Tale of a Golf Course for Sale reveals ways developers take advantage of unsuspecting homebuyers. In this case it’s phantom refundable membership deposits and a parking lot handoff.
Palm Coast, FL – November 8, 2010 – The failure of two recent attempts to buy Crescent Resources’ Jack Nicklaus-designed Grand Haven Golf Club in Palm Coast has shined a spotlight on questionable tactics used by developers during the housing bubble, when everyone thought the only direction in which real estate values could go was up.
In October, a potential foreign buyer for Crescent Resources’ Grand Haven Golf Club walked away from a pending contract when due diligence disclosed a $4.2 million membership deposit liability. A week later, second buyer offered significantly less than the offering price of $3.85 million to partially offset the membership deposit liability. Crescent’s $3.8 million counteroffer (plus buyer pays closing costs and doc stamps) would have cost the buyer over $8 million. That buyer also walked away.
Though the seller has reportedly explained to potential buyers that deposit refund monies come from new membership deposits, not the club owner, the $4.2 million is still a liability. At a total cost in excess of $8 million, I’m told the numbers don’t work from a business standpoint. Crescent’s rigid negotiating stance is counter to its purported goal of unloading its Florida assets. The standoff it creates between Crescent and potential buyers may ultimately lead to a member buyout. Member/owners and an equity structure would provide more flexibility in how the deposit liability is handled.
Grand Haven is a private non-equity club. Like many courses built to anchor residential developments during the late 1990s and early 2000s, the developer requires a "refundable membership deposit," to be returned (less a transfer fee) when the member resigned. Grand Haven’s "full golf" members typically paid deposits ranging from $10,000 to $35,000.
The phantom refund
But developers typically had strings attached to the refund. At most clubs, when members resign, they are placed on a refund waiting list. As long as the total club membership is not at full capacity, refunds are paid in a ratio of 1:3 or 1:4 until full membership is achieved. That means that 3 or 4 new memberships need to be sold for each refund. (That’s why the refund monies don’t have to come from the club owner.) When the membership is full, the ratio becomes 1:1. In today’s depressed housing and financial markets, most clubs are losing rather than gaining members. Resigned waiting lists are growing, not shrinking. Resigning members face waiting indefinitely for their refund.
But it gets worse. Grand Haven, as do most clubs, requires resigning members to continue paying dues until their refund is issued. Grand Haven actually has two groups of members. Those who joined before a policy change need only pay dues through the end of the year in which they resign, but they still have to wait for their refunds. Those joining after the policy change must continue to pay dues until their deposit is refunded. If they discontinue paying, their deposit is forfeited.
The final blow
New memberships mean a new revenue stream for the club, but Grand Haven and other clubs are stuck between a rock and a hard place. It Grand Haven’s membership deposit remains $35,000, new memberships would cease. If the deposit is lowered, the club faces the possibility of refunding a former large deposit in return for a new smaller deposit; negative cash flow.
What to do? Why not create a "new" class of membership: say a recallable membership with a reduced non-refundable up front charge. Recallable members pay the same dues and receive the same privileges as resident full-golf members but because they are a different membership class, no deposit refund is triggered. The club gets what it wants. The members don’t.
Another Crescent Resources shell game involves the golf club and Grand Haven’s Community Development District (CDD). CDDs are pseudo-governmental entities formed to own and manage, maintain, secure, and insure common areas within planned communities. They collect fees (taxes) from property owners to fund their activities. Until a planned community is nearly sold out, the CDD Board is controlled by the developer. Then it is turned over to property owners.
LandMar Group, Grand Haven’s developer, was a subsidiary of Crescent Resources. In 2003, when Landmar was still in control of the CDD Board of Supervisors, Crescent Resources initiated a real estate transaction which GoToby.com believes is at least dubious, if not illegal. Crescent deeded the land on which the Grand Haven parking lot is situated to the CDD. In return for the conveyance of the land to them, the CDD granted Crescent Resources a no-cost perpetual easement to use the property. The CDD, which receives no particular benefit from the transaction, was forever saddled with property taxes ($2,166.70 this year), maintenance, plus the cost of public liability insurance. The golf club is privately owned by Crescent Resources. It is not one of the amenities owned by the CDD.
How could such a one-sided deal happen? The easement is signed on behalf of Crescent Resources by Ed Burr, Senior VP of Crescent Resources (and founder of Landmar) and on behalf of the CDD by Roger Postelthwaite as Chairman of the CDD Board of Supervisors (while also a VP of Landmar). Could the transaction be challenged? I’m not an attorney, but I can understand why a potential Grand Haven Club buyer might have some reservations.
In a similarly seedy deal, Ginn-LA (Bobby Ginn and financial partner Lubert-Adler) offered club memberships to buyers at Tesoro in Port St. Lucie before the amenities had been built. To assuage potential buyers concerns, the membership deposits were to be placed into an escrow account until the club facilities were completed or until they were contracted under a fixed price contract and bonded to assure completion.
The Tesoro Club was one of the victims of Ginn’s $675 million Credit Suisse default. That default triggered the Chapter 7 bankruptcy at Tesoro. The bankruptcy trustee has been unable to locate an escrow account even though the promised Beach Club was never built. The money is gone. Club members with whom I’ve spoken asked the developer to see the escrow documents before the bankruptcy. Their requests were rebuffed.
Read>>>> Ginn – Tesoro Escrow Agreement