One of my earlier buyer's guide pages.
MIKE KAHN'S GOLF COURSE BUYER'S MANUAL
Are you ready to buy a golf course? Write: buyer@golfmak.com and tell us about yourself.
Before you decide to own a golf course, it is important to remember that a golf course is like a 3-week old baby. It needs virtually 24/7care. Forget days off. Forget nights off. Forget long-weekend holidays. However, unlike a baby, a golf course never grows out of dependency. In fact, as golf course ages, its care and needs become even greater.
DISCLAIMER: The information herein comes from Michael A. Kahn based on his own experience. All calculations, contracts, plans, etc., that a person or party makes, whether using this guide or not, shall be solely at person or party's risk. Michael A. Kahn shall not be responsible in any way for any person or party's results.
FIRST. ESTABLISH YOUR MISSION.
The first thing one needs to decide before entering golf course ownership is a mission. You should write down exactly what it is you want to gain by owning a golf course. Here are a few reasons a person or group may wish to own a golf course:
- Pride of ownership
- Love the game of golf
- To change vocations
- To run the operation like a business, and to make a profit
In the opinion of the writer, the fourth reason is the only reason a person or group should invest in a golf course. The first three reasons are, in the writer's opinion, a scenario for financial disaster. If any of the first three reasons are yours, convert your thinking to number four! Reason number four can satisfy the first three reasons (round and round we go), but if you make any decisions based on the first three, the word 'business' is quickly eliminated.
THE MISSION STATEMENT
The first thing you need to understand is that the golf course business is as competitive as any business. Attracting loyal golf play at a reasonable price so you can make a reasonable profit must be the cornerstone of your mission.
To be competitive, a golf course needs good greens, good fairways, good tees, and properly groomed bunkers. It needs to be a reasonable test of golfing skill. It must be competitively priced. If your target is located in a highly competitive neighborhood, the only advantage you can have over competitors may be service. You must be committed to making superlative service and spotlessly clean surroundings your most important operational rule. "You must be prepared to fix problems immediately." Without that kind of commitment the golf community will abandon you.
Therefore, the mission statement should read, "My efforts as a golf course owner will be to provide a reasonable challenge, with good greens, good fairways, good tees, good bunkers, clean surroundings and the best service - all at a reasonable price."
MAIN OBSTACLES TO YOUR MISSION STATEMENT
- Nature: Weather, pests, environmental issues
- Service: Employees (low paid service personnel are difficult to motivate)
- Competition: Every time a new golf course opens for play, it takes play away from you
- Redundancy: Modern golf equipment has rendered many golf courses obsolete (non-competitive) .
LET'S BRIEFLY REVIEW THESE ISSUES
Obviously, you have no control over weather. A drought or a rainy period can ruin fairways and greens. You're faced with a barrage of pests like mole crickets, nematodes, fungus diseases, varmints and all sorts of natural attacks. Meanwhile, irrigation restrictions, chemical bans and restrictions can tie your hands to providing treatments and cures to save your golf course. For instance, a wall-to-wall mole cricket treatment costs about $35,000, and only lasts six months (Mole crickets are one of the most destructive turf creatures anywhere. To learn about this creature, go to: http://www.ces.uga.edu/pubcd/L414.htm).
All but your superintendent, golf professional and kitchen manager are among the lowest paid employees anywhere. You'll be constantly turning over and training personnel. Grounds maintenance staffing is particularly difficult to retain, because the pay is low, and their work day starts as early as 5:AM. Motivating service employees to keep them showing up for work is a constant chore.
Competition from new golf courses grows every year. Add to that all the private golf clubs that have opened their courses to public play. Most studies on the growth golf in the USA indicate stagnant player participation since 1990, yet over 3,000 golf courses have been built since then. That simply means fewer golfers per golf course.
Redundancy is a 2001 phenomenon in the golf course business. Many golf courses less than 10 years old are so challenged by 300+ yard drives that they need to be retooled or redesigned to provide the same test level they did when they first opened. A leading golf course architect recently reported that he has moved his fairway 'guide bunkers' from 600 feet to over 850 feet from the tee boxes to provide the same relative test of ten years ago.
"Golfers move around like a school of fish, usually attracted to the newer golf courses. Remember the rule: New golf courses don't create new golfers, they take golfers from other golf courses. You want to take a hard look at the golf course in your sites in terms of redundancy. Look carefully to see if the layout can be re-tooled to meet the 2001+ golf community demands. It's all in length. If you can't add a few hundred yards to the score card sometime down the road, you may be boxed into an out-of-date golf course." Mike Kahn
YOUR COMMITMENT.
It is extremely important that your commitment to managing the golf course you plan to own is sincere all the way. You are about to become a multi-faceted 7-in-one businessperson:
- You're going to be in the food and beverage business.
- You're about to become a retail merchandiser.
- You'll likely have a practice range.
- You'll need to become a group physiologist (managing a membership).
- You will become a farmer (turf manager).
- You will become a marketer.
- You'll be an accountant - watching your accounts every day.
Weekends off? If you're aiming for success, not likely!
YOU ARE COMMITTED, WHAT'S THE NEXT STEP?
You need to find out what sort of golf course you can afford to buy.
Immediately put together a financial statement that bankers can verify. Even if you pay cash for the chosen property, you'll still need to fill out hundreds of credit applications for your suppliers. Supply sources for Titleist golf balls, Toro machinery, etc. will want financial information on you to establish your credit (unless you plan to do business on C.O.D., which means you've got more money than brains and don't need to read this stuff). If you're hesitant to tell the world your financial affairs, you'll create a roadblock to your golf course operations. You'll need everything from irrigation repair parts to ground beef from many different suppliers and services to run a golf course. Without established credit, you won't be able to operate properly.
Anyway, you need to identify exactly what cash you have available as your down payment. You also need plenty of operating capital to address the hundreds of surprises you'll encounter during your first six months of ownership. Believe me, no matter how careful your diligence, you will encounter dozens of unforeseen expenses. Here's the Mike Kahn formula:
In the 2001 golf course marketplace, be sure you'll have plenty of operating capital available immediately after the close. These competitive times warn golf course buyers to avoid highly leveraged acquisitions where you can be wiped out in one rainy month. Regardless, plan at least 70% of your ready cash for your down payment and keep aside 30% of it for your operating capital reserves (the banker likes that too). You'll plan from 10% to 50% of the purchase price as a down payment, depending many factors. Remember the older the subject golf course, the more you will need available in capital reserves. However, by our formula, if you have $1 million in cash and equity to contribute to the acquisition, you can comfortably buy and finance a $3 million dollar golf course (subject to cash flow).
CASH/EQUITY AVAILABLE: $1,000,000
DOWN PAYMENT AMOUNT: $700,000
OPERATING RESERVES: $300,000
The $700,000 down payment illustrated above can buy a golf course from $700,000 (full price) to as high as $7 million at 90% financing. Of course, your down payment requirement depends on factors comfortable to a lender (helping to determine the minimum down payment is one Mike Kahn's client services).
The above illustration is extremely simple. No reference is made to diligence expenses and closing costs. Those items are addressed in another page on the web site:
WARNING! Golf courses more than ten years old can become 'money pits' for inexperienced buyers (remember the movie?). In Mike Kahn's opinion, a golf course ages five years to one in human terms. Therefore, a ten year old golf course will have the health equivalent of an average 50-year-old man (wading through all these issues is what Mike Kahn does in his diligence work for his clients).
SO, YOU'VE GOT A MISSION STATEMENT. YOU'VE GOT THE MONEY. YOU'VE BEGUN YOUR SEARCH.
SELECTING A PROPERTY. WHERE DO I LOOK?
To be blunt, you need to be prepared to relocate if you are truly serious about owning and operating your own golf course. Amazingly, many of my clients want to own a golf course within a few miles from home. I explain that there's only about 17,000 golf courses in the entire United States. That's a small number when you figure the country has over 300,000 restaurants. What I'm saying is that if your sticking to business (choice four above) you'll have to go where the best opportunity is located. There are three basic regional locations you might consider: 1) The Freeze Zone, 2) the Shoulder Zone, 3) The Tropics. Lets sort these out:
- Freeze Zone: Where the ground is frozen over for a long enough period that you need to drain your irrigation pipes like Saginaw, Michigan, Milwaukee, Wisconsin, or Butte, Montana. Most golf seasons in these areas are about 200 days long. Golf course buyers usually don't favor Freeze Zone golf courses because of the cold winter weather. However, if they're run right, you get to spend your winters in Florida anyway.
- Shoulder Zone: The ground never freezes, but the mid-winter months all but close you down, and the summers are as hot as Florida. You'll find courses like that in places like Virginia Beach, Virginia, Amarillo, Texas, or Nashville, Tennessee. A golf course in, say, Asheboro, North Carolina will have two comfortable periods we call the shoulder seasons - April, May and June, then September, October and November. The summer months are generally oppressively hot and humid, and the December through March months can get cold. Most of these courses never close except for the occasional snow cover.
- Tropic Zone: Your in business all year around, but those summer months are ever so hot. Consider places like Phoenix, Arizona, Fort Lauderdale, Florida or Corpus Christi, Texas. A golf course in Sarasota, Florida operates 365 days a year. The main revenue season runs from about January 10 through April 30 (or Easter). Either side of those days, it's a very competitive market, as the tourists have all gone home. Enduring 90+ temperatures every day from mid June to the end of September, some courses drop fees as low as $10.00, including a cart to keep the locals on the course.
WHAT'S WRONG WITH A FREEZE ZONE GOLF COURSE?
Too many prospective golf course buyers turn their noses up when presented with freeze zone golf courses. However, I've operated golf courses in both regions, with experience with those in between. Golf courses in Chicago, Detroit, and Toronto (Canada) are extremely profitable, because of their short seasons and high fees. I always point out to buyers that in the peak season in Chicago, like July and August, they have several more hours of prime-time tee times to sell than a course in Florida in February. Meanwhile, every November, freeze zone golf courses drain their water lines and close right down. Florida golf courses have to keep up maintenance 12 months of the year - with those tropical grasses growing like mad!
SO, YOU'VE MADE UP YOUR MIND.
You can put the word out to brokers that you are looking to buy a golf course, and you will get all kinds of deals from Alaska to Argentina. However, there are a few excellent golf course brokers out there who know the business and can steer you toward courses that fit your criteria. Call Mike Kahn, 941-739-3990 for referrals to excellent golf course brokers.
You need to establish an understanding of the deal before you write an offer to buy the golf course in your sites. The intent of both parties (buyer and seller) can be established with a letter of intent (LOI). Usually non-binding in terms of a purchase or sale on either party, the document sets out the understanding between the two. In essence the buyer is asking what is exactly for sale, what's the price, what comes with it, etc. I consider the LT as important to the process as the purchase contract. Although a letter of intent may contain the words, 'non-binding' it still can be an important document in the deal if it contains intentional falsehoods from either party. I have a few one-page LOI boilers on file, but as time goes by, they are becoming more and more detailed - thanks to the attorneys.
When I'm part of the buyer's diligence team, I sit in and help the buyer's attorney prepare the letter of intent. It is important that as the buyer, you don't represent deeds or actions that the seller could throw back at you. With lawsuits running rampant, a seller could charge you with tying up his property, or worse, that you let out secrets about his property that seller considered proprietary. CYA all the way!
THE OFFER TO PURCHASE
I have participated in the writing of several golf course purchase contracts. As a golf course buyer, having Mike Kahn at the table is like having a general from the apposition army assisting your strategy. I sit with the buyer and the attorney providing my experience to help draft the document so that as many protections are in place for the buyer as possible. Let's face it. The seller's interests are the same as yours. He wants the best deal too! However, the seller knows things you've got to find out for yourself. Business is business!
The offer to purchase a golf course property can be up to 100 pages in length (attorneys need the work). However, with so many licenses, permits, easements, contracts, etc., the contract needs to be as specific as possible. Every piece of equipment, every inventory item to be included in the price needs to be clearly spelled out. Don't forget the finance contingency. If a lender won't finance the golf course, you cannot buy it. Make sure you can get 100% of your earnest money back if you couldn't get financed. The earnest money deposit must be clearly defined and fully protected in case the property fails your diligence study or your finance request. Buyer and Seller will select a mutually agreeable place to hold the deposit.
There's one clause I insist should be in the offer of purchase. I will reveal it to you by email. Just click: mike@golfmak.com and ask the question.
"The very clause I insist upon was missing from a recent contract to which I was associated after-the-fact. The contract was drawn before I came aboard. The result has cost the buyer many $ thousands of dollars after the close." Mike Kahn
HOW MUCH SHOULD I OFFER? You need only to make an offer that addresses the real value of the property, your interests, and your financial capabilities (I can help you determine that).
Don't waste your time and money pursuing a deal that doesn't make sense. In my opinion, if a golf course isn't making money, it isn't worth anything. Walk away from outrageous deals, no matter what they say about upside. Stick to a safe formula based on multiples of earnings. Don't pay over 10 time earnings, unless it is a brand new golf course! I'm talking reliable earnings over the past five years. Even those earnings can be misleading if maintenance has been lax over those years. Of course, that's where I come in. I can provide an opinion on what the real earnings are for a golf course by studying their revenues, rounds and expenses. Operational standards remain pretty well the same in the nation's golf course neighborhoods - subject to adjustments. I can usually tell by what the subject shows in maintenance expenses whether a deferred maintenance situation may be the reason for higher earnings - which are therefore, probably false. I can form an opinion, because I've studied cash flows from hundreds of golf courses all over North America. Matching financial activity with my physical inspection can reveal the 'real' subject's character. Remember, I was once an owner too!
If you engage Mike Kahn, consultant, as your guide to golf course ownership, I will help you decide upon a suitable golf course property at the right price. That's my business.
HOW MUCH SHOULD YOU DEPOSIT WITH YOUR OFFER?
If your attorney is competent, you can make a stronger impact on the seller by putting up a eye-opening deposit without risking it. The key is how you write the contract to be sure you get it all back if you decide not to buy the property. However, you'll get a higher degree of cooperation from the seller if he sees you've put serious money behind your offer.
AM I THE FIRST ONE?
You're not likely to be the first ‘new’ owner of the golf course you buy. Like buying a used car, your getting a property that is in a condition reflecting how it has been used and cared for. You want to be sure you're not buying a money pit. There are a few telltale areas that you can observe to quickly learn whether the place has been properly maintained. I look at sand traps, edges of cart paths, sniff the water in the ball washers, observe the comfort stations, etc., where neglect will be most obvious. I rub a finger along the reels on the fairway mowers, and take a peek into the pump house. If a golf course is more than three years old, it should already be on the second generation of some maintenance machinery. Greens mowers, fairway mowers, trap rakes, etc. are only good for a number of working hours before they are beyond economical use (depending on whether it's a snow belt course, a tropical course, or somewhere in-between). Daily use machinery with more than 2,500 hours logged will be an indication that the seller has been cutting corners in the maintenance program.
One of the best sources of information about the subject course's maintenance practices can be the assistant superintendent (not the head guy). A laid back conversation with this person can reveal an unreliable irrigation system, a worn out tractor, or expensive ongoing disease or pest issues. Sometimes the superintendent won't tell you these things under orders from the seller. Dialogue is very important in the diligence process. A talk with a key member, the starter, a ranger, or an assistant pro will alert you to problems the seller would rather you didn't know. Most of the bits of information you gather is normal wear-and-tear stuff and should be expected (not to be of a deal-killing nature). However, much of this information prepares you for the cash you'll need available after the change of ownership.
As I indicated earlier, the older the course, the more that stuff will show up.250 ITEM CHECKLIST
A true golf course buyer's diligence checklist should contain up to 250 separate items, with a couple of hundred more sub-issues. Every item needs to be taken seriously. Permitting, licensing, environmental issues, transferable leases, personnel contracts, supplier lists, available operational records, member lists, are among the headliners, but hundreds of smaller details can help the buyer avoid mistakes. However, this is where you should engage an experienced golf course individual (like me).
Everything must check out. Remember that a golf course is an ongoing business. You don't want your power shut off, your phones turned off, your bar or kitchen closed down the day you take over. Different counties have different rules about health issues, environmental issues, etc. Don't take any person's word for anything. Get all documents and permits verified in writing. Verbal assurances from public officials can be fatal. Get the documents!
IRRIGATION AND DRAINAGE
The essentials for every golf course on the planet are irrigation and drainage. You must be absolutely sure you have adequate irrigation forever.
IRRIGATION. Demands can be anywhere from 200,000 to 500,000 gallons for daily irrigation of an 18-hole golf course. You must check the irrigation permits to be sure you have an adequate water source to irrigate under normal conditions. I say normal, because every neighborhood has contingencies in case of sever drought conditions. When droughts occur, the first cut will often be the local golf course. Meanwhile, the irrigation permits are usually renewable, so you should check the renewal dates. Also see if there are any clauses that could cause you to lose the water altogether. Another irrigation source is effluent.
Effluent is the resulting waste water from community sewage treatment plants. Every community needs to get rid of their effluent safely, and there's no better place to dump it than on a golf course. If the community targets your course as a disposal site, you're likely to be obliged to accept it. Not only are you to accept effluent for irrigation, most communities make you pay to get it to your property. Then they charge you to use it!
Some irrigation permits are annual, some may be good for up to 20 years or more. Don't assume anything. Get the documents!
THE IRRIGATION SYSTEM.
You need to study the irrigation system carefully (I do that). Any golf course older than 10 years will have an out-of-date system that has used up two thirds of its operational life. Not only are 10-year-old irrigation systems near redundancy, they will be terribly inefficient compared to the latest systems. Therefore, sometime in the next five years the system will need a complete overhaul - up to a $1 million dollar expense for 18 holes of golf.
Check with the superintendent to find out how frequently the irrigation system needs repairs. Check the spare parts inventory to see how well stocked it is. You should look for blind spots indicating areas the sprinklers don't reach. Do all the sprinkler heads work? Did they cut any corners during installation? Does the system include a fertigation tank? When was the last time the main pump shaft was pulled and repaired (a $25,000 job).
In the USA and Canada, the most popular irrigation systems are Toro, Rainbird, or Buckner. I don't have much faith in any other make.
DRAINAGE. You must be certain that the drainage plan for the golf course is reliable, proper, and in good order. Get any and all documents you need to satisfy yourself that these two critical components are available now and forever. There are several drainage issues that will affect the course - and the business.
Anytime it rains, you'd like to know how long the course will be closed down (if at all). You should look for areas of erosion that will suggest poor drainage planning, or dried up puddle dimples in places indicating long-standing water. Check the sand traps to see how well they drain (most 10-year-old golf courses will have sand traps that won't drain and are in need of repair). Darker areas of sand traps will indicate possible drainage problems.
CONSTRUCTION PLANS.
Get a copy of the subject golf course's construction plans. As new owner, you have no idea where the irrigation pipes and drainage pipes are located (You don't want to have to rely in the superintendent for this stuff. I'll tell you why. Write mike@golfmak.com for the reason).
ENVIRONMENTAL
Depending on where your target golf course is located, every county, every state (province) will have their own twist on environmental rules. Some will inspect your fuel bunkers with a magnifying glass, others don't even require a sealed fuel bunker. Some will transfer a storage license, others will require you apply for a new one. Some won't require any fuel storage permits.
Some states/counties/provinces may require a separate license for chemical storage. You can expect to be required to show a separate chemical storage room, or even a completely separate building. Full regulations require specific ventilation and proper shelving, etc., to be sure reactive chemicals are safely separated.
This will really get you, but if the property has natural ponds or waterways, you'll need to learn what (local) rules apply. Flora and fauna, wildlife, water quality, etc. will all be your responsibility at your expense. A typical Florida golf course with lots of ponds spends about $20,000 a year for professional pond monitoring services. You'll need to review all the pond care documents to be certain they are fully conforming (I can tell you about disasters where the buyer did not treat these issues strongly enough).
If your target golf course is located in Ontario, Canada, and has a trout stream on the property, they guard it with tanks, guided missiles, and swat troops (just kidding). However, I'm sure you get my point. Get the documents!
THE CLUBHOUSE
The clubhouse is just like buying a house except that it sustains more wear and tear on a daily basis. I suggested that a golf course ages about 5-to-one to a person, you can almost double that for the golf course clubhouse. Consider a 200 round day.
Plumbing will endure at least 200 flushes, plus all the drainage from kitchens and the cart washing areas. Consider 200 persons coming and going at least twice each day. A 40,000 thousand round golf course means 80,000 entries and 80,000 exits from the clubhouse. Few clubhouses are constructed to endure that kind of traffic. It’s no wonder so many clubhouses look tired after only a few years!
Anyway, the first thing your lender will want is an engineers report on the structural integrity of the building (your lender wants to see it). You need to check all the heating and cooling units, electrical supply, roof shingle condition (not usually an engineering issue), termite, plumbing, etc.
The layout of the clubhouse will be extremely important in how it encourages traffic, concession opportunities, and efficiency of operation (I'm your man for that study).
THE KITCHEN. Inspect the kitchen very carefully. You can learn a lot about how the place has been operated by the seller by the condition of the kitchen. But there are other important issues to consider too. Check the fire proofing system (ask a third party expert to inspect it). Make sure all the stoves are working 100%.
Check the coolers and freezers (ask a third party expert to inspect them). If they are more than five years old, expect major compressor repairs. Check around refrigerator doors and hinges for rust or cold air losses. Look at all the cooking utensils, dishes, serving equipment, and storage areas. These are extremely expensive items that can dry up your capital in a flash! Ask to see the local health unit’s inspection reports. Be sure that all issues have been signed off by the health inspector.
You will also want a copy of the latest fire safety inspection report. If there hasn't been one lately, ask for one. The building must be certified fire safety conforming or there's no deal, because the banker will not fund without it!
LOCKERS, SHOWERS, TOILETS. A 10-year-old clubhouse will show normal wear and tear, but neglect will accelerate deterioration. The smell of the locker rooms will tell you something about the seller's care. Check the tiles in the shower, look behind the toilets, flush each one, turn on the taps, flick the light switches, inspect the carpeting. Act like your planning to live in the clubhouse.
STORAGE SPACE. Too many clubhouses were designed without enough storage capacity. When you see stuff stored in hallways, or in traffic areas, you know you've got a storage problem. Every 10-year-old golf course has storage problems, so look to see if there are reasonable solutions available.
THE PRO SHOP.
I look to see how the pro shop is located and designed to manage golfer traffic. The perfect scenario (I call a 10) is a pro shop where the cashiers can see the first and tenth tees, the parking lot and the practice range. Anything less is simply less, and more expensive and inefficient to operate.
In your inspection of the pro shop, do the white glove test around merchandise displays, behind the service counter, and in the golf professional's office. Check for old merchandise that's been there for a couple of years (you don't want to be paying invoice price for the old stuff).Ask to look at all the old tee sheets to see if they reflect the rounds reported in the seller's cash flow history.
POWER CARTS
Power cars are the single most profit-producing concession at golf courses today. However, they have a limited number of rounds on them before they hit redundancy. If the fleet is more than three years old (at a Florida course) it is ready to trade. If your research learns that carts are being towed in regularly, you know the fleet is about dead. Remember your credit information? You'll need it to lease or finance a cart fleet. (I have negotiated for several cart fleets from 50 to 90 cars by Club Car, E-Z-Go and Yamaha. Just another area where Mike Kahn can help.)
Are they gas? Are they electric. By far, golfers prefer electric cars. Electric cars are quieter and provide a smoother ride.
Is the cart storage area in an efficient location? Carts stored more than a few feet from the clubhouse (pro shop) can be expensive to transport back and forth. While you're at it, check to see the condition of the electrical source. If you're not sure, have an electrician inspect the power source.With gas carts, check to see how they managed their gas consumption. How far do they need to take them to fill the gas tanks? These inefficiencies can be operational nightmares.
CART PATHS.
The coverage and condition of the cart paths will have a bearing on cart life, as well as an impression on golfers (and the bankers). If the golf course is more than 10-years-old, you will have cart path repairs to consider. Check to see if they can be patched, or whether they need complete replacement? Replacing cart paths on an average 18-hole golf course can run from $100,000 to $200,000 or more. If you're not sure, get an estimate from a company that install cart paths.
MAINTENANCE BUILDING AND OUTBUILDINGS
A modern maintenance building should be of no less than 5,000 square feet with an office, employee lunch room, full service washroom with shower, and a parts room. If it is in the north country (freeze zone) it should be heated (at least enough for a mechanic to work in). It should be well ventilated. You need a high ceiling with at least three full height overhead doors. A mezzanine is extremely desirable for storage. Check for oil change areas, machine areas, hydraulic lifts, torches, welding equipment, air hose, water supply, electrical supply, and a reasonably sized yard. Check to see whether the more sophisticated machinery can be stored inside.
If the target golf course is more than five years old, ask to view the graveyard. Sometimes these places can become environmental problems with old batteries, gas tanks, and oily engines, resting on the ground. (Make the seller sign a paper saying they have not hidden any old equipment or chemicals on the property.)
OUTBUILDINGS. The chemical storage shed (if they have one) should be ventilated and constructed according to local regulations. Check to see whether different chemical containers are stored apart from each other.
FUEL BUNKER. Most golf courses use gas and diesel fuel. Tanks larger than 50 gallons (or so) must be stored in a tightly sealed bunker. Some areas require poured concrete and sealed bunkers with no seams, and sides as high as three or more feet (enough to hold the contents of both fuel tanks). Other neighborhoods require only cement block structures with a sealer. Most will also require a concrete fueling platform to park vehicles for fuel.
COMFORT STATIONS. Most golf courses today provide washrooms on the golf course (especially with so many women playing golf today). You'll learn a lot about the seller by the cleanliness of the comfort stations. If they are not well maintained, it's a negative reflection on earnings. Same as the clubhouse bathrooms. Flush the toilets, run the water, etc. Open and close the doors too.
RAIN SHELTERS. Good golf courses provide rain shelters. Just make sure they are safe and secure. Many have a perpetual urine smell. I wonder why?
GOLF COURSE
You're main interest is the golf course. There are eight basic components of a golf course:
- Teeing grounds
- Fairways
- Greens
- Rough areas
- Bunkers
- Natural hazards
- Service center (clubhouse)
- Maintenance facility
In your interviews with the superintendent, you want to learn what grasses make up the tees, fairways, greens and rough areas. You'll be smart to look for internet sites where you can become knowledgeable on the care and maintenance of the grasses on the target golf course. Understanding cutting heights, fertilizing programs, pest and weed controls, will help you determine whether the seller has been keeping this work up (another effect on the cash flow statements).
The condition of the tees will tell you one of two things. If they're worn out, they are too small, or the course is very busy. Always check the white tee boxes if you're trying to determine whether the place is busy or not. So few golfers play the back tees, they don't tell you anything.
You'll learn a lot about the maintenance program, and the efficiency of the irrigation and drainage system with your inspection of the fairways.
The same holds true for the greens and rough areas. You should also ask to view the superintendent' log books. These notes should indicate various fertilizing, chemical treatments, airification schedules, etc. They also may be required to keep irrigation records. Have a look at them too. You can refer to your studies on care of the subject's grasses to see whether the seller has been keeping up with proper maintenance schedules. If not, reduce the earnings they show accordingly.
Inquire about the original construction of the greens. If they state they are USGA specifications (USGA Specs) greens, that means they are built the best way.
Go to http://www.usga.org/green/coned/greens/recommendations.html to review construction of USGA Spec greens. However, understand that most greens are not built to USGA specs.
The advantage of USGA Spec greens is in their drainage and how they promote deeper root growth - important in areas where water conservation is an issue. I can explain. Just write mike@golfmak.com.
We talked about the sand traps (bunkers) and how they appear. Sand depth should be a uniform two to three and one half inches and be the same color throughout the bunker area. If weeds and grasses are encroaching into the main sand areas, you're seeing another indication they are under-maintained - another deduction from earnings.
REVIEWING THE FINANCIAL NUMBERS
Of course, you'll be interested in rounds played and financial information about the subject golf course. If numbers can fool or mislead, here's where you're going to see a lot of smoke and mirrors. Every seller wants to show you solid earnings and lots of potential to get the asking price for the property. However, as we indicate often above, earnings may be inflated by way of cutting corners in maintenance routines. The phrase, "pay me now, or pay me later!" applies here. In my experience, a golf course showing $500,000 a year in net earnings before taxes, depreciation, interest, and amortization is likely inflated by up to 20% or more (That's where I do my thing). I have a little joke about round counts...
Every time a flock of birds fly over the first tee the owner counts more rounds.
NUMBERS THAT SHOULD SEND YOU PACKING!
The direction or trends for rounds and revenues are rather obvious when reviewing annual financial statements. Since 1997, just about every golf course in the USA is showing downward trends in rounds and income. I believe that will level off sometime soon, but you should look at department ratios to get a picture of the kind of business you are buying. Assuming your interest is to own and operate a golf course, it is important to make sure you're not getting yourself primarily into the food and beverage business. A golf course showing more than fifteen to twenty percent of its revenue from food and beverage sources will become an unpleasant experience for most people who are in it to be in golf. Believe me, the energy to manage the F & B department is more than you want.
THERE'S UPSIDE IN THEM NUMBERS TOO. I'm a great believer in concession opportunities and in attaining reasonable margins thereof. You'll find hidden profits if you see food and beverage barely breaking even, or pro shop merchandise profits below fifteen percent. However, as long as the food department represents less than fifteen percent of total revenues, and the pro shop indicates less than ten percent of revenues, you won't need a great deal of energy to make either of these profitable. (I have formulas to form an opinion of the concession opportunity issues.)
EMPLOYEES
You'll need to carefully study all employee documents and employee contracts. In some places (like Florida), all employees are releases from employment at the moment the seller releases the property. You can interview them all and hire them as you see fit. Obviously though, you'll want most of them to stay, unless you already have your replacement crew in place.
THE CLOSING TABLE.
The cost to close a golf course acquisition can be substantial. Consider that you will spend your own money (that you won't get back) in many areas to satisfy yourself (and the lender) that what you see is what you get. An appraisal can cost from $5,000 to $10,000. A survey will cost anywhere from $5,000 to $50,000. The finance source will charge up to 4 points, with up to $20,000 up front to start the process. You'll pay for your own environmental survey, up to $3,000. A diligence guy like me gets $500.00 a day, plus expenses for up to 20 days of work (the best deal of all). You'll have documentary stamps, legal expenses, transfer fees, utility deposits, license transfer fees, and more. You'll need cash for your new insurance policy, likely up to $10,000 down on a an insurance policy. If there's an inventory adjustment, have cash to cover that too.
STATISTICS ON GOLF IN THE USA (1997 data).
There are approximately 26.5 million golfers, age 12 and over, which represents roughly 12% of the U.S. population. Review the 29 facts:
- 25% or 6.5 million, are age 50 and over. They play roughly 36 rounds per year.
- 19% or 5 million, are in their forties.
- 47% or 12 million, are between the ages of 18 and 39. They play an average of 13 rounds per year.
- 9% or 2.4 million, are between the ages of 12 and 17.
- 21% or 5.6 million, play 25 or more rounds per year.
- 22% or 5.7 million, are female. Female golfers comprise 39% of all beginning golfers.
- The typical male golfer, age 39, plays 21 rounds per year and has a household income of $63,300.
- The average female golfer, age 43, plays 16 rounds per year and has a household income of $61,000.
- Since 1986, the number of golfers has increased 33% (19.9 to 26.5 million).
- Female golfers increased 24% (4.6 to 5.7 million).
- Junior golfers (12-17 years old) increased 68% to 2.4 million.
- There are approximately 16,010 golf courses in the U.S., including regulation, par-3 and executive length courses.
- 70% or 11,300, are open to the public.
- 66% of all rounds are played at public facilities.
- Texas is the fourth largest state, with 838 golf courses; tied with New York (838) and lead by Michigan (906), California (942) and Florida (1,170).
- 429 new courses were opened in 1997. 144 were additions to existing facilities and 203 were 9-hole courses.
- There were 932 additional courses under construction and 720 in planning, at the end of 1997.
- Most new course construction is occurring in Michigan, Wisconsin, Indiana, Ohio and Illinois.
- The number of U.S. golf courses has increased 20% since 1986 (13,353 to 16,010).
- Approximately 30% of courses built in the last 5 years, have been additions to existing facilities.
- The course construction rate has increased, since 1986, from 150 to 400 per year.
- 40% of all course construction is related to real estate ventures.
- Roughly 3.7 million or 15% of all golfers live in a golf community and 80% of them own their residence.
- Another 3% of all golfers own a residence on a golf course, which they use as a vacation home or rent as investment property.
- The average 18-hole score for all golfers is 100 (97 for men and 114 for women).
- Only 22% of all golfers regularly score better than 90 (7% of Ladies and 25% of Men).
- Only 6% of men and 1% of women say they regularly break 80.
- Less than 20% of all golfers maintain a Handicap, although 30% say they are interested in participating in golf tournaments.
GHIN is the most widely accepted and respected Handicap maintenance system in the nation. Nearly 2 million amateur golfers are provided the benefit of GHIN, through authorized golf associations, like the NTGA, in the U.S.
WHAT IT REALLY COSTS TO BUY A $5 MILLION DOLLAR GOLF COURSE WITH A $3 MILLION DOLLAR MORTGAGE
YOU DO THE MATH!
A golf course acquisition can be a complicated and highly detailed business venture. This article will help persons or companies planning to purchase a golf course plan for expenses over and above the purchase price of a $5 million dollar golf course.
Unless you're paying cash for a property, your finance source wants several important assurances. You must consider the effort, time and expense you'll need to obtain the documentation a lender will require, such as:
- Exactly what property is being transferred, evidenced by a survey (among other things)
- An appraisal of the property by a certified property appraiser
- Evidence that the property has no environmental damage
- Engineers report on all permanent structures
- Termite inspection and report
- Title Insurance and Search
- Agronomy Report
Basically, the seller is offering you the property on an as is basis, leaving you the effort and the cost of gathering the evidence you or your lender needs to be comfortable with what you're buying (and financing). Therefore, although all these expenses are negotiable between buyer and seller, you can expect to pay these costs.
SURVEY - $5,000 TO $50,000, PLAN TWO MONTHS. In a golf course transaction, the lender will want an updated survey of the property. All encumbrances, easements, environmental designations, drainage ditches, power lines, roadways and location of all improvements material to the property must be confirmed by the survey. Depending on the land configuration, surveyor's difficulty, and surveyor's fee structure, you can expect the cost to be anywhere from $5,000 to $50,000.
APPRAISAL - $5,000 TO $15,000, PLAN AT LEAST ONE MONTH. A golf course appraisal will need to be done by a party approved by the lender. Expect an appraisal cost from $5,000 to $15,000.
ENVIRONMENTAL 1, 2 OR 3 REPORT. $1,000 TO $50,000. Allow one month for a environmental 1 report, up to three months for an environmental 2 or 3 report. You and your lender want to be sure the property is not contaminated. Based on visual reviews and even rumors, the only one who doesn't want to hear about contamination is the seller.
ENGINEER'S REPORT - $3,000 TO $10,000. ALLOW ONE MONTH. A lender will want an updated engineer's report on all permanent structures on the property. Clubhouse, maintenance building, pump house, etc. will need to be inspected by an approved engineer.
TERMITE INSPECTION - $500 TO $2,500. ALLOW UP TO ONE MONTH. All permanent structures will require a termite inspection by an approved termite inspector. Cost will depend on the size and number of buildings to be inspected.
TITLE INSURANCE - $ UP TO $15,000 FOR A $5 MILLION DOLLAR GOLF COURSE. (GO TO: http://www.homespot.com/r4mort8.htm#cost to calculate the cost of title insurance in Florida.) Even if you pay cash for the property you purchase, you want the title insured for your own safety. However, a lender will require proof that a new title insurance policy takes affect upon transfer of the property. According to the web address indicated above, a $5 million dollar golf course purchase will cost the buyer $15,000 for the policy, plus title search expenses. (Is title insurance compulsory? Not by law, but if you're obtaining a mortgage, the lender will require it. Either way, the experts say don't do without it.)
DILIGENCE - UP TO $75,000, MINIMUM OF 90 DAYS. In a golf course purchase exchange, there are hundreds of details you, as buyer must study. Based on the 'as-is' position of the seller, it's up to you to confirm all pertinent details. Unless you're are a seasoned golf course operator and have made these transactions before, you should engage an expert (like Mike Kahn) to assist you.
AGRONOMY REPORT – UP TO $2,000, UP TO 2 WEEKS FOR A REPORT: Best source, the United States Golf Association Greens Section (use google to look up USGA online). It will pay you to order an agronomy report on the subject golf course. You may find subtle problems like mutations and/or invading grasses you cannot detect yourself. Nematode problems and even inadequate maintenance practices or equipment may be identified in this report.
The most important items required for diligence is detective work and time. The contract should allow at least 90-days from signing to closing to allow for adequate diligence. With over 200 separate items to be reviewed and verified, including the lender's requirements,
there should also be a clause included in the contract for a 'reasonable extension' should information implied by seller be delayed at no fault to you, as buyer.
LEGAL - $5,000 TO $15,000. For a transaction as complicated as a golf course property, a Real Estate Attorney should be retained the moment an offer is planned. The attorney's job is to protect you, the buyer, throughout the transaction. During the diligence period, the attorney's review of all pertinent legal documents, including the survey, and supervision of the closing statements is crucial to the buyers protection. Remember, the lender will want an attorney's opinion as well.
ACCOUNTING - $1,000 TO $5,000. The lender will require an opening balance sheet prepared and delivered on a certified accountant's letterhead. As an accounting source will be needed ongoing after the closing, selecting and retaining an accounting source should be done early in the diligence period.
EXPENSES - $15,000. Expenses for the diligence party (like Mike Kahn), which includes travel, accommodation etc., will average approximately $150.00 a day over a 90-day period. A properly applied diligence effort will include intensive gathering and verifying of information about the subject property.
FEASIBILITY - $ PART OF THE DILIGENCE CONTRACT. A brief update on the future feasibility of the subject may be required by the lender, but should be completed for the comfort of the buyer. The report includes a competitive market survey, etc.
BUSINESS PLAN - $ PART OF THE DILIGENCE CONTRACT. The lender will want a business plan going forward from the closing. The report will include an executive summary, operation plans, marketing plans, improvement plans, and pro forma statements for one-year and five-years.
PROPERTY SURVEILLANCE ANALYSIS AND REVIEW - $ PART OF THE DILIGENCE CONTRACT. Inspection of the books and records provided by the seller. Review includes membership lists, supplier lists, employee list, all contracts, permits, licenses and agreements. Review of all documents for personal property to be conveyed via estoppel agreement. Review of all inventories, equipment, machinery, etc. Work includes visits to government offices to review permits, land use permits, fuel storage licenses, food service permits, drainage permits, irrigation permits, and any government-managed activity for the property.
Diligence must uncover any and all previous and pending lawsuits, liens, property work orders, or any documents that may cloud either title, or buyer's ability to conduct business without interference after the close.
FINANCE FEES/POINTS - $52,500 to $122,500 ($3 MILLION BORROWED). An application for mortgage financing from an institution may require an up front fee to cover the lender's expenses in case the loan is somehow disqualified. Expect to pay from 1 to 4 points at closing. A $3 million golf course will cost up to $90,000 in lender's fees. However, if the property appears to be a solid investment, or the loan to value is well below the lender's minimum, the lender's fees and many other buyer's costs may be included in the funding at close.
CASH YOU'LL NEED AFTER THE CLOSING - $$$ LOTS!
YOU DO THE MATH!
Get out your legal pad and add these up (this is your job). Make adjustments depending on your area or circumstances. Be extremely conservative! Better to overestimate your costs than to underestimate them.
UTILITY DEPOSITS - $1,000 TO $5,000. Depending on the local utility source, you will need to plan for up to $5,000 or more in deposits to continue utility service without interruption. Most golf course have more than one utility connection. The clubhouse, pump house, cart storage building, and any separate outbuildings may have separate utility hook-ups, each requiring a separate security deposit.
Licenses - Inventory (For Retail, Food Service Inventory, Plus Fertilizers, Chemicals, Supplies, Fuel Etc.) - Furnishings - Maintenance Equipment- Insurance Premiums - Computers, Computer Software, Point of Sale System - Transfer Of Any Licenses - Any Buyer Pro-rations - Office Supplies - Contingencies.
THERE ARE A FEW OTHER 'OPTIONAL' EXPENSES TO CONSIDER:
If you intend to use a payroll leasing service, plan for at least the equivalent of one full payroll as a deposit. At a recent transition, which I presided over, the payroll company's deposit requirement was $40,000.
Many sellers take their software with them after the sale (been there, done that). Golf club point of sale and management software will run up to $30,000, plus time and expense to train employees on the replacement software.
Changing letterheads, score cards, brochures. Plan $2,000 to $5,000 depending on the type of golf club and your marketing plans.
Advertising and Marketing. You'll likely want to announce the change of ownership and tell the world about your new plans for the golf course. The larger the market, the more expensive it becomes to get your message out. If your market is a city like Detroit, plan from $10,000 to $20,000 - especially if you intend to attract new business to the course.
Are you ready to buy a golf course? Write: buyer@golfmak.com and tell us about yourself.
