A survey of clubhouse renovations: costs and financing.

Clubhouses are not only expensive to simply maintain but they must periodically be renovated. Failure to renovate physical assets will result in worn, out-of-date facilities, often leading to a reduction in members and possibly the demise of the organization.

CMAA published Club Renovations: How to Have a Successful Outcome! in 1997. It includes sample contracts, suggestions for the general manager for surviving a renovation, and ways to gain membership approval. In addition, a chapter in the book includes sample letters regarding the financing of club renovations, and how a couple of clubs handled their respective projects. Anecdotal evidence, however, does not represent how club renovations in the United States are financed, and many finance questions were not addressed.

Club Management has featured many clubhouse renovations over the past decade. The focus has generally been on (1) restoring an aging club to its original beauty, (2) how the renovation has increased the club's membership, and (3) the increased efficiency accomplished by renovation. There have been virtually no articles published in Club Management in the recent past on how clubs have financed clubhouse renovations.

Therefore, research was undertaken to answer a number of questions regarding the renovation of clubhouses as follows:

* What part of the clubhouse was renovated?

* What was the cost of clubhouse renovations?

* How were the renovations financed?

The answers to these questions for current renovations and limited comparisons to past renovations were the topic of a survey directed to club executives.

The Sample

A mail questionnaire was sent to 500 members of the Hospitality Financial & Technology Professionals (HFTP) associated with the club industry. Usable responses were received from 123 executives resulting in a response rate of nearly 25 percent. The titles of the vast majority of respondents (84 percent) were controllers while 7 percent identified themselves as general managers. The remaining 9 percent of the respondents held other positions in their clubs such as assistant controllers. The vast majority of respondents (82 percent) were associated with country clubs, while 7 percent identified with city clubs and 11 percent with other clubs such as yacht and athletic clubs. The membership and annual revenues of clubs of respondents varied as shown in Table 1 from less than 250 members to over 2000 members, and from less than $2 million in annual revenue to over $10 million. The age of clubhouses of respondents ranged from less than five years (6 percent) to over fifty years (35 percent). The median age was 43 years.

Research Results

Seventy-two club executives of the 123 respondents indicated that their clubs have recently undertaken a club renovation. The cost of these club renovations varied from under $500,000 to over $5 million. The median clubhouse renovation expenditure was $875,000. Specific clubhouse renovation projects the respondents revealed included renovation of their club's locker room, fitness center, pro shop, pool, lounge, kitchen, dining facility, and the building.

Financing by these clubs for their clubhouse renovation projects included using membership dues, capital assessments, loans, using capital reserves, cash provided by operations, and combinations of the aforementioned methods. Table 2 reveals the use of these methods. Clearly, no method was used to the exclusion of others. Twenty percent of the respondents indicated capital reserves were used, followed closely by a combination of methods, capital assessments, loans, and other methods such as cash generated from operations.

Respondents were queried regarding each method of financing. The average cost of renovation projects financed solely by dues was $1,434,000 while the largest project so financed cost $4.2 million. On the average, these clubs increased their dues by 50 percent in order to raise funds for these projects and the largest increase in dues by a club was 150 percent.

As shown in Table 2, 18 percent of the respondents' clubs used capital assessments to finance their clubhouse renovations. The median cost of a renovation financed by capital assessments was $500,000, while the largest renovation project cost $7.5 million. The average amount of assessment per member was $3,000, while the largest capital assessment by a club was $8,188 per member.

Loans were used to finance projects by 17 percent of the clubs who have recently renovated all or part of their clubhouses. The median amount borrowed was $1 million while the largest amount borrowed to finance the renovation project by a club totaled $5.5 million. The length of these loans varied from five to 30 years. The most common terms were 10 and 15 years used by 36 percent each of the respondents' clubs.

The annual interest rate of these loans ranged from 6.75 percent to 10 percent. The median interest rate was 7.9 percent. Though several clubs used borrowed funds to completely finance their clubhouse renovation, loans constituted as little as 10 percent of the financing of one club's renovation. The average percentage of financing using loans was 60 percent.

Finally, capital reserves were used by one of every five clubs to finance their renovation projects. The range of funds used from capital reserves was $35,000 to $3 million. The average amount was only $250,000.

Comparisons with the Past

In addition, respondents were queried regarding the financing of recent past clubhouse renovations. Table 3 reveals the comparison of the number of past and current projects, the range and median cost of these projects, and the methods of financing.

The comparison reveals the following:

* Fewer current projects than recent past projects;

* The costs of the projects are the same;

* Fewer clubs used capital assessments than in the past;

* Fewer clubs used loans than in the past;

* A greater percentage of clubs used a combination of financing methods for current renovation projects than in the past;

* A greater percentage of clubs are using other methods of financing for their current projects.

As part of the research, we were interested in the amount of cash these clubs had available. Though all clubs have cash to pay their bills as they come due, many clubs have excess cash invested for short periods of time in certificates of deposit, money market accounts, treasury bills, and other financial instruments. In addition, some clubs also restrict part of their cash for capital projects.

Specifically, club executives were asked the amounts of cash on hand (including cash equivalents) and the amount of cash restricted for capital projects. Further, they were queried about the rates of returns earned on these cash investments. Table 4 reveals the amounts of cash and cash equivalents and cash restricted for capital projects. Cash equivalents were defined as short-term investments, with maturity dates generally of less than 90 days that are readily convertible to cash.

The amount of cash and cash equivalents held by clubs of 116 respondents ranged from only $14,200 to over $8.4 million. The average (median) was nearly one-half of a million dollars! The cash equivalents included money market accounts, certificates of deposits, and treasury bills, and clubs earned between 4.5 percent to 5.5 percent on these investments.

Sixty-one respondents revealed that their clubs restricted part of their cash for capital projects. The restricted amounts ranged from only $2,000 to $4 million while the median amount of restricted cash was $235,546. These funds were invested similarly to the clubs' cash equivalents and earned similar returns, that is, annual rates of 4.5 percent to 5.5 percent.

It is surprising that respondents reported similar investment returns on their clubs' cash equivalents (short-term investments) as on their longer investments (cash in capital reserves). Generally, the longer the investment the greater the return. These results possibly suggest very conservative investment practices by clubs.

Renovation Financing in a Nutshell 

Clubhouse renovation projects vary from building renovations to the remodel of a section of the clubhouse such as a kitchen, locker room or dining room. The cost of very recent renovations varied from less than $50,000 to over $5 million. The average was $875,000.

The financing of the clubhouse renovations varied from earmarking dues to a combination of several methods. The most common financing approach was the use of loans but several other financing approaches were nearly as popular.

When comparing the cost and financing of current projects with the cost and financing of past projects, few differences were noted. The costs of current and past projects are similar. There is a greater use of capital reserves, other approaches, and a combination of financing approaches with current projects than compared to the financing of past renovation by respondents' clubs. Less popular financing approaches used for current renovation projects compared to the past include loans and capital assessments.

Finally, clubs have sizable amounts of cash both for short-term purposes and as part of their capital reserves for longer-term purposes. The returns on the excess cash invested by clubs ranged from 4.5 percent to 5.5 percent. The returns for the short-term and longer-return capital reserve investments were the same.

Comparison of Financing:
Past & Current

Cost of Projects
      Range    less than $250,000-$5 million
      Median   $500,001-$1 million

                                Past     Current

Number of Projects               111       70

Methods of Financing
   Membership dues               10%       10%
   Capital Assessments           27%       18%
   Loans                         21%       17%
   Capital Reserves              19%       20%
   Combination of above          13%       19%
   Other                         10%       16%

                                100%      100%
Cash & Cash Reserves

                             Cash & Cash          Restricted
                         Equivalents (n=116)     Cash (n=116)

less than $100,000               14%                 26%
100,000-250,000                  15%                 28%
250,001-500,000                  21%                 23%
500,001-750,000                  14%                  8%
750,001-1 million                15%                  0%
more than 1 million              21%                 15%

      Total                     100%                100%

Range                      $14,200-$8.423M        $2,000-$4M
Median                        $403,000             $235,546
Size of Membership

more than 2000             (4%)
1001-2000                 (21%)
751-1000                  (18%)
501-750                   (32%)
250-500                   (24%)
less than 250              (1%)

Note: Table made from pie chart.
Annual Revenue

more than 10 million       (6%)
5-10 million              (27%)
3-5 million               (41%)
2-3 million               (17%)
1-2 million                (9%)

Note: Table made from pie chart.
Methods of Financing Renovations

Other                        (16%)
Combination (Dues, Loan
   Assessment, Reserves)     (19%)
Capital Reserves             (20%)
Loan                         (17%)
Capital Assessment           (18%)
Dues                         (10%)

Note: Table made from pie chart.

Ray Schmidgall, Ph.D., CPA Hilton Hotels Professor of Hospitality Financial Management The School of Hospitality Business Michigan State University