by Arthur Gimmy, MAI and Martin Benson, MAI
Published by Appraisal Institute, Chicago, 1992
Copyright © 1996 Property Valuation Advisors, Newburyport, MA
ACCORDING TO ITS authors, "This text should provide its readers with everything they need to know about the economic characteristics of golf courses and the factors to be considered in their valuation."
Golf began in St. Andrews, Scotland in the 15th century, and spread to the US as Scots emigrated here. The first permanent US course was established in Foxburg, PA in 1887. By 1900, about 950 courses existed in the US.
During the "Roaring Twenties" about 550 new courses were built each year. Growth was spurred on by the times and the high profile of golf icon, Bobby Jones. Both the depression and WWII ended construction, however, and the number declined until 1946. With the election of Eisenhower (an avid golfer), again course construction surged during the 1950s and 1960s. And, from 1975 through 1985, increasing television coverage helped with golf's growth.
In recent years, demographics and the recreational needs of a growing and aging population have bolstered golf's growth. In 1986, about nine percent of the population played golf, by 1990, about 13% played the game. During 1989 and 1990, nearly 600 new courses opened. And, as of early 1991, 560 courses were under construction. Nonetheless, contrary to popular myth, the largest segment playing the game are not older players, but those 18 to 29, in which one in six plays the game.
Courses are either private, daily-fee, or municipal. Private courses are open only to members and their guests and generally offer lifetime tenure with monthly dues. In 1990 in the US, private courses accounted for about 5,200, daily-fee courses accounted for 6,500 (and are the fastest growing category), and municipal owned courses accounted for about 2,200.
Typical course configurations include:
The basic types of courses include: regulation, executive, and par-3. These are further grouped by size, type of operation, layout, topography, location, and difficulty. Typical courses have a par 72 with a course length of 6,300 to 6,700 yards. Executive courses have a par of 58 to 68 with a length of 3,000 to 4,500 yards covering 40 to 75 acres, while par-3 courses have a par of 54 and a length of 2,000 to 2,500 yards covering 35 to 45 acres.
Fairways, the largest area of a hole, are 45 to 65 yards wide. Greens, a smaller component, range in area from 3,000 to 5,000 square feet, however, greens require more careful subsoil and drainage preparation. Moreover, they tend to be a key item in the rating of a golf facility.
Proper clubhouse sizing also is key: sizes range from 1,000 to 20,000 square feet. Inappropriate sizing, however, is common. Overbuilt clubhouses can be recognized by looking at their revenue centers: 1) the pro shop; 2) food and beverage sales; and 3) car rentals. Units of comparison include pro shop sales per member or per round, food and beverage sales per square foot or per round, and car rental per member or per round.
Qualitative course differences include playability, aesthetics, condition, reputation, and location. The site quality is determined by size, shape, topography, accessibility, vegetation, and utilities (especially water). On-site water for irrigation is essential, because public water tends to be too expensive: an 18 hole course may use 250,000 to 500,000 gallons per day. Although barely visible, the irrigation system is crucial. One, therefore, should become knowledgeable about the different types; line lengths; number of sprinkler heads, valves, pumps, and wells; as well as the capacity of the water storage.
Course capacity utilization, itself, is measured by determining the potential number of rounds of which a course is capable and comparing that to the actual number of rounds of play it receives, similar to determining the occupancy rate of a lodging facility.
A table is included showing the number of holes per state and population per hole. As a percentage of population, Minnesota ranks first with 21% of the population playing the game with Mississippi last with only 5% taking to the links. Demand, however, cannot be measured simply. Rounds per capita within a 10 mile radius may be the appropriate measure for one facility, while viability may depend on tourist demand and be measured by lodging room nights at another course.
Moreover, expensive private clubs may target those within 15 miles with incomes above $75,000, whereas an older, less elegant course may appeal to those with incomes below $40,000 within a five mile radius. Or driving time to the course may be the more precise influence. One study found that 85% of patrons lived within 30 minutes of the courses.
Appraising a course is not simple. The value of a course includes intangible, non-realty business assets: goodwill, permits and licenses, name and reputation, customer lists, management systems, management contracts, non-compete covenants, staff in place, supplier relationships, golf pro agreements, and tournament contracts. Moreover, furniture, fixtures, and equipment (FF&E) values must be separated from the real estate value. FF&E typically represent 3% to 9% of the total assets of the enterprise.
Value-in-use using the cost approach is usually the most appropriate valuation method for facilities subject to homeowner's association covenants because they tend to be limited-market properties. Private clubs rely on dues or fees to members. Members may receive use privileges or may receive an ownership interest. On the other hand, buyers of profit-oriented courses will base their valuation decision primarily on income.
Nonetheless, trophy properties have been known to sell at capitalization rates as low as 5%, while distressed properties may sell at rates of 15% or higher. When analyzing the risk of a golf course deal, lenders tend to place the greatest weight on debt service coverage ratios, loan-to-value ratios, and market share as a percentage of the total.
Comparable sales also can play a role in determining value, however, the uniqueness of each course, typically only allows one to establish a most likely value range and not pinpoint a valuation estimate. The units-of-comparison of price per hole are often a starting point. If one is able to get further financial information on the "comps", however, Total Revenue Multipliers, Golf Revenue Multipliers, Price per Round, Price per Membership, or Greens Fee and Rounds Multipliers also may be developed and applied.
On the negative side, since the book was written in 1991, some data is now a bit stale. Moreover, although the authors emphasize the importance of separating business value from realty value, they provide only abbreviated business valuation methodology in the comparable sales section, and no information (where it ought to be) in the income approach section.
Otherwise, useful information abounds along with a useful glossary, a financing survey, and tables full of income and expense ratio data.
So, no matter how you slice it, an intelligent practitioner should find enough information to avoid the hazards of golf course valuation. And (as promised), it will "provide [one] with everything they need to know about the economic characteristics of golf courses and the factors to be considered in their valuation," therefore, enabling one to perform a golf course appraisal that is on par.
The book above is available on-line at Amazon Books.
Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME and MA.
To contact the author of this review, e-mail to: firstname.lastname@example.org or contact him at the address above, or call 978-462-4347.
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