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Challenges in the appraisal of private golf clubs.

In any appraisal assignment, an appraiser begins by identifying the property rights to be valued - a task that can be very confusing in the case of private clubs because property rights are often divided in ways unique to these properties. Since the validity of the value estimate rests entirely on the correct understanding and treatment of the property rights valued, any unresolved confusion with this first step can lead to misleading and erroneous value conclusions.

Such confusion is frequently manifested later in the appraisal process, although its basis and resolution are found in the identification and understanding of the property rights being appraised. A common example is in the valuation of the fee simple interest in a nonprofit equity club, for many encounter difficulty applying the income approach to a property with no income. Typically this difficulty stems from misunderstanding the property rights involved, followed by the absence of a conceptual framework for the valuation.

This article first identifies the three primary ownership and operating structures that a golf facility can take (equity club, non-equity club, and - for necessary background - the public daily fee facility). This foundational data is fundamental to understanding the subsequent presentation of the conceptual framework for valuing the equity and non-equity private club.

While it is recognized that golf and country clubs are operated as businesses and their assets are a combination of real and personal property as well as intangibles or business value, for the purposes of this article, no allocation process has been introduced because it would overly complicate the concepts being considered.


Daily fee facilities. A daily fee facility is a golf course where the owner of the real estate allows public use of the property, charging a "greens fee" for each round of play. Included in this category are municipal courses, for which the owner is a public agency. Excluded are facilities that restrict use to a private group of individuals, such as university or military courses; these are private golf clubs, even though they may charge their members a greens fee to play it.

Note that owners of some daily fee facilities will sell season passes, multiple-play discount books, or the equivalent that grant the holder certain future use benefits, creating a condition similar to a non-equity private club.

Equity clubs. A private club is a golf course that restricts the use of its facility to specific individuals called "members." A private club may be either an equity or a non-equity club. In an equity club (also known as a proprietary club), the club members own the real estate. More specifically, the real estate is typically owned by a legal entity such as a corporation (the club), which in turn is owned by the shareholders (the members). In other words, the members own the club, and the club owns the real estate.

Members (owners) enjoy certain rights, privileges, and obligations specified in the bylaws, which typically include the right to use the golf facility. As owner-occupied properties, equity clubs are typically not operated for profit, for any profit would only be pocket to pocket from the owner to itself.

An equity club may own more than one golf facility and other property as well such as a ski lodge or city club. Also, an equity club may have different classes of members - such as honorary, restricted, family, or corporate - who participate in the ownership.

Non-equity clubs. The other private club structure is non-equity (also known as a nonproprietary club), in which members do not own the real estate. Instead, another party owns (leases or otherwise controls) the real estate, and grants certain rights to its use to others who wish to become members under the terms of a membership agreement or similar document.

Such rights to use are often considered licenses, effectively a rental agreement, with the owner (lessor/licensor) granting use to individual members (lessees/licensees) in exchange for entry fees and monthly dues (rent, both prepaid and monthly). They are typically operated for profit.

A non-equity club may offer different classes of membership, such as transferable, non-transferable, lifetime, family, temporary, corporate, or others. Like equity clubs, these are typically private and exclude public use. Also, members may enjoy the use of other facilities that the subject property owner also owns or with which he has made other arrangements.

Hybrid clubs. Finally, many private dubs are hybrids of the three basic structures. An equity club may create a second, non-equity class of members. Either equity or non-equity clubs may allow some daily fee play (then called semi-private equity or non-equity clubs). The valuation of such facilities requires close attention to the various property rights involved and the integration of the different appraisal procedures for each.


Property interest valued. The owner's interest is typically what is being valued. However, this may not be a fee simple interest. Often the equity club has encumbered its ownership interest by granting non-equity memberships or entering a lease agreement, thereby creating a hybrid club and a more challenging assignment.

To determine the owner's interest in the property correctly, the appraiser must keep in mind that market value assumes that the owner sells its interest. Therefore, it is important to focus on determining exactly what rights the owner has to sell (and will therefore be giving up) and what rights the buyer will receive for the consideration paid. Reading the documents is essential. These include the bylaws, articles of incorporation, membership contracts, financial statements, leases, contracts, title reports, etc. If they are ambiguous, clarification must be obtained.

Fee simple interest value. Fee simple is the most straightforward interest to appraise and lays the foundation for more complicated assignments. The income approach - a very important tool in valuing a golf facility as an equity club - may seem confusing since, with non-profit operations the net operating income (NOI) may be zero (or very low, or negative). Capitalizing the NOI would indicate a very low (or negative) value by the income approach, leading some appraisers either to undervalue the property or abandon the income approach. The sales comparison approach is also problematic since equity clubs rarely sell their full fee simple interest in bulk. Therefore, a sales comparison approach must use the sales of daily fee and non-equity clubs, with their substantially dissimilar characteristics. The resulting value is, therefore, likely to reflect that of a daily fee or non-equity facility, when indeed the maximum value (and highest and best use) may be for an equity club. This leaves the cost approach, which is diminished by such difficulties as land value and depreciation. Further, a club may well be worth much more (or less) than its cost would indicate.

The error creating the confusion with the income approach is a faulty assumption that the property would continue to operate as a nonprofit club, with the members continuing to enjoy their rights of use and generating little NOI. The following example illustrates this case.

Assume an equity club holds the fee simple interest in the real property (i.e., no rights of use granted to anyone but the members). As summarized in table 1, there is only one class of member (a full equity membership), new members must pay a $20,000 entry fee, the membership is transferable and, upon sale of a terminating membership, the club retains a $5,000 transfer fee, with the terminating member receiving the balance of $15,000.

The operating history is stable, with the past three years showing stable membership turnover rates, transfer fees, revenues, expenses, and NOI, all adjusted to constant, uninflated dollars for clarity. The facility is in excellent condition, all rates are at market, and operating income and expenses are reasonable. The market is strong, and there has always been a waiting list of over three years to join the club.

The purpose of the assignment is to appraise the fair market value of the club's ownership interest (fee simple in this case) in the real property(1) for use in mortgage financing, secured by the real property.

Frequently an appraiser will first use an income approach, and upon finding that investors seek a 10% capitalization rate (and a 10% discount rate based on constant dollars), he capitalizes the NOI ($250,000) to reach a preliminary value indication of $2.5 million.

This is incorrect. The underlying error is that it was incorrectly assumed that the existing members would continue to use the facility following the assumed sale.

Because the members own the club and the club owns the real property, if the fee simple interest in the real property is sold, the members have sold their rights to their former property, including their right to use or occupy it. If prior members want to play, they must rejoin the facility, assuming the new owner wants to continue operating it as a private (equity or non-equity) golf course. Prior members must then pay the new entry fee, which will be reflected as revenues to the new owner (and included as such in the income approach to value).

To value the property as an equity club, the appraiser would consider an income approach, probably a discounted cash flow (DCF) analysis, as in table 2. The assumptions used are the same as those in table 1, except that the projection of revenues and expenses begins with no members.

To project the revenues and expenses, appraisers must recognize that the hypothetical buyer would establish an equity club structure and generate revenues, in large part, by selling equity memberships. In doing so, the buyer is proceeding to resell his fee simple interest in the property to the members one membership at a time until his entire interest in the property is sold out - similar to selling out a condominium or subdivision development.

Additional assumptions for the discounted cash flow analysis are:

* Constant uninflated dollars.

* Discount rate is for constant dollars.

* Annualized year-end accounting (see table 2).

* NOI accrues to club treasury.

* Operating revenues and variable expenses vary directly with the cumulative number of members.

* The owner establishing the equity club is responsible for paying any operating loss until memberships are sold out.


As shown in table 2, the net cash flows that the buyer of the subject will realize are the entry fees from new members, less operating losses, both of which are presented in the buyer's projected capital account. In this strong market, most of the prior members are expected to rejoin in the first year. A first-year operating loss must be paid by the new property owner. The second year's net operating profit is retained by the club's treasury, as would be established by contract. By the third year, all memberships have been sold, resulting in a 100% transfer of ownership from the buyer to the new members. The buyer no longer has any interest in the property and will realize no future benefits or obligations from this property.

Discounting the cash flow projections indicates a fair market value for the fee simple interest in the subject of some $8.6 million by the income approach. This is much different from the original estimate of $2.5 million, which was based simply on capitalizing the existing NOI of the club and misunderstanding the property rights appraised.

By recognizing that the owner's interest is fee simple, that market value assumes a sale, and that the prior members will, thereafter, lose their interest in the facility and its use, the income approach is properly applied, offering a powerful valuation model. Sales of equity clubs. Like a condominium building or subdivision, once an equity club has been established and its memberships sold, it will rarely sell its full, undivided fee simple interest in bulk. Rather, individual memberships are sold to succeeding members, again like condominiums or single lots in a subdivision. Over time, the individuals who own the club (the corporation) will change through membership turnover, while the club's ownership of the real estate remains unchanged.

The lack of such bulk sales diminishes the accuracy and applicability of a sales comparison approach for equity clubs. Turning to the sales of profit-oriented non-equity clubs or daily fee facilities may reflect a potentially significant difference in value from a nonprofit equity club.

Occasionally equity dubs do sell in bulk. For example, the membership may vote to disband the club and sell the property in bulk to a [TABULAR DATA FOR TABLE 2 OMITTED] profit-motivated owner to relieve themselves of management duties and end political friction. Moreover, it is possible that an equity dub may be selling under duress, in which case the selling price would require a difficult adjustment for comparative purposes.

The value of the fee simple interest in golf course real estate may be significantly different as an equity club than for any other form of ownership and operation. An accurate appraisal of this equity dub value is critical for such purposes as highest and best use determination, mortgage financing (in which a dub pledges its bulk fee simple interest in the property), property taxation, and eminent domain.

Less than fee simple interest. If the fee simple interest in an equity club has been divided, it is likely that rights to the use of the property have been granted to non-equity members or lessees. The valuation of such properties will therefore involve both the equity club considerations already mentioned, and those affecting the non-equity club, as will be discussed.


Non-equity club ownership and operation is typically profit motivated. Structurally, these clubs have divided property rights; the owner of the fee simple interest has divided this interest by granting certain property rights to others, the members.

Leased fee interest. For the non-equity club, membership agreements may be thought of as leases, whereby the property owner grants certain rights of use and occupancy to the property for a specified time and receives rent in return from the members (tenants). The owner's interest is not a fee simple, unencumbered one but an encumbered, or leased fee, interest. This distinction is critical, for the value difference is often great.

Underlying the successful valuation of a non-equity club is a thorough understanding of the rights and obligations of the members and the owner (current and future). Ideally these will be set forth in the membership agreements (similar to a lease agreement). Often there are several classes of memberships. Membership agreements for private clubs are sometimes subject to specific laws and regulations that differ by jurisdiction. These can materially affect the valuation, and they deserve special attention by the appraiser. Otherwise, agreements are limited only by the imagination of the parties, and many varieties of creative agreements can be encountered.

Membership structures and rights. The simplest membership agreement is a monthly fee (rent) paid by the member (tenant) to the owner and terminable at will by the owner. When determining the value of the owner's interest in such clubs, the appraiser again assumes a sale of the property. A buyer is typically not required to recognize these former membership agreements, which are terminable at will and only extend one month. Therefore, the buyer effectively receives the undivided fee simple interest in the property, and the valuation begins with a full highest and best use analysis, as if vacant, as discussed for equity clubs. (In this analysis, although the buyer would have no obligation to prior members, their memberships could be continued. Applying the income approach, the appraiser would likely conduct a DCF analysis that continues some aspects of the past operations into the future, adjusting income and expenses to market levels as appropriate.)

However, unlike typical leases, membership agreements usually provide for an initial entry fee followed by monthly payments. Such an entry fee may be considered a form of prepaid rent that can introduce complications to the valuation. For example, the membership may be a lifetime membership, effectively granting the member a life estate in the property as long as the requirements of membership are met, such as paying monthly dues. Conversely, the entry fee may be a one-time, non-refundable fee upon entry, and the membership carries from month to month, and is revocable at will.

Many other questions must be answered. Does the membership grant use to family members? Does the membership include the rights of survivorship? Is the membership transferable? What are the terms and conditions of transfer and are they revocable or recallable? And must a buyer of only the real estate recognize these membership rights, whether or not he or she buys the legal entity that issued them (i.e., do these rights attach to the real property)?

These are some of the vital questions. In appraising the property, one must evaluate exactly the rights being sold. The appraisal should then clearly specify the rights and assumptions under which the property is valued. For example, if the memberships are recallable and the appraisal assumes their recall, who pays any recall fee and expense, the buyer or the seller? The appraisal then moves to the cash flows that ensue from these rights to a buyer of the property.

Valuation Model

A simple case helps to illustrate the valuation model and to point out common pitfalls in the income as well as the cost and sales comparison approaches. As before, the purpose is to value the owner's interest in the real * property for use in mortgage financing.

The same physical facility as was used for the former equity club example will be used, except that it will be structured as a non-equity club. Past operating data is presented in table 3, which begins with the dub's startup in 1992 as a newly constructed golf course.

This is a standalone club with members enjoying no benefits at other facilities. There is one class of membership: full family golf, lifetime, with right of survivorship to surviving spouse only, non-transferable (i.e., a 100% transfer fee), and non-recallable, with memberships to be assumed by subsequent property [TABULAR DATA FOR TABLE 3 OMITTED] owners. The non-refundable entry fee is $10,000, and dues are $3,000 per year adjusted annually to the Consumer Price Index. The membership limit is set at 600. Guest fees, other revenues, and variable expenses are at the same rate per member as the former equity club example; fixed expenses are identical. The operating history has been stable, with the past two years showing stable revenues, expenses, and NOI (all adjusted to constant, uninflated dollars). Again, the golf market is strong, and the course is in excellent condition.

Leased fee valuation model. Again, direct capitalization of the stable NOI at 10% gives a value by the income approach of $5.5 million. (A DCF also indicates $5.5 million, as shown in table 4.) Yet, it was previously demonstrated that the value of the owner's interest in this same property as an equity club would be $8.6 million. Assume that the fee simple value of the property for daily fee use would also be some $9 million by each of the three major approaches to value. Why is the owner's interest valued so much lower as a non-equity club? Is there again an error in the income approach?

The difference stems from the property rights valued. The owner's interest in this non-equity club is not fee simple, but encumbered by the members' rights to use. As developed below, the $5.5 million value indicated by the income approach is correct, and great caution must be exercised when applying the cost or sales comparison approach to this case.

The owner has granted rights of use and occupancy to the members. As non-recallable lifetime memberships, with rights of spousal survivorship, the memberships will continue until the member and spouse are deceased or have voluntarily resigned their membership. A buyer must recognize these contractual obligations. Further, by contract no more than 600 such memberships may be granted. Upon reaching 600 members (full occupancy), an owner can sell a membership only following vacancy (an existing member's termination). History indicates a stable turnover rate of 35 such resales annually. Therefore, the owner - current or future - will receive only a continuation [TABULAR DATA FOR TABLE 4 OMITTED] of those cash flows currently realized by the subject, which has sold out its memberships except for turnovers. The income projection is depicted in table 4.

In valuing such a club, one could assume that an owner/buyer will stop selling lifetime memberships, ultimately terminating them through attrition. Another assumption could be that an owner may buy out and thus terminate existing lifetime memberships. These are refinements not detailed here.

The original owner has sold a portion of his bundle of rights to the membership in exchange for entry fees (prepaid rent) received. Notice the large cash flows he received in the early years of the operation's past (see table 3). A buyer of the owner's interest is, therefore, left with the obligation to provide the contractual benefits, receiving only turnover fees and other operating revenues, while the seller keeps the entry fees.

Fee simple valuation model. It is often necessary to estimate the fee simple value of a golf property if put to use as a non-equity dub - typical of situations in which memberships have not yet been sold, leaving the property unencumbered and the interest as fee simple. This is encountered when an appraiser is valuing a newly constructed facility that may be put to use as a non-equity dub. It is also encountered when determining the highest and best use of an existing property that is held in fee simple (as a daily fee course) when use as a non-equity dub is an alternative. In all cases the model is the same, and the same scenario is used.

Before selling any memberships, the owner of such a new facility would first hold the fee simple interest. The value of this property, if put to use as a non-equity dub at that time, is estimated by the income approach, using a DCF analysis from its inception (with no members) through stabilization. Unlike the prior leased fee model, this fee simple model recognizes revenue from the entry fees paid by all 600 original memberships sold (see table 3, "Hypothetical fee simple value - DCF from inception"). The 'indicated value is $8.7 million. Cost and sales comparison approaches for non-equity clubs. The cost and sales comparison approaches require special attention when the value of the owner's interest in a non-equity club is being determined. Without such care, these two valuation approaches are likely to yield an indication of the property's fee simple value although the owner's interest is likely to be less than fee simple. The value disparity can be substantial.

The cost approach will initially provide an indication of a property's fee simple value. This must be adjusted (usually negatively) for the leasehold interest when valuing the owner's interest in a non-equity club to avoid overstating the value. Since the extent of this adjustment is most effectively estimated by income characteristics (i.e., the difference between the fee simple and leased fee values of the income approach), the correct application of the income approach becomes an important foundation for the cost approach.

The sales comparison approach requires even greater vigilance. If all sales are of the fee simple interest and the owner's interest being valued is leased fee, an adjustment similar to that used in the cost approach is indicated. However, the sales of comparable non-equity clubs are often not the sales of the fee simple interest but of the owner's leased fee interest. And not all leased fee values are equal. (For example, in the case study, the ratio of leased fee to fee simple value was 63% ($5.5 million-$8.7 million), whereas a comparable property with an identical fee simple value of $8.7 million may have sold its leased fee interest at a ratio of 45%, or $3.9 million.) One way to resolve this dilemma is to adjust all sales to their fee simple value to produce an initial estimate of the subject's fee simple value, and then adjust this negatively by the subject's leasehold interest value.

Also helpful in making these leased fee adjustments is the relationship between entry fees and dues. Typically, higher entry fees are offset by lower monthly dues, and lower monthly dues means a lower leased fee value if all else is equal. Therefore, when a comparable's dues are less than the subject's, a positive adjustment is indicated when all else is equal. A similar relationship may exist with the term of the memberships, with longer terms diminishing the leased fee value and indicating a positive adjustment.

It is also useful to keep in mind the basic equation that fee simple value often equals the sum of the leasehold and leased fee values. If the subject's leased fee value is 70% of its fee simple value, it is worth more than an otherwise comparable sale of a leased fee interest of 30% of its fee simple value, where the seller had previously transferred to the members a more sizable portion of the fee simple interest. Higher entry fees and longer terms are but two examples of indications that an otherwise comparable property's leased fee value may have been diminished. The extent of such differences between the subject and a comparable must be closely considered and adjustments appropriately applied.


In practice, a golf and country dub may present a complex mix of property rights to be unraveled, such as one dub with both equity and non-equity memberships of different classifications, recallable and non-recallable, lifetime and monthly, multiple facilities, and some daily fee play for a new facility partway through its initial absorption. These factors may profoundly affect value. But patience and attention to fundamentals, especially the determination of exactly what property rights are being valued, will result in a successful appraisal.

1. It is important to note that golf clubs are businesses whose assets typically include the real property as well as personal property and intangible/business value. For the purpose of this and other examples, no asset value allocation has been included. For a discussion of this subject, see Arthur E. Gimmy and Martin E. Benson, Golf Courses and Country Clubs: A Guide to Appraisal, Market Analysis, Development and Financing (Chicago, Illinois: Appraisal Institute, 1992).

Marlin E. Benson, MAI, is vice president of Arthur Gimmy International in Sausalito, California. His appraisal and consulting practice focuses on the analysis of difficult, unique, or specialized properties, and he is frequently an expert witness in litigation matters involving complex appraisal issues. He has extensive experience with golf facilities and is a co-author of the Appraisal Institute's monograph, Golf Courses and Country Clubs: A Guide to Appraisal, Market Analysis, Development and Financing. Mr. Benson earned his MBA from Boston University. Contact: (415) 339-1850. Fax 339-1855.
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Author:Benson, Martin E.
Publication:Appraisal Journal
Date:Oct 1, 1998
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