[Steve Lapper]

No, not in today's market! Jeff Brauer's model is mostly correct.

As many of you know, Kelly Moran and myself had a project in Old Bridge, NJ. The course was to be less than 5 five miles from one of the top three traffic junctions in the US (NJ Tpk., US 287, Garden State Pkwy, and the Staten Island Expressway. The site was less than 40min from NYC within 75 miles of over 8 million people.

We were to be granted a 25-50 year lease for a raw 208ac with a very, very low embedded cost (redevelopment fees, utility hook-up fees, and various other relatively minor fees). We were responsible for all build-out costs, had a very low and efficient capital cost structure that required building 18 holes, a small and reasonable clubhouse/pro-shop facility, maintenance facilities, adequate parking spaces, and adequate irrigation and water retention areas. Our initial budget for all of this ran near $11.5MM. Adding 10% for overage brought this up closet to $13MM. Heck, KBM wasn't even charging any outrageous fee! The project had a zero Real Estate component.

Our end pricing was only constrained by a state rule (for Green Acres Land) that prohibited us from charging local residents anymore than 50% of our top rate. Given that and market competition parameters, we assumed between 40-50,000 rounds max(seasons and conditions permitting, with some years accordingly lighter). Rounding out the all the pricing formulas, all the bare operating costs (Donnie...we were leaving the rough in their natural grasses and not planning on irrigating it), we broke even, after debt service and return of invested principal, near a $85 daily fee and really didn't make any $$ until we drove the average north closer to $110-115.

If we failed to hit the capacity #'s in any given season, we could have easily gone into the red and fallen behind our debt reduction(and thus exposed the principals to real and personal financial risk). We did exhaustive local and regional demographic market research. Kelly had a magnificent and highly-entertaining routing.  Textron agreed to make us the only "to-be-built" loan offer East of the Mississippi and the town had agreed to defer any profit share until all invested capital could be repaid. Kelly and my team were in this as much for a labor of love and pride.

Sure, a course in the Northeast has inherent seasonal weather constraints and risks, but the offsetting argument is the density of population and active public golfer community. Yes, labor, marketing and regulatory costs are considerably higher in NJ as well, but none of those variables were large enough to break the model. Bottom line is we had to reach near perfection to make anything and break-even wasn't buffeted by a large margin. We had highly efficient operating schedules and budgets with realistic assumptions.

Eventually, costs rose and terms became onerous (higher interest rates, 100% full personal recourse, etc..) and after efforts seeking to have the township participate in the financing met stiff and unyielding resistance, we relented and abandoned it. Could we re-ignite this project, maybe, but given how tough times are, the model has only gotten far, far worse.

Back in 2004-5 we approached ALL the major group operators and developers and while all of them loved the location, each and every one noted that it was getting much cheaper to buy an existing course, than building a new one. Only (once deep-pocketed) RE developers and equally wealthy autocratic golf visionaries can afford to build new courses these days (with the exception of an occasional local government). Those folks, IMHO, are the only people hiring the Tom Doaks and C & C's these days.

[Charlie Goerges]

Don, I agree with you that the budget is a guideline. I like zero budgets. They do seem to encourage buying what you need rather than the "smoke 'em if you got 'em" (or spend it if you've got it) mentality.

[Charlie Goerges]

Steve, yours is the type of story that concerns me. It's true that even a modest project seems to add up fast.

It seems like when you subtract the real-estate projects, deep-pocket projects, and government projects, a pattern or common thread starts to emerge (among the projects that can survive). The common thread is you need an angle. Using Jim's example of the family from earlier in the thread, their angle was they already had the land. Major cost...gone. But even that is no guarantee. Other than already owning the land outright, I'm not sure what angle there is (besides being rich) that can compensate for the difficulties in getting a course built for a cost that allows the FIRST owner to survive and thrive.

[Charlie Goerges]

I'm curious as to the ethics of building a course, business-wise.

For the sake of argument, say that an area is somewhat over-built with higher-priced (but not outstanding golf-wise) resort courses/CCFADs. In these hard times those places are giving heavy discounts to compete.

Someone could come in to build a cheaper course (like the family Jim mentioned...who already owned the land) that beats them on price at the very least, and perhaps matches or beats the golf (depending on many variables obviously). Should they do it? Resort courses are at least subsidized by the resorts, but CCFADs may be standalone, so the new competitor could potentially put someone out of business, or into bankruptcy. And the local golfers would simply be exchanging one course for another.

Going by the rule of business, they should do it, because a cheaper, better product deserves to succeed. Unfortunately, the issue I see in this situation is the "3rd owner" phenomenon. The CCFAD goes into bankruptcy and a new owner comes in cheaper and leaner, and all of a sudden, they can run very lean and beat the "better run" business.

Any other ethical issues in General?

[Tom Yost]

On your other thread Peter, you mentioned a real-estate component of high-density commercial or something to that effect. I can honestly say that I've only ever thought about real estate (when it comes to golf courses) as housing. I'm curious what might be an example of a commercial use that seems compatible with a course?

Longbow GC in Mesa AZ is the centerpiece of a planned (yet to be built-out) light commercial/office complex.   It seems to be the only course coupled with non-resort commercial development that I am aware of in the greater Phoenix area.

http://www.daedalusllc.com/projects/longbow/

[Steve Lapper]

Steve, yours is the type of story that concerns me. It's true that even a modest project seems to add up fast.

It seems like when you subtract the real-estate projects, deep-pocket projects, and government projects, a pattern or common thread starts to emerge (among the projects that can survive). The common thread is you need an angle. Using Jim's example of the family from earlier in the thread, their angle was they already had the land. Major cost...gone. But even that is no guarantee. Other than already owning the land outright, I'm not sure what angle there is (besides being rich) that can compensate for the difficulties in getting a course built for a cost that allows the FIRST owner to survive and thrive.

Charlie,

   We had the land at little or no cost. Of course, we were responsible for the redevelopment planning($15k), engineering($75k), and permitting($10k), but those costs are minimal. It is very hard to to make a go even if your land costs are low. Feel free to drop me an e-mail if you want more detail.

[Jed Peters]

Charlie,

   We had the land at little or no cost. Of course, we were responsible for the redevelopment planning($15k), engineering($75k), and permitting($10k), but those costs are minimal. It is very hard to to make a go even if your land costs are low. Feel free to drop me an e-mail if you want more detail.

I should note that Steve's soft cost estimates are VERY conservative as well.

To have someone that is in the land use profession like myself take on the project in my area (Northern California) it would cost Steve's group triple the amount listed above (at a minimum) in Planning/Permitting.

[Jim_Kennedy]

Charlie,

This family didn't build a course to compete with others, they built something that didn't exist in the area (exec/range) and one which mainly serves a different segment of the population (although the Monday night skins game draws some players who might not otherwise play there   ).

I think the CCFAD that's now at bargain basement prices will always have the burden of being overbuilt, and will always need to charge higher fees, no matter how good of a deal it was for the '3rd owner'. I also don't think that any new course that gets built would ever price itself below the prevailing market. A quick look at the 'price fixing' that goes on in a place like Myrtle Beach is an example of this.

 
 



 

[Adrian_Stiff]

Impossible

I have done it 10 times out of 10.

[cary lichtenstein]

No bank in their right mind would finance a new course today without major personal guarantees that are backed by excessive equity!!!!!!!!!!!!!

[John Moore II]

No bank in their right mind would finance a new course today without major personal guarantees that are backed by excessive equity!!!!!!!!!!!!!

And I would never finance a project so large. You are asking for failure taking out a loan of $4-5 million. Everything has to go right for it to succeed. I would not go into a project like this if I could not outright pay for 75%+ of the total cost up front. Of course this goes with what I said about minimizing liability.

[Rob_Waldron]

Can you make money operating golf courses...Yes
Can you make money developing a golf course...Only under unique circumstances.

I look at deals every day. We avoid development deals like the plague. In most cases the development costs cannot be justified by the prospective cash flow and return on investment to the developer. Sure there are situations where a group of wealthy investors (Members) lend the development costs interest free (The old Club Corp 30 year plan). The Real Estate golf course model made sense as long as the golf course produced lot premiums and the development could be quickly built out. Unfortunately the housing market is stagnant and many developers are left with unfilled courses and numerous unsold lots. Meanwhile the cost to operate the courses continue and the debt service on the land comes due monthly.

When I was doing feasibility studies during my days at Legg Mason I did more negative feasibilities than positive. I know I pissed off several architects however my oligation was to my client, the developer.

I believe new golf courses can be successful but only if they are well located, positioned properly in the market, and well financed. Unfortunately our industry has been driven more by ego and passion for this wonderful game than sound business sense.     

[Bruce Katona]

I've been wanting to chime in since I saw this, but was away and just got back.....I cut and pasted the answer to this question (from my perspective) to a similar tpoic discuused some time ago....

Jeff Silverstein looks at the golf business model in a manner similar to our group....at its simplest a golf operation should be:

18 holes of a fun golfing experience at a reasonable cost

Small pro shop/locker room  to collect fees with mininaml staff

BBQ grill at the turn for quick hot meals at a reasonable price
"player assistants" (volunteers who are pais little but play golf for free) to control pace of play and act as the starter.

A facility fairly easy to find and get to located within 30 miles of a reasonably populated area - this will generate approximately 30,000 rounds/year; in areas where the golf season is not 12 months; as this will cover the cost of operations - any round above 30,000 begins to generate profit ( for areas not in the Sun Belt/South where the metrics are different dure to a 12 month season...12 month golf season clubs need closer to 40,000 rounds to cover the additional added expense of really operating the addional 3 months/year to break even operationally.

Someone opined earlier that a 50% operating margin was generous....an example follows:

$2,000,000 in gross sales
$1,000,000 in operating expenses (course maintenance, salaries, etc.)
$300,000 fixed costs - equipment leases, property taxes , water    purchases, office equipment leases, etc.

$700,000 in NOI/EBIT

$600,000 - Debt Service ( on $6.0 million of debt to build/acquire a facilitty)

$100,000 Net Annual Income on an investment of minimally $8.0 million (see above debt of $6.0 million + $2.0 million in equity as banks will only let you borrow 70% cost of a project maximum) is a 5% annual retun on your $2.0 million equity investment.


Looking at the above example, now you can undersatnd why acquiring existing facilities at a discount;  which  are failing operationally; makes economic sense.  Reduce the $8.0 million outlay by 25%-50% and a $100,000 return on an equity investment of $500,000-$1,000,000 gives you an annual return of 10%-20%, which is respectable.

[Steve Lapper]

Bruce,

   You and I both know that the #'s you mention don't really work on any to-be-builts anymore. Nowhere on either coast could you build a decent and fun 18 hole course and associated facilities for $8MM. The costs have moved considerably above those levels. It's closer to $11MM and that doesn't even factor in the cost of the land or the soft costs of readying it.

   Marketing costs to get to those round counts have increased and competition has increased. Even Jeff would have trouble signing off anywhere near those #'s today.

[Jim_Kennedy]

Bruce,
If 5% was being made, wouldn't the owners be satisfied enough to try taking cost cutting measures or ways to increase rounds before they sell.

Aren't the majority of these courses failing because they don't get anywhere near the number of rounds they need to survive, and doesn't that make it more likely that it requires a well funded company, one with a substantial number of existing properties that operate in the black, that can absorb a few points of loss to be successful as the next owner?

    

[Mike Sweeney]

Bruce,
If 5% was being made, wouldn't the owners be satisfied enough to try taking cost cutting measures or ways to increase rounds before they sell.

    

Jim,

I say this with love, but that type of leverage is what got us into this mess.

[Bruce Katona]

The simple answer is no as the reward is not worth the risk involved in the making the intital investment....if your already in the game, you do what you can to make it...shaving  a few points off ops isn't going to help most of the clubs in trouble, because the trouble is begger than that amount due to overspending or over-borrowing.....every operator knows to within a few hunded rounds what they need to run thru the door to operate at a break even, pay their debt and to generate their 1st dollar of real profit.

Steve Lapper is spot on, the example I gave works for an asset not on either coast, but for other markets...on either coast multiply my numbers by either 2 or 3.

I'll give you some choices   for you to make with a make believe $10 million in a market that is fairly normal, not 2009:

1. Put the money in the bank at 5% - you can't lose , but inflation will eat away at net profits and your $10 million will always be $10 million.

2. Invest in the stock market at the historical 9% return rate, which gives you a net 5% return on your money, but you can lose some of the principal, but in the end your initail investment is grwoing to more than $10 million.

3. Invest your all money $10 million, borrow $10 million more and guranantee the repayment personally....if, work hard and if you do everything right make $500,000....that's the back of the envelope analysis we do....if I can say we'll do better than #3 most years, we do the deal...if not we do either #1 or #2.

1. Pu

[Jim_Kennedy]

Mike,
Do I get a box of candy too?  

In Bruce's example there was 2 million equity and 6 million of debt, unless I misread it. That doesn't sound overly leveraged, does it?


Bruce,
Thanks for the reply.   

Mike,
Oh well, I'll still take the love. 

[George Pazin]

Nowhere on either coast could you build a decent and fun 18 hole course and associated facilities for $8MM.

I think there's actually quite a bit of the ole USA between the coasts...

[Bruce Katona]

True George.....Steve L specifically was addressing projects on either the left or right coast.....in many ways the parts of the USA in between both coats are locations taht are a bit easier to make a go of it.

[Charlie Goerges]

I must say that I am befuddled by this thread. I am seeing people in the business saying (I'm paraphrasing): "yes it can be done, but it takes planning, discipline etc." and others saying "you'd be out of your f#@!ing mind" to try it. I can't help but think that this thread is evidence supporting that sage observation that:

"It's such a fine line between stupid and clever..."

Note that I'm calling none of you stupid (or clever for that matter  ). Rather it seems that if one gets in and succeeds, one is clever; and if one doesn't succeed, well what else is left. Yes it's a very fine line, and it gets smaller and smaller every day.

[Don_Mahaffey]

Charlie,
You do have to be clever, a dreamer for sure, and you probably need a little luck.
Just keep one thing in mind, all the experts were telling everyone to make a go of it just a few short years ago. Now they say, no way. They are not ahead of the curve, they just ride the wave.

How many business deals make sense right now? Does anyone really know what anything is worth?

I will say this. If you think the economy will rebound within...say three years. And if you have the money or if you can get it, then it’s not as farfetched as everyone thinks. You can build a golf course for less $$$ now then you could five years ago. Three years from now when others who played it safe are starting to test the waters, you could have a well designed golf course, built with an economy of construction not seen in recent times, ready to go. Heck, if you’re really clever you might even be able to stir up some govt money because at least you’re tying to do something constructive.
 If one were to view it as a labor of love, as a lifestyle, then the real risks are macro. And if the whole world goes to shit, what's it matter anyway as at least you gave it a go. At the very least you’ll have an area you can graze your livestock and grow a little food

[Steve Lapper]

Nowhere on either coast could you build a decent and fun 18 hole course and associated facilities for $8MM.

I think there's actually quite a bit of the ole USA between the coasts...

George,

   As Bruce tried valiantly to say, my reference to the "coasts" was just a point to emphasize how expensive such areas are for golf development. Of course, most of the "in between" offers a better value (often a better experience as well ) !

   You know my fondness for the Steel City Go Steelers!!

[Adrian_Stiff]

Bruce has pretty much got this nailed. To many people go off track and invest their monies in the wrong places, big clubhouses' are  often the biggest cause of failure. You can make profits but much past £200,000 per year in the UK is very hard and £100,000 is pretty good, there is always something to spend money on. With big borrowings at say 6% it may nearly impossible. It is a small return, certainly its almost always single digit percent returns. I think in this current climate it will be hard to make money and most courses will lose money, who knows how long it will last, but new courses will be very rare for the next few years in western europe, there will definitely be plenty on the market and probably the ass will get knocked out of the market and you will buy much cheaper than new build. I suspect this will happen in the USA. So probably a lean time for new architecture.

[George Pazin]

   You know my fondness for the Steel City Go Steelers!!

That's why I included my smiley!

Anyway, golf seems like an industry you get into for love, not money. The old saying "Do what you love, the money will follow" is a bit naive - the money doesn't necessarily follow. But sometimes what does follow turns out to be worth more than mere money.

Having said that, I'm not rushing out to build a golf course....

 

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