Golf Course Valuation Issues

William J. Pastuszek, Jr., MAI, SRA, MRA

Shepherd Associates

Newton MA

billp@shepherdnet.com

617 928 1778

GOLF & GOLF COURSES

What We Will Cover Today

• Golf Course Basics• Functional Issues: Design, layout, size, etc.• Types of Courses• Clubhouses and Amenities• Real Estate and Golf• Market Conditions• Highest and Best Use• Income Analysis• Valuation Techniques

What Do You Want to Cover Today?

The Game and Business of Golf

• Golf is a game (and business)of enduring appeal

• Simple (and highly challenging) game with endless complexities: interesting due to its appeal across age groups, levels of ability

• Business of golf is complex and challenging: the expansion of the 1990’s and 2000’s has made it even more so.

• The business of golf is intertwined with real estate.

Golf Today

• Golf participation and course creation peaked in the early part of the century

• Golden Age of Golf needed

– Growing economy

– Time and Income

– Strong RE market

– Golf’s Image

WHAT HAPPENED

• Participation/Population Peaked (see next slide)

• Golf is a Hard Game!

• The Economy…

• Fewer rounds per persons makes a difference

• In terms of supply, many courses, flat/declining participation

History

• Golf Participation has trended down from in 2005 (per Golf Digest)

• Down significantly from 2000

• Number of courses flat

• Crash of 2007-2008 was merely “final straw”

Golf Participation

Courses

• Supply of Courses continued to grow, number of golfers (& rounds played) peaked.

• Many courses created had a high cost (land, improvements) which required high fees, etc.

• Too many private clubs for a limited audience

• As golf participation peaked and the economy slumped, fewer rounds.

Supply

• According to NGF, openings/closures = no net loss in courses

• Low end courses were replaced with upper end courses

• Most closures were of public courses

• See data following

Course Openings/Closures (NGF)

Revenues

Golf in Mass.

• Mature, committed golfers

• High incomes, dedicated core group

• Short season

• Market is oversupplied with courses

• Not enough population for the number of holes

Course Types

• Different Types of Operations

– Municipal

– Daily Fee

– Semi-Private

– Private

– Other

• Different Types of Physical Layouts

Types of Golf Course Layouts

Golf Course Layouts - Examples

Typical Core Course

Other

Two Course Layouts

Mixture of Uses

What Kind of Course Layout?

Of Handicaps• A golf handicap is a number that is used to make the

competition between players of differing skill levels more even. The number is calculated using a complicated formula that takes into account the golfer's adjusted gross scores and the difficulty of the course. The lower the number, the better the golfer. A "scratch" golfer is one with a golf handicap of 0 or better.

• When two golfers with different handicaps play together, the handicaps are used to even the playing field. At it's most basic, if a person with a golf handicap of 2 plays against someone with a golf handicap of 10, the first person cuts two strokes off his or her score final score, while the second person cuts 10 strokes off his or her final score. The scores are then compared to see who won.

Handicaps

• For a golf handicap to be official, it typically has to be obtained through an organization like the United States Golf Association (USGA). The formula for figuring a golf handicap takes into account the difficulty of the course on which a round was played to give a more accurate representation of a golfer's skill level. To do this, the USGA assigns what is called a slope rating to each set of tees on each course. This number is figured into the formula that calculates a golf handicap.

Slope Ratings• Slope Rating - Slope rating (a term trademarked by the

USGA) is a measurement of the difficulty of a golf course for bogey golfers relative to the course rating. Course rating tells scratch golfers how difficult the course will be; slope rating tells bogey golfers how difficult it will be.

• To put it another way: USGA Course Rating tells the best golfers how hard a golf course actually plays; USGA Slope Rating indicates how much harder the course plays for "regular" (meaning not among the best) golfers.

• The minimum slope rating is 55 and the maximum is 155 (slope does not relate specifically to strokes played as course rating does). The slope rating for a golf course of average difficulty is 113.

• Like course rating, slope rating is calculated for each set of tees on a course, and a course may have a separate slope rating for certain tees for women golfers.

Course Ratings• The USGA Course Rating is a numerical value given to each set of

tees at a particular golf course to approximate the number of strokes it should take a scratch golfer to complete the course. A course rating of 74.8, for example, means that scratch golfers are expected to post an average score of 74.8 from that set of tees on that course.

• A course rating of 74.8 is pretty stiff, but there are no hard-and-fast parameters for how high or low course rating can go. Most course ratings range from the upper 60s to the mid 70s.

• Golf courses that participate in the USGA Handicap System are rated for each set of tees at their course (front tees, middle tees and back tees, for example). Most have separate ratings for some of their tees for women golfers. For example, the forward tees might be rated 67.5 for men and 71.5 for women.

• Course ratings play a key role in determining a golfer's handicap index in the USGA Handicap System. However, course ratings have also been adopted in many places that are not governed by the USGA.

Golf Course Anatomy

Design Concerns

Types of Holes

Key Physical Elements

• Size

• Wetlands/Water Table

• Access to Water

• Irrigation/Sprinklers

• Cart Paths, Greens, Tee Areas

• Clubhouse

• Maintenance

• Other buildings

Clubhouse – Area of potential Superadequacy

Layout & Areas of Possible Obsolescence

Other Areas of Obsolescence

• Water access• Sprinklers• Physical condition• Outbuildings• Carts• Can you think of others?

– Functional– External– Physical

• Bears on Valuation

Make up of a Hole

Construction Details

Appraisal Process

Market Analysis

• Supply

• Demand

• Competition

• “Threats”

• “Opportunities”

• Survey competing clubs for rates/services

What Works Here may not Work There!

• Functions

• Golf Outings

• Leagues

• Food and Beverage

• Oversized Clubhouse

• Overhead

• Administrative Costs

• Beverage service demand may far surpass food demand

Highest and Best Use

• Key concept with Golf Courses

• Is the Golf Course the highest and best use?

• If not, what is?

Highest and Best Use

• In the current market

– Golf Market is down

– Housing is down

• What are alternative uses if any?

• If none can be determined, what effect does that have on valuation

Cost Approach

• Advantages• If data is available, a

strong method, especially if the course is viable

• Can be used to reflect typical buyer actions, given alternatives in the marketplace

• In conjunction with financial analysis, can arrive at a well supported conclusion.

• Disadvantages• Difficulty in determining

depreciation• Open to challenge in

terms of costs• Often will require

additional financial analysis to complete approach (more than just sum of physical items)

• Not realistic in high barrier to entry markets

Sales Comparison Approach

• Obviously a strong method when data is plentiful and

• When subject and comparables are similar

• In today’s market, is it relevant?

• Are its results defensible

Sales Comparison

Advantages

• Strong direct market support

• In active market, provides strong evidence of market trends

• Direct comparison of buyer/seller behaviors

• Useful if rates, factors, expenses, operational characteristics can be extracted.

Disadvantages

• Each golf course is a unique operation/business and sales comparison may not reflect that uniqueness

• In a market which is largely of distressed or underperforming properties, use of these sales may be open to criticism

• Limited sales activity may reduce reliance on approach

Points of Comparison

• Price/hole

• Overall Price

• Price per round

• Greens fee multiplier

• Cap rate/NIM

• Expense/hole

• Expense as % of Revenues

• Expense/round played

• Other

CURRENT MARKET

Trends

Trends, cont

Sales Data

Older Sales – Do you see Distinctions?

Income Capitalization Approach

Pros

• Reflects typical buyers’ approach to acquisition

• With well supported data and analysis, it is the strongest way to arrive at a supportable value

• Requires substantial data

Cons

• Underperforming courses

• Lack of credible or historical income or support for projections/forecasts

• Doesn’t always work when course is NOT being operated at highest and best use

• Doesn’t work when golf use is NOT the highest and best use

Considerations

• Access to actual I/E (multi-year preferred)

• Access to data for projections

• Understanding of revenue producing sectors: greens fee, pro shop, carts, functions, F&B, etc.

• Understanding expenses, COGs, salaries, benefits, maintenances, capital items.

Capitalizing NOI

• Stabilized NOI

• Cap Rates

• Discounted Cash Flow (DCF)

• Discount Rates/Terminal Rates

• The latter may be preferable if the course is not running optimally.

Overall Rates

• Preferred method is to extract from sales but investor surveys and built up methods are also acceptable.

• Band of Investment/Mortgage-Equity/Debt Coverage Ratio

Surveys – Equity Dividend Rates

Compare to Competitive Alternatives

Overall Rates – Risk, Competitive, Market Position, Condition, Location

Mortgage-Equity

Operating Statement – Sample Smaller Facility

Case Studies

• Presentation

• Discussion

• Conclusions

Black Rock

Today’s Market

Wrapping it Up

• What have we covered?

• What else?

• Going forward….

The Future of Golf?