Good Leases Gone Bad: Who is Running Your Golf Course?

Leasing has its advantages and disadvantages. If your municipal golf course is leased to outside management, simple monitoring and a well-constructed lease agreement can prevent a potential financial disaster.

The "Acme" course is in abysmal condition. Due to what appears to be the failure [of the lessee] to perform even the most basic course maintenance over the past several years, "Acme" has steadily fallen into a sad state of disrepair: Of the competitive courses in the region, "Acme," by far, is in the worst condition. These poor conditions permeate not only the course itself, but also the clubhouse, maintenance facilities, and driving range. Public perception of the course is not good.--Actual language from a 1999 NGF Consulting operational review of a public golf course.

In this case, the leaseholder of this course took everything and the bathroom sink from the halfway house. It was ripped right off the wall. After neglecting the course for years and turning a community jewel of a course into a beaten-down goat farm, this lessee absconded with the proverbial sink (and three of the four toilet seats)! So, who is running your municipal golf course?

According to National Golf Foundation data, approximately 2,600 municipal courses were in operation in the United States as of year-end 1999, with several more on the way in 2000. Many of these courses are managed under a lease agreement, whereby the municipality transfers control of the course (and revenues) to the leaseholder in exchange for a rental payment. Many leases serve the community well and enhance the operational and fiscal performance of the course by bringing in responsible and experienced personnel to manage the golf course. Unfortunately, that is not always the case. When the wrong leaseholder takes control of the right course, the results can be disastrous.

Lease Advantages

Not all leases are bad. In fact, a lease may be exactly what a municipality needs to ensure that its golf course operates at optimal capacity and performance. There are several advantages to a lease agreement--none less important than the fact that it can provide experienced golf course management. Most municipalities do not have individuals on the payroll who have numerous years of golf course operational experience and who can step right in and run the course like a finely tuned Swiss watch. Theoretically, experience is what you are paying the lessee for.

A lease can also relieve a municipality from having to make the substantial expenditures necessary to run the golf course, which can be expensive. Depending on the quality of the course, maintenance alone can cost between $500,000 to $1 million, while the general and administrative expenses can add another several hundred thousand to the mix. Golf carts, equipment purchases, and inventory aren't cheap either. Under self-operation, the municipality is responsible for all of these obligations. The lease agreement shifts the financial burden to the lessee, thereby letting the municipality keep its money for other services. Some lessees, in exchange for a long-term agreement and rent concessions, will make those necessary capital improvements that the municipality has been meaning to do but just couldn't find the money for, such as refurbishing tees and greens or a installing a new irrigation system. In theory, a lease can get you out of the check-writing business, and the municipality can earn money for doing next to nothing at all. Each month or each quarter, the checks come rolling in and all the municipality has to do is deposit them in the bank. This is sort of like manna from heaven--assuming, of course, that you disregard the manna's return on investment. But be wary of whom you entrust with this investment.

Lease Disadvantages

The biggest drawbacks to a lease agreement are the loss of control and the limited financial gain. With a lease, the municipality no longer runs the show. You cannot break the lease simply because you dislike the type of carts for rent, the style of cardigan sweaters for sale in the pro shop, or the employee working the front desk. As long as the lessee is not causing "asset degradation" or violating the terms of the agreement, the municipality has no power to dictate how it wants things done. Some municipalities have big problems with that.

A simple fact of life is that a municipality will probably earn less under a lease than it would under self-operation (all other things being equal). The simple reason for this is that you are paying the lessee for his/her expertise. Not to mention the fact that the lessee has a financial stake in the operation for which it needs to be rewarded.

There are a few other potentially huge drawbacks to leases. With a lease, the care and upkeep of your multimillion-dollar facility are entrusted to another party. Do you know who the lessee is? If you take nothing else from this article, take this suggestion: DO YOUR HOMEWORK. A poor lessee can turn a $5 million golf course into a $2.5 million course much faster than a competent lessee can turn it into a $5.5 million course.

Another serious disadvantage of a lease can be its duration. Leases usually stretch between 5-10 years--some as long as 50 years. Note some actual language from another 1999 NGF Consulting operational review of a municipal facility that generated over $1 million in revenues:

   Since 1950, the [lessee] has paid the City a total of $10,838 in direct
   lease payments for the use of the facility, with only $1 of that amount
   being paid since 1957.

That is a long time to be on the contra-side of a one-sided lease.

The Problem with Leases

From a municipality's standpoint, there are two common (and recurring) problems inherent in lease agreements: poor drafting and a failure to monitor compliance. Both can have disastrous results.

The easiest of these problems to prevent, and the one most applicable to any municipality with an existing lease, is monitoring. It is amazing how often no one from the municipality bothers to drive down to the golf course to check on operations. Instead, many adopt an attitude that "as long as the check is coming in, everything must be all right." In many instances, nothing could be further from the truth. The "Acme" course is now faced with a potential $2 million renovation because no one monitored the lessee.

   The biggest eyesore on the "Acme" course is the pond located between the
   8th and 9th holes. It appears that the lessee simply abandoned construction
   of this pond midway through the project, leaving a poorly constructed,
   severely deformed pool of water. Unfortunately, its location makes it
   visible from the course entrance and it sends a poor greeting to potential
   patrons.

Every municipality should have an individual whose primary responsibility is to monitor lease compliance. This person should ensure that the course is not being neglected, that customers are receiving quality service, and that the lessee is keeping proper (and accurate) financial reports. This may, and should, entail independent agronomic and financial reviews (probably at the municipality's expense unless indicated otherwise in the lease). Make sure that your municipality is getting everything it is entitled to receive from that lease.

There is no rule that says every lease has to be disproportionately beneficial to the lessee. As the owner of a very valuable asset, the municipality is entitled to negotiate benefits on its behalf in the lease agreement. For example, many leases do not allow the municipality to inspect the lessee's financial records pertaining to the operation of the golf course. Avoid doing business with anyone that asks for this provision. If you put this provision in one of your leases, you may have just taken the first steps toward making the lessee very wealthy. See, for instance, the following example of a leaseholder that ran a course into the ground:

   NGF Consulting did not obtain any information from the leaseholder on the
   operation and performance of the golf course. The lessee told the
   consultants that her attorney advised her not to provide any current
   information or historical data regarding activity levels, financial
   performance, or operational costs.

This lessee drove a very nice Mercedes Benz.

Remember--the golf course under lease is a community asset. Demand unrestricted access to the books.

What Can You Do?

Many leases ignore specificity when it comes to course maintenance. Let me tell you now that your view of "reasonable and necessary" maintenance will differ greatly from the lessee's. To avoid future problems, specify what the lessee has to do and how much he has to spend. In some instances, leaseholders have written off greens aerification programs as capital improvements (at a cost of $80,000). If necessary, hire an agronomist or a consultant to specify what constitutes "necessary" versus "normal" versus "capital improvements." There also should be a provision to ensure that the capital improvements are spread throughout the life of the lease. Otherwise, you will be amazed at how many lessees will make all the improvements in the early years of the lease in order to recoup the benefits.

Another oft-forgotten (or ignored) principle when it comes time to negotiate leases is the old cliche "a dollar today is worth more than a dollar tomorrow." Leases that call for fixed dollar payments without revenue or inflation "kickers" benefit one party only, and it is not the municipality.

A properly structured lease may be just what your municipality needs to maximize the fiscal and operational performance of its golf course. A poorly structured lease will hang over a municipality like the Sword of Damocles, while the lessee ignores the course and laughs all the way to the bank. Don't let it happen to your course.

   For many golfers, their first point of contact is the clubhouse, and many
   form an initial impression of the entire course within seconds of entering
   the pro shop. If that is the case at "Acme," then a large percentage of
   first time golfers will never return for a second round. It is apparent
   that previous management neglected the clubhouse for years.

How many golfers has your club lost?

NGF Consulting specializes in providing golf advisory services to a broad array of municipal and private sector clients. Its services include operational reviews of existing facilities, feasibility studies, cash flow analysis and property acquisition/disposition studies, and the review and drafting of leases and other contractual agreements. NGF is located in Jupiter, Florida, and can be reached at 561/744-6006 or at www.NGF.org/consulting.

Stephen M. Youhn is a project director with the National Golf Foundation (NGF) Consulting group, which specializes in providing golf advisory services to a broad array of municipal and private sector clients. He has a J.D. degree from the Stetson University College of Law and an MBA from the University of Florida. Before joining NGF Consulting, Youhn was senior counsel for the United States Securities and Exchange Commission in Washington, D.C.

In his article, "Good Leases Gone Bad: Who is Running Your Golf Course?" (p. 78), Youhn warns municipalities of the potential dangers of leasing public golf facilities to outside parties and recommends simple measures they can take to protect themselves.