Wednesday, August 11, 2021

The Selling of a Country Club Part 2


A previous post detailed how an HOA painted an optimistic picture of the future financial position of a country club in a sales brochure entitled Better Together (BT).  Homeowners were asked to vote (i.e., give their proxy to the Board) before the sales agreement was finalized.  That was an error in judgment made by many members because the sales agreement and proposed changes in the CC&Rs contain provisions detrimental to the bests interest of golf members.  If these provisions had been aired and debated before the vote, would it have affected the outcome?   Probably not.   The acquisition decision was framed as “good versus evil.”  For most homeowners, this made the choice simple. The major differences between BT and reality are detailed below so their impact on the club can be measured over time.      

1.       BT does not specify that the golf club members will be responsible for the golf course even though they have no control over its management.   The golf club will be required to be self-supporting as shown in the proposed new CC&R:

Section 18.1 (B) The expenses incurred by the Master Association in the operation and maintenance of the Golf Facilities SHALL NOT be included in the Common Expenses and Regular Assessment levied pursuant to Article 5, Section5.3 of the Declaration.  All such expenses shall be paid from income received from the operation of the Golf Facilities, including without limitation the Golf Membership fees and dues.

The proposed CC&Rs put the golf club in the same precarious position other clubs have faced. Morningside Country Club and Indian Ridge Country Club, both owned by the golf members, had to negotiate with their respective Homeowner’s Association (HOA) for financial support to put them on a sound financial position. At this Club, the HOA has stipulated no support is forthcoming. BT did not spell out the golf members obligation which could turn out to be onerous.

2.      BT presents a superficial estimate of the financial future of the club.  It does not present a separate analysis of the viability of the golf club.   For example, BT does not contain any audited records of the costs and revenues or pro forma income and cash flow statements of the golf club.    Many golf members believe the golf club is on strong financial footing based on the numbers presented in BT.  That analysis, however, is highly suspect as shown in “The Sale of a Country Club Part 1,” June 7, 2021,

An approximate divisional accounting is provided in BT (p. 10). BT shows the golf operation is near breakeven. It is probable the golf course operates at a loss, but the Club makes a profit because of the Racquet Club Assessment ($330/month/homeowner). In a Board produced brochure, Racquet Club dues are projected at the same $330 per month or $3.52 million per year. BT estimates the operating cost of the Racquet Club is only $721,000. What will the Board do with the excess funds? It is only clear from the proposed CC&Rs that the Golf Club will not receive any funds from this account.

3.       BT stated ”To manage the diverse interests of the Racquet Club and the Golf Club, divisional accounting will be used to capture the actual costs and revenues of each facility.”   This statement implied golfers would pay for golf and racquet players would pay for racquet sports.  This statement was either misleading or an example of “bait and switch marketing.”   A homeowner cannot opt out of the Racquet Club.  According to Section 5.3 (E), expenses incurred in the operation and maintenance, and/or improvement of the Racquet Club and Related Facilities are a part of the Common Expenses for the Master Association and will be billed to each Owner as part of the Regular Assessment. 

4.      Over the past year the Developer has been selling what are called Premier Memberships. A Premier Member pays his/her dues for one year upfront.  To entice more members, the Developer has increased the length of the Premier Membership by several months. In real estate transactions it is customary to pro-rate pre-paid revenues (e.g., rent) between buyer and seller.  The sales agreement, however, lets the seller (Developer) keep all of the Premier Membership fees.  This amounts to $1,214,880 in revenue (12/31/2020 to 8/17/2021) which will not be shared with the HOA.  As of the closing date, 68 Premier members will not be paying golf club dues at least until 2022.  The Golf Club is obligated to provide 468 months of membership to these Premier Members while receiving no dues.  At the current dues level of $1,495 per month this amounts to $700,000 in foregone revenue.

At the end of one year, a Premier member can convert to a full golf membership. BT indicates the conversion price would be $39,500 though this is not explicit. In practice, Premier members have been given a $10,000 discount and only pay $29,500.

The short-term fate of the Golf Club is dependent on how many Premier members convert and at what price. A high conversion rate would be a shot in the arm to the Golf Club and provide it with needed reserves. This financial windfall is not likely to be repeated in future years since the low sales inventory in housing reduces the pool of potential golf members.  BT does not mention the Premier Member program even though the decisions made by the 68 participating members are vital to the financial viability of the club. Why was such an import fact left out of BT?

5.       BT and an associated Frequently Asked Questions imply the Board cannot impose an assessment with the homeowner’s approval.  This is false.    Neither homeowner nor golf membership approval would be necessary.  Section 18.1 (B) states “nothing in this Section shall prohibit the imposition of a Special Assessment pursuant to Article 5, Section 5.4 of the Declaration to the extent that any such Special Assessment is necessary to defray in whole or in part, the cost of any capital improvement to the Golf Facilities…”  Section 5.4 states that no Special Assessments shall exceed five percent (5%) of the budgeted gross expenses of the Master Association for that fiscal year.  The budget for the Master Association is approximately $9.2 million so the Special Assessment is capped at $460,00 per year. If the capital improvements are for the golf facilities, the Master Association can elect to impose the Special Assessment on only those members who hold golf memberships.  Assuming there are 325 golf members, the Master Association can impose a Special Assessment of approximately $1,400 a year without a vote.

If golf members wanted to finance a capital expenditure larger than the Special Assessment procedure allows, there does not appear to be a mechanism for it.  Section 5.4 only specifies a vote of all members (i.e., homeowners) for major assessments.  The new Article 18 is silent on this type of assessment.

6.      BT argued the Developer could raise golf club dues at will.  BT did not say the HOA will have the same ability. The Developer, however, was able to moderate increases in golf dues by either using reserves or allocating Racquet Club dues to golf course related expenses.  The new golf club, however, will be formed without reserves and is barred from using Racquet Club dues.  Golf Club dues will be the cost of operations plus capital expenditures minus miscellaneous income (e.g., membership fees, guest fees) divided by the number of members.  The level of dues will be a function of the number of members.  If a golf member is replaced by a pickleball enthusiast, golf dues must increase.  If this cycle is repeated enough times, the golf club could enter a death spiral.

7.      Legally the HOA is responsible the liability of the member deposits. In actuality, it is the golf members who are responsible.  This is not made clear in BT.  The Board’s operating plan assumes member initiation fees exceed deposits refunds from 2020 to 2031.  In this case, the extra revenue is allocated to the Golf Club.  What if deposit refunds exceed new member fees?  The proposed CC&Rs are not clear on this matter.  From the tenor of the CC&Rs, the HOA could lend the Golf Club account funds to cover the deficit.  This loan, however, would have to paid back at some time by the Golf Club.

8.      In the Sales Agreement, the HOA gives an Honorary Corporate Membership to the Developer Group. This gift is not mentioned in BT.   The Developer can name the six members, but they can be changed with certain limitations.  This Honorary membership is given in perpetuity.  This represents a yearly gift to the Developer $99,240 at the present dues rate and trail fee.  Golf club members had no input in granting this membership but must bear the costs it will impose.  The CC&Rs do not provide a mechanism for the HOA to reimburse the Golf Club.  BT does not mention the honorary memberships.

9.      The Sales Agreement acknowledges the Developer will remove approximately 30 golf cart parking spaces that service the Racquet Club.  The Developer is obligated to provide parking at an alternative location on the property.  The sales agreement does not give the Board any approval authority on the location and size of any new parking area.  BT does not mention the inconvenience the elimination of the present golf cart parking area will cause.  Why was this very important provision omitted from the BT?

Perhaps the biggest fault with BT is that assumes a linear world. Membership and operating costs increases at the same percentage each year. The golf industry does not behave that way. There can be large swings in the financial viability of a club. The number of clubs that have been closed attest to that. To survive rough periods a club must have substantial reserves. This Club will not have substantial reserves. It will rely on the HOA increasing Golf Club dues to meet financial contingencies. Higher dues can mean the Club is less competitive in attracting new homeowners and golf members. Time will tell if this comes to pass.

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