Non-Equity Golf Communities Face Challenges as Golf Loses Popularity and Developers Flounder
Course operators no longer hold the cards in a buyers’ market. High fixed operating costs make them particularly vulnerable to declining revenue. Members may be the big losers.
Palm Coast, Florida – May 5, 2009 – Real estate developers used golf courses and other high end club amenities to leverage property sales during the real estate boom. Memberships to courses designed by famous professionals carried a cache and enhanced the value of the property. Now the real estate bubble has burst. With practically no revenue from real estate sales and diminished revenue from dues and club operations, developers are stuck with the high fixed costs of amenity operations. To make matters worse, club members have seen the value of their properties and investment portfolios drop to unforeseen levels.
Club operations are having trouble dealing with the results of the real estate bubble’s burst. Suddenly the fine print in the membership offering becomes important, exposing the shortsightedness of both developers and their members. Club operators can no longer use the "take or leave it" tactics of a few years ago, but they are mired in their boom time mindset. They face hard decisions. So do club members who are only now becoming acquainted with sections of the membership agreement they wish they had read when they signed it.
The phantom refundable deposit
Non-equity membership has been the most common developer club offering to prospective buyers. In most cases, the buyer is encouraged to join because the membership deposit (initiation fee) is refundable in the event the membership is cancelled or transferred. The membership offering details the refund process. Typically, refunds are paid (minus a transfer fee) on a 3:1 or 4:1 ratio. In other words, the resigning member is placed on a waiting list. One refund is paid for every 3 or 4 new memberships sold.
In the first half of the decade, this wasn’t an issue since all new clubs were growing their membership quickly and there were few resignations. Deposits were returned promptly. But things have changed. The number of resignations is soaring while new members are practically non-existent. Waiting lists are growing longer. Some resigning members are discovering that they must keep their dues current until the refund is available, possibly months or years in the future under current conditions. Unable to keep up the payments, most are forced to abandon their deposit.
Why are resignations soaring? The economy and real estate market are certainly factors, but another factor is the structure of the membership sale. At pre-construction sales events, buyers were given the opportunity to "secure" a membership by paying only 50% of a "promotional rate" deposit. The balance would become due when the facilities were completed, often a few years out. Monthly dues would also commence at that time.
Investors, making up a large percentage of buyers at the time, did not worry about the balance of the deposit or the future dues because they planned to flip their properties quickly. Unable to find buyers, many were not financially prepared for the additional deposit and dues.
Why are there so few new members? Again, the economy and real estate market are the main reasons, but developer tactics make a big contribution. As property values soared early in the decade, so did initiation fees (deposits). Property values have suffered severe declines, but new-member deposit fees remain at their peak level. It begs the question; is this just unintentionally stupid or is it a clever strategy to force those on the long refund waiting list to abandon their deposits?
Some operators’ management decisions defy logic. Hampton Golf, which operates several golf courses for LandMar Group, found it necessary to close one of their courses for several months last year to rebuild the greens. Members were required to continue paying dues. When the course reopened, members were rewarded with a 5% dues increase and a newly instituted food minimum. Adding insult to injury, Hampton Golf now allows outside play through an "executive" program at costs below those paid by members.
How safe is your membership deposit? It may be gone already, as members of the Tesoro Club in Port St. Lucie recently learned. Membership offering documents indicated that membership deposits would be secured in an escrow account until the club facilities were completed. The Beach Club portion of the promised amenities was never built. The bankruptcy trustee found that no escrow account existed. Most club offerings do not specify an escrow agreement. Deposits go to the developer/operator. If that entity fails, the members are left "holding the bag" as unsecured creditors.
Tuesday, Duke Energy announced that bankruptcy was a possibility for its Crescent Resources real estate subsidiary. Crescent directly or indirectly owns four golf courses in Palm Coast, FL, making it the largest golf course operator in the area. The clubs; Grand Haven and the Grand Club, comprised of the Pines Course, the Cypress Course, and the Matanzas Course all operate with "refundable membership deposits." The Matanzas Course is currently closed. Renovation work was originally scheduled for 2007. The news of Crescent’s financial woes cast further doubt on future of the course. Members are not the only ones to suffer. Those who own property bordering the course are seeing property values decline. The four courses are operated by Hampton Golf, throwing another legal entity into the mix.
The Corporate Shell Game
Landmar literature indicate it’s a subsidiary of Crescent Resources. So how would a Crescent bankruptcy affect local Landmar operations? A search of corporate records does not provide much guidance. In fact, there are two Landmar entities; Landmar Group, LLC and Landmar Management, LLC.
The three Grand Club courses are owned by The Grand Club LLC and managed by Hampton Golf, Inc.
The Florida Dept. of State lists for the Grand Club LLC show:Manager – Landmar Management, LLC – registered in N.C. (Duke Energy is headquartered in Charlotte, N.C.)Manager/Member – Hampton Golf, Inc.Florida Dept. of State lists the following officers for Hampton Golf:Ed Burr, founder of Landmar – Burr resigned from Landmar in 2007MG Orender, President of Hampton Golf and former President of the PGA
The Grand Haven Golf Course and Clubhouse are owned by Crescent Resources, a joint venture of Duke Energy and the Morgan Stanley Real Estate Fund. It is managed as The Grand Haven Club by Hampton Golf, Inc.
Records for The Grand Haven Club, LLC show:Manager – Landmar Management, LLCManager/member – Hampton Golf, Inc.
Florida Dept. of State records for Landmar Group, LLC show:Manager – Landmar Management, LLC
Join or else strategy
The Ginn Company followed a strategy used by many other developer/operators. Memberships were offered to all buyers at the sales release event. Those who declined or who later forfeited their memberships became amenity orphans. They are prevented from purchasing a membership in the future. The membership ban follows the property, meaning that no future property owner may join the club either. The threat of devaluing their property intimidates many members to continue paying their dues.
Developers are finding this strategy is a double edged sword. Clearly, the chances of future development of their community as well as future viability of the club itself will depend on their ability to attract new members going forward. At some point, they will have to change the coercive tactic, but the change itself will result in a sudden flood of new resignations/abandonments, hurting current cash flow. It’s the rock or a hard place.
Invitational memberships – controversial but necessary
Several membership clubs have found it necessary to offer recallable invitational memberships. The concept is to allow memberships for those "outside" the community (non-property owners) until the membership roster fills with community residents. The additional cash flow is necessary, but the strategy riles current members, especially in "private" clubs.
The golf industry is in a slump. The number of rounds played is declining. More courses have closed over the past three years than have opened. Many think the slump is permanent. If so, clubs will forever have a difficult time filling their memberships. If so, invitational memberships may become effectively permanent. The change will likely result in a greater differentiation between developer owned and operated clubs and equity clubs, where members own the facility and the club is operated as a private club. Hammock Dunes, offering two courses to its members, is Flagler County’s only equity club.
Grand Haven
Toby, great article which captures the reality of what’s happening here. An interesting aside is that the legacy of boom time real estate development left a series of broken promises regarding the ‘private’ criteria of Grand Haven, while the sense of an unlimited boom led to what can only be kindly described as arrogant, and misguided management decisions regarding course maintenance and club policies. While all other area courses flourished, Grand Haven fell into dismal condition.
The final irony is that other developments offer multiple courses in pristine condition such as Plantation Bay, are out of reach for most Grand Haven residents since they’re stuck with property whose market value has at least deteriorated by a third and there are little to no buyers. The people in Grand Haven are exceptional, but with the gift of 20/20 hindsight, I think I would have opted for a multiple course community vice a single course with the unpleasant experience we’ve had here.
Golf Membership Resignations and forfeits
Toby, Do the course owners have recourse, other than taking back the membership and disallowing future membershipassociated with the property, if the former member either resigns or forfeits their membership to at least continue to receive the minimum monthly membership dues? After all the members do sign a contract when they purchase the membership.
Reply to Wil
I agree with you assessment of the Grande Haven golf course management side. However, the Grand Haven real estate market has faired as well or better than most other communities. The Wild Oaks section, unlike The Conservatory, has a fair amount of building activity and a modest number of foreclosures. On the residential side, there are currently 95 homes for sale in Grand Haven, down from 176 a few years ago. And there are 19 pending/contingent sales contracts. This is actually quite impressive.
Reply to Rob
The answer to your question will vary from one club to the next. Talk to the membership director for your club. They should be able to respond to your questions.