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Trouble on the links: for all their country-club glamour, immaculately groomed greens and undulating fairways, golf courses in America are overbuilt and being sold at deep discounts. Lenders are being much more conservative, and developers are advised to include houses on the courses.

DEPENDING ON WHOM YOU ASK ABOUT THE STATE OF THE golf-course industry in the United States, it is (a) terrible, (b) in bad shape but poised for a slow recovery or (c) not doing as poorly as believed. [??] Colin Hegarty, for example, painted quite a bleak picture during a recent interview with Mortgage Banking. He is president of Golf Research Group, Dallas, an international consultancy that reports and interprets the results of its research--good or bad. Objectivity is the company's currency. [??] "Golf courses are suffering an enormous amount of pain," Hegarty says. "Annual revenues have dropped by 25 [percent] to 30 percent, and in a fixed [operational] cost business it's the same [overhead whether] there is one player or 40,000." [??] The number of golf rounds played has dropped by 5 percent or 6 percent, he says. The situation has deteriorated to the point where a golf course that would have sold for $10 million three or four years ago is marked down to $8 million or even $5 million today, Hegarty says. Builders with visions of upscale homes on 18-hole courses dancing in their entrepreneurial heads can buy distressed golf properties for as little as 50 cents on the dollar, according to Hegarty. [??] For years, golf courses in the United States were opening at the rate of more than 400 a year. That's down to about 120 a year--and 60 percent of those are real estate-driven, with residential development selling for premium prices. If there is a bright side in all that, Hegarty says, it's that fewer courses are being built.

"It's always been extremely difficult to raise money to build a new golf course, as it should be, because they've always been a very risky thing," he says. "The bank will match the equity with 50 percent debt, so if the course gets into trouble and is sold for 50 cents on the dollar the bank is OK. It doesn't have to be that way--but golf courses make the same mistakes again and again, so they get into trouble a lot."

An 18-hole course with 400 homes on the property is far more likely to succeed than a stand-alone course, Hegarty says. "'Do I add a golf course or not to a residential development?' is a question asked more carefully today than it was 10 years ago," he says.

What complicates the answer is the issue of what to do with a golf course when all the homes are sold--particularly if the golfing operation starts losing $300,000 a year, for example. Builders aren't by inclination or aptitude golf-course managers, but ultimately have to think, carefully and intelligently, about an exit strategy, says Hegarty.

When asked about some current trends, he replied that:

* Rather than try to dazzle golfers and/or residents belonging to the country club with lavish 35,000-square-foot clubhouses, some owners are building more efficient 6,000- or 7,000-square-foot clubhouses.

* Rather than build golf courses that cost $1.7 million a year to maintain, developers are building ones that cost $650,000--which makes them easier to dispose of after the houses are sold.

* Golf-course developers that include residential to add value are much more disciplined than they were in the past in terms of being more likely to hedge their investment bets with housing than developers who took their chances on stand-alone courses.

Hegarty isn't entirely downbeat about the industry. He cites the example of a client who wanted to buy a 27-hole municipal golf course from government owners anxious to recover their investment. "They [the owners] had spent more than they should have, and the course was only carrying a quarter of the players it needed to make money. The municipality released enough land for 350 houses, which then became an unbelievably good business and resulted in quadruple the number of golf rounds played [drawing on the resident owners]," he says.

A different line

On the other hand, the widely held belief that golf courses have been mainly hurting in recent years is somewhat distorted, according to Jerry Sager, managing director, First National of America Inc., Martinsville, New Jersey, a mortgage lender on golf-course properties.

"The industry volume of loans is not up or down, but stable--and the banking community generally sees it that way," Sager says. "Some resort properties [with golf courses] got into trouble after 9/11, [and a precipitous drop in tourism], and residential developments with golf courses outside the demographic profile have not done well and fallen into financial difficulties."

But if you match the number of 18-hole golf courses built in the United States between 1960 and 2000 against percentages of increased population and core golf players, Sager says that comparison will reveal "a pretty steady growth--no huge peaks and valleys--compared to bowling alleys or tennis courts," which have fluctuated in popularity over the years.

Many mature courses continue to turn profits, and some golf courses in certain parts of the country have done very well while others haven't done well at all because of local economic conditions. "You can't build a golf course in the middle of nowhere, 80 miles from the closest major demographic market, and expect to make money, or put houses around it and expect to make money," Sager says.

His company focuses on the demographics of the markets in which it lends: the size of a local population, average incomes, ages and other information that identifies capability and inclination to spend money on golfing. Its smallest golf-course loan was an $18 million construction loan; the largest was $63 million for the development of 36 holes of golf and ancillary real estate.

Unlike some lenders, Sager's company will provide mortgage loans for both stand-alone golf courses and ones with residential development. During June, for example, First National of America closed a $5 million loan to refurbish a golf course in Texas and develop some residential lots, and $11.5 million in acquisition financing for a 27-hole project on the West Coast. Earlier, in the spring, it closed a $3.9 million construction loan for another developer, in Oklahoma, for a residential community/golf-course development.

When asked why there were so many bad golf-course loans, notwithstanding his more upbeat take on the subject, Sager replied: "Because they weren't based on prudent lending decisions. We [First National] have an inordinately low default rate because we're fairly conservative and approach golf-course loans as bankers, and not any differently than lending to any other business."

A golf lending pro

Gregory Lewis, president of Textron Capital Corporation, Philadelphia, part of Textron Inc., a network of businesses with total annual revenues of $10 billion and believed to be the world's largest golf-course lender, describes himself as an exclusive correspondent responsible for the origination of all the company's golf-course loans in the eastern United States.

The golf-course market continues to be "weak," Lewis says, except when there are homes built on those properties. Builders have in fact come to regard golf courses as an amenity that boosts sales of homes built along the fairways, not courses that happen to have homes attached.

There is "still a great need for golf-course financing; although, given the risk profile for that type of asset, fewer and fewer lenders are willing to do that type of lending. So there is also an imbalance between lenders with an appetite for making golf loans and people seeking them," says Lewis. "It's pretty easy to find a lender for loans on any stabilized asset, but for [golf] turnarounds, repositionings and development loans, capital is much more scarce," he says.

It shows. The spread between mortgage interest rates for a loan on a golf course--whether it's a major renovation or a new one--and apartment building or any tier-A commercial property, compared with a stabilized golf course, is 100 to 300 basis points, depending on the type of asset, Lewis says. Or he offers the example of a loan in the low 5 percent interest range for an apartment building and low 7 percent range for a golf course.

Lewis doesn't expect the situation to change much over the next few years. "There will be some attrition of golf courses in some markets where they no longer represent the highest and best use of land," he says. A bright spot on the horizon is an aging population and more golfers among larger numbers of retired people, which should help revive the industry.

The trend today is for 200- and 300-acre parcels on golf-course properties to be redeveloped for residential, retail or other commercial space purposes, as well as resorts, he says.

Lots of tee times available

In the early 1990s everyone in the industry believed there were too few golf courses for the number of people who wanted to play. "An 18-hole golf course or its equivalent a day was built over the next 10 or so years, expanding from 13,000 courses to just over [16,000] courses. There was nowhere near that growth [of players] in the golf game," causing a serious supply and demand imbalance, Lewis told Mortgage Banking.

Some markets--in Texas and Arizona, for example--have been overbuilt, and unprofitable courses in those states have closed, Lewis says. "We haven't touched bottom yet. Some markets are expecting a better year [in 2005] or expect to keep waiting for the golf-course inventory to be absorbed," he says.

Home builders are interested in building as many as 500 to 2,500 houses around new golf courses, Lewis says. Municipalities are also more interested in the housing because it produces tax revenues and adds to the residential character of their immediate neighborhoods.

As for environmental issues associated with golf courses, a potential liability could come from such things as nitrates spread on grass, pesticides and other chemicals, and heavy use of water to keep the greens in peak playing condition in places like Las Vegas, Arizona and Texas, Lewis says. But, he adds, the "golf industry has done a tremendous job as stewards of our natural resources and environment. That is one issue that won't discourage loans."

Part of his advice to lenders is to properly research, when evaluating a golf loan, the availability and cost of water in parts of the country where it is scarce.

When asked what capital markets look for in borrowers with golf courses that need financing, Joe Fraser, senior vice president of Americap, San Ramon, California, replied, "Developers must have a track record and skin in the game [risking some of their own money]. For example, if a $20 million budget is involved and it needs $5 million in equity, $5 million in mezzanine dollars and $10 million of debt to build, we would want to see the developer come in with 10 [percent] to 20 percent of the equity."

Americap has provided more than $200 million of equity and $250 million of debt financing over the past three years for various development projects throughout the United States, says Fraser.

"Borrowers also have to package transactions with the right golf [course] architects and developers," says Fraser. A "decent" golf course, depending on the location, will cost between $10 million and $15 million, with a correspondingly decent club-house, maintenance and other outbuildings, he says.

The package must include an executive summary; statement of existing debt structure; sources/uses of funds; exit strategy; when the property was purchased and the price (if it's a refinancing); a list of entitlements; cost breakdown and time schedule for entitlements/infrastructure to be completed; financial projections/pro forma operating statement; copy of the sales contract (if it's a purchase); the most recent appraisal, if available; aerial color photographs of the property; borrower's real estate experience and list of real estate owned; current personal financial statement of the borrower/principal; and market studies.

Playing to local demand

Proper documentation is important, but it counts for very little if a golf course can't draw on the local population to create a profitable critical mass, says Gregg Logan, managing director of Robert Charles Lesser & Co., LLC, Atlanta, a real estate consulting firm.

Logan agrees with the obvious conclusion that "Golf is very local and needs the population to support it." That is coming as baby boomers reach retirement age, he adds, which will expand the population of core golfers and, in time, the less-dedicated golfers in a growing population, who will sustain the market.

John Mullen is president and chief executive officer of GMC Financing Co. Inc., Las Vegas, which he says will this year provide more than $300 million in golf-course development loans and more than $750 million for resorts, with or without golf courses. The company's golf-course loans range from $5 million to $50 million, usually at a LIBOR rate based on the risk, strength of the borrower and operator of the course. (LIBOR is an acronym for London interbank offered rate--the rate of interest at which banks could borrow funds from other banks, in marketable size, in the London interbank market.)

Mullen blames the golf-course slump on overbuilding. One example he cites is Myrtle Beach, South Carolina with more than 120 courses--but he also attributes it to the relatively high cost per golf round in an uncertain economy. On the other hand, Mullen notes the start of a revival of play and therefore improving prospects in parts of Florida and Nevada (especially Las Vegas), Southern California and Houston.

"There is lots of availability [of golf-course properties for sale], but not many deals that make much sense," he says. "The only way a golf course works today is if it has a residential component to it. We won't finance one without residential"--a $50 million loan for a golf-course development with more than 2,000 residential units, for example.

Some courses in particularly dry areas of the country are being sold because of a lack of the volumes of water needed to keep them green, and are being converted to residential, which "is much more viable for a developer," says Mullen.

Another more optimistic observer in recent years is Laurence Hirsh, president of Golf Property Analysts Inc., Harrisburg, Pennsylvania, a consulting appraisal and brokerage firm. He wrote about "renewed interest in acquisitions (albeit at lower prices) and in many cases by the Wall Street and institutional interests that fueled the industry through the 1990s" in the December 2002 issue of Golf Course News.

Moreover, he wrote that the golf-course slump may have touched bottom (back then), despite a lack of debt financing slowing a recovery, because commercial banks were avoiding new construction, and demanding stabilized cash flow and often personal guarantees from prospective borrowers. He wrote that the market was starting to rebound because high debt loads were promoting golf-course sales at "bargain prices."

In an interview with Mortgage Banking in June, Hirsh was still optimistic about a turnaround in the golf-course market and the availability of financing. Why? Because, among other things, motivated sellers in overbuilt markets stimulate demand, investors continue to prefer real estate to the volatile stock market, and golf is popular in the business community.

But it will be a slow recovery, he says, mainly because debt financing for golf courses continues to be difficult to arrange. And even if it is arranged, it's a very management-intensive business that can depend on the weather and the current state of the leisure-time industry. There is still some reluctance, given the economy and rising gas costs, to spend a lot of money on club memberships and daily greens fees.

Hirsh's company's recent survey of cap rates (the yield or return an investor can expect from a property) on sales of golf courses indicates they have definitely declined over the past few years, but are still proportionately higher than other real estate categories.

Greg Cory, senior vice president at Economics Research Associates, San Francisco, a branch of the head office in London, compares golf-course lending to the hospitality market, in terms of 40 percent equity requirements. "It's an interesting industry right now, because in many parts of the country a golf course can be bought for less than replacement cost. Golf courses change hands because someone thinks he has a better business model and can dramatically raise the fee structure," he says.

"It will take a while for the natural dynamics and demographics to catch up to the supply of high-end courses and daily fees," Cory says. "Then we'll start to see rounds and rates coming back up." That kind of simple economics is par for the course in this unique real estate niche.

Albert Warson is a Toronto-based writer specializing in real estate-related subjects. He can be reached at


THE NUMBER OF NEW GOLF COURSES BEING BUILT IN the United States has decreased every year since 2000, the National Golf Foundation (NGF), Jupiter, Florida, reported in February.

"In 2004, there were 150.5 course openings and 62.5 verified closures (in 18-hole equivalents), for a net gain of 88 courses--representing a net increase of approximately one-half of I percent," NGF announced in a press release.

NGF forecast 150 to 160 18-hole-equivalent course openings in 2005, compared with nearly 400 18-hole equivalents opened in 2000.

It reported that real estate-related courses accounted for 59 percent of new development last year and is expected to continue at that rate, although the overall number of new real estate-related courses is lower than it was in the 1990s.


ACCORDING TO GOLF IN AMERICA: THE FIRST ONE Hundred Years (George Peper, ed.), the St. Andrew's Golf Club in Yonkers, New York, founded in 1888, is considered the oldest continuously operating golf club in America. Over the intervening 117 years, the game has grown to the point that, according to Colin Hegarty, president of Golf Research Group, Dallas, in the United States:

** There are more than 16,000 golf courses--more than 7,000 of them built over the past 15 years.

** 26 million people played golf on these courses (out of 52 million who play golf every year world-wide) over the past 12 months.

** An estimated $1 billion a year is spent on golf clubs.

** The golf vacation market in the United States is worth $25 billion a year.

** Every year $48 billion worth of houses are bought around golf courses.

** Greens fees 15 years ago were an average $23 to play 18 holes of golf; today it's $42.50.

** The number of golfers on the links has dwindled over the past three years by 2 million.

RELATED ARTICLE: Neither a Lender and a Golfer Be

"I'VE BEEN ON THE BANKING SIDE OF GOLF FOR 20 years," says Jerry Sager, managing director, First National of America Inc., Martinsville, New Jersey, a principal mortgage lender for the construction and acquisition of golf properties.

Sager concludes, "The one mistake the financial industry has made is that the golfers who work in the financial industry also like playing golf and being on golf courses, and think it's a wonderful sport. They want to loan on golf courses and do lend aggressively, but they need to understand they shouldn't be golfers ... they should be bankers and stay focused on the prudent diligence of doing a loan.

"If they do, they will do well and survive in the marketplace," says Sager. "But if they make inappropriate decisions [about golf courses] as bankers, which lots have done, they will make serious mistakes and have bad loans in their portfolios, and the press will jump on it."
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Title Annotation:COMMERCIAL
Author:Warson, Albert
Publication:Mortgage Banking
Geographic Code:1USA
Date:Oct 1, 2005
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