing equity to buy or build additional courses. If your cash flow is positive now, a lender who is experienced in the golf course industry will see that your success carries over to new properties. Certain lending products in the market allow you to buy or build new courses by tapping into your existing equity. For acquisitions, a minimum cash equity investment of 30% or more may be required. If the terms of the loan are favorable and the performance of the subject property is strong, it’s possible to “earn out” future advances, plus subsequent advances. This type of financing is relatively unique to the golf industry and typically only available from lenders who specialize in golf course finance. One potential source of financing and course acquisitions can be from banks that own golf courses. Defaulted loans and foreclosed golf courses are not assets a bank wishes to hold for an extended time. Good operators may determine that courses in this condition are good buys and if financing is offered by the lender, it can lead to a successful purchase.
- Construction and equipment projects. There are also lending products that give you the power to increase cash flow for improvements which can then increase your pricing to customers and reduce your operating costs. You can use these lending strategies to construct or rehabilitate courses — or to buy new turf equipment that is more cost-efficient than your current gear.
How Golf Facility Lenders Make Decisions
If you've purchased property in the past, you are probably familiar with the loan application, underwriting and approval process. Lenders try to get a complete picture of your financial status by checking your income, assets, debts, credit history and so forth. In a specialized industry, such as golf, there are some aspects of the process that are not common in general lending.
For example, when lending money for new construction, lenders are asked to make funds available for raw land that will not have a realized value until construction is completed. Therefore, the lender's examination of the property and the proposed construction is often highly analytical and very in-depth. It will likely include detailed construction cost models, histories of the key players involved, and operating plan specifics, such as projected greens fees, revenue sources, and the decision to be private, semi-private or public.
In tough economic times, lenders will want to minimize risk by assessing the potential operating value of the project. This assessment is somewhat similar to a more mainstream construction project, such as an office complex. However, golf is viewed by financial institutions as being as “specialty asset” and not a mainstream asset class for loans. Office, retail, industrial buildings, and apartments are considered core real estate assets that are widely financed – golf is not and requires special knowledge of the borrower or the market and industry to be obtained. Data from organizations such as the National Golf Foundation, the Golf Course Owners Association, and PGA can help to show that golf is a solid business that may be less risky than some may think.
Lenders also may want to mitigate risk by ensuring the project is well managed. Details surrounding projected rounds of play, membership marketing, retail and food sales, course policies, and turf maintenance will likely be important considerations. Borrowers with a team of professionals that has been successful in the past are often critical for this phase of the underwriting process.
The due diligence process will require borrowers to submit key documents, such as:
- Financial models — including revenue sources and expenses
- Management team — resumes and work histories of partners and key employees
- Course description — pro shop, buildings, equipment, yardage, etc.
- Permits and approvals — construction, environmental and food documentation
- Drawings and bids — details about the construction process
- Contracts — with management firms, architects, etc.
It's often said that times of crisis are times of opportunity, also. If you see a special opportunity at your facility, don't count out the financing to make your vision happen. Do your homework, find a lender that customizes loan products to the golf industry, and develop a working relationship with a loan officer that listens to you, then structures a loan product to fit your situation.
Knowing the lending vocabulary can help you present your vision to a lender -- and better understand the lending terms she uses when explaining her loan products and strategies. See Important Terms of the Lending Process
Originally posted by JerryHinckley
on 23 Feb 2009.
All contributors: JerryHinckley
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