## Sunday, December 18, 2022

### Handicapping a Skins Game for Par Threes

A group of players participate in a gross skins game and net skins game. There is a wide range of handicaps with players receiving 0, 1, or 2 strokes on a par three.  In the net skins game, nothing irritates the low handicap player as much a seeing his natural birdie tied by a bogey made by a player receiving two-strokes.   To right this injustice, the low handicapper suggests that players only receive one-half of their handicaps strokes on par three. That is, a player receiving two-strokes would only get one-stroke.  The player receiving one-stroke would only get one-half a stroke.

What are the implications of going to the “0ne-half Rule”?  A rigorous analysis would require scouring tons of data and using a simulation model to estimate which golfers win and which golfers lose under the different handicap rules.  Even then, the result would be imperfect since results of skins games depend upon the mix of players[i], a hole’s difficulty, its stroke allocation, and the abilities of players (e.g., long hitter, short hitter).  The importance of this problem does not call for that much work.

In this post, a more slothful approach is taken.  It is assumed three players play a par three with the scoring probabilities of each player shown in Table 1.  There are 36 possible outcomes each with its own probability of occurring.  For example, the probability of all three players making par is (.6 x .2 x .1) .012.

Table 1

Scoring Probabilities

 Gross Score Player 1 (0 strokes) Player 2 (1 Stroke) Player 3 (2 Strokes) Birdie 0.1 0.05 0.0 Par 0.6 0.2 0.1 Bogey 0.3 0.6 0.5 Double Bogey 0.0 0.15 0.4 Average Score 3.2 3.85 4.3

For each outcome, one of three players earns a skin or there is no skin.  A player’s probability of winning a skin is the sum of the probabilities of occurrence where he wins a skin.  Table 2 presents these probabilities for three handicap rules (no handicap, full handicap, one-half handicap).

Table 2

Net Skin Probabilities

 Handicap Rule Player 1 Player 2 Player 3 No Skin No Handicap .505 .055 .020 .420 Full Handicap .030 .117 .435 .418 ½ Handicap .196 .353 .198 .253

If the competition was only net skins, the ½ Handicap Rule would appear to be best.  The No Handicap Rule gives the low handicap player a big advantage and the Full Handicap Rule gives the high handicap player a big advantage. But the competition under consideration has both a net skin pool and a gross skin pool. Table 3 presents the probability of each player winning at least one skin.

Table 3

Probability a Player Wins At least One Skin

 Handicap Rule Player 1 Player 2 Player 3 Full Handicap .52 .23 .45 ½ Handicap .60 .39 .21

These numbers do not represent the actual probabilities in a skins competition.  With many more players than the three used in the example, the actual probabilities will be much lower.  The probabilities in Table 3, however, do indicate the relative advantage of each type of player.  The Full Handicap Rule appears to best in terms of equity and simplicity of administration (1/2 strokes can be confusing).  Moreover, this analysis was done for par three holes which the high handicapper typically finds the easiest (i.e., scores the least over par).  Therefore, applying the Full Handicap Rule over all holes would tend to equalize the chances of all types of players earning at least one skin.

In the long run, this type of skins game is an annuity for the low handicap player and he should not begrudge the high handicap player who chips in for a three and wins a skin.

[i] www.ongolfhandicaps, “Why You Win (or lose) in Skins,” June 25, 2012.

## Wednesday, October 26, 2022

### The Selling of a Country Club Part 5

This is the fifth is a series on the Selling of a Country Club.  It documents how errors by an HOA Board can diminish its credibility and impose costs on its members.

There is no doubt serving on an HOA Board is a difficult job.  Board members can become defensive when they believe, often with good reason, they are being criticized unjustly.  In some cases, Board members realize it is easier to manage without transparency.  If members do not know what to complain about, criticism will be is diminished. An example of this is how the issue of the property tax exemption for the Club was handled.  As detailed below, the Board’s actions can only be explained by its hubris.

The Master Association Board published a sales brochure, Better Together, that asserted if the HOA bought the Club, the Club would be exempt from \$241,000 in yearly property taxes.  As a former adjunct professor of State and Local Government at UCLA, this struck me as too good to be true and probably false.  To validate the tax-exempt assumption, the President of the Master Association was asked if the assertion of the exemption had been corroborated by the Assessor or by the tax treatment of similarly situated HOA owned clubs.  In an email dated 4/25/2021 the President responded:

·       Yes, both were done. We also checked with the HOA owned courses that were part of DRM (Desert Resort Management) as the management company. There were 2 DRM managed HOA’s that owned clubs, and both are tax free…[1]

The President was then asked (email dated 5/7/2021) if the Board had any documentation from the Assessor affirming the exemption from property tax.   No response was received.  My inference was the Assessor did not give the Board any assurance about a possible exemption.

Second, the Riverside County Assessor (email dated 4/28/2021) was asked the following question:

·       If a privately owned golf course is bought by an HOA, does the property tax disappear or is it allocated to homeowners?

The following answer was provided by the Supervising Appraiser, Total Property & Exemptions in the Office of the County Assessor-County Clerk-Recorder (email dated 5/3/2021):

In response to your general question…, the property tax does not disappear, the property is still taxable to the HOA.

There was also empirical evidence the Club would not be exempt from the property tax. The Springs Golf Club sold itself to the Springs HOA in 2019 under terms similar to the purchase of the Club.  Examination of the history of paid taxes revealed the Springs HOA now pays the taxes that were previously paid by the Springs Golf Club—i.e., the property taxes did not go to zero.

When confronted with the Springs example, the General Manager of the Master Association argued (email dated June 10, 2022) the Springs example was not relevant and continued to vouch for the Board’s claim that Club would become tax exempt:

The statements contained within the Better Together brochure are accurate, and no one was misled.[2] Further the statements contained in this brochure were confirmed by two separate legal firms, CPA firms as well as by employees of the County Assessor and Tax Collector prior to distribution as it (sic) not the association’s practice nor habit to distribute misleading information to the membership.

When the General Manager was asked to produce any statement from the Assessor about being tax exempt, she refused writing (email dated June 13, 2022):

You are welcome to “doubt” any statements; this does not place the association in a position of having to provide you documentation to “end the issue.”

It is doubtful any documentation exists.

So where does the property tax stand?  The Riverside County Tax Collector issued a 2021 tax bill for the Club property.   The first and second installments went unpaid and late fees of 10 percent were added.  After July 1, 2022, interest on the outstanding balance was also added.  As an example, parcel 60211003 (i.e., most of the Clubhouse property) had an initial property tax of \$10,844.02.  On August 31, 2022, the property tax bill had risen to \$12,328.17 and was paid by the Master Association.[3] The late fees and interest accounted to a 13.7 percent in the property tax bill.  Assuming the total property tax bill for the Club was \$245,000, the delay in resulted in penalties of \$33,655.

The way the property tax issue was handled illustrates the governance problems at the Club.  When questions about the exemption arose, Board members should have been more aggressive in seeking the truth. Instead, they let the General Manager continue the charade in an effort to bluff and bully their way through the predicament.  The evidence is clear the Board erred in both not alerting the members about the property tax and not paying the tax on time.

[1] DRM’s experience may be with clubs that were always owned by the HOA.  In that event, the value of the common property would have been embedded in the price of housing and the HOA would not be subject to property tax.  This scenario was affirmed by the appraiser cited in the email dated 5/3/2021.  That would not be the case at the Club, however, since the Club was being purchased after the sales of homes.

[2] The Better Together brochure was misleading primarily by omitting key facts.  Missing was 1) any mention of the \$300,000 the HOA would lose with the departure of the previous owner, 2) any mention of capital replacement costs for the golf courses, 3) the loss of cart parking at the Cantina, and 4) the loss of golf dues from 68 Premier members.

[3] The Tax Collector wrote (email dated 10/12/2022) “The Master Association paid the prior year 2021/2022 taxes on 8/31/2022.”  Previously, the Master Association’s Treasurer was asked (email dated 9/21/2022) if the Master Association did in fact pay the 2021 property tax bill.  The Treasurer did not answer.

## Wednesday, August 24, 2022

### Bradley S. Klein and the Fallibility of Experts

In April of 2020 Bradley Klein wrote an article (SI, Morning Read, April 29, 2020) predicting the long-term effects of the Covid outbreak on the golf industry.  This post examines the accuracy of Klein's predications.  It turns out that he was wrong on just about everything.  At the time, I wrote that his predictions were overly pessimistic, but I would evaluate the evidence after two years to see who was right.  Here is some of what he wrote so you can be the judge:

Based upon extensive conversations with industry professionals during the past few weeks, I found that these long-term trends are likely to emerge.

For Golfers

* Establishment of stringent measures for preserving social distancing, to be communicated clearly throughout the course.

* Provision of casual health-care stations, including hand washing and hand sanitizing.

* Removal of multiple touchable points on the course, including ball washers and towels, drinking fountains, benches, scorecards and pencils.

* Wider spacing of tee times– to 10-15-minute intervals or more – to allow for greater separation among groups.

* Significant reduction in aggregation of golfers before and after rounds, with attention paid toward less socializing in parking lots, patios and 19th holes.

* Restricted use of motorized carts, including limitations on shared use by non-family members.

* Increased tolerance of push/pull carts and widespread adoption of lighter carry bags, all designed to encourage walking.

* Gradual and limited return of caddie programs, emphasizing forecaddies and single-bag carriers, with players handling the clubs and caddies masked, gloved and expected to limit duties to yardage, ball hawking and conversation from a safe distance throughout the round.

* Limited availability of on-course bathrooms, subject to stringent measures of multiple cleanings per day.

For Private Clubs

* Private clubs positioned to enhance their non-golf services, including gym, health club, swimming, tennis, spa and child care, will be able to offer the kind of comprehensive experience of safety, nesting and family comfort that is likely to prove highly attractive in a post-pandemic culture.

* Private clubs that position themselves carefully can provide a wide range of comprehensive services that, individually, are struggling to survive in the marketplace. Movie and stage theaters will continue to struggle with reopening, as will gyms, hair and nail salons, and many restaurants. A great number of those businesses will disappear, thus creating a market niche for carefully planned club offerings.

* Likewise for private real estate golf communities, residents will come to value the onsite provision of functions formerly dispersed, from post office and shipping to medical and pharmacy, grocery shopping, hair and nail salons, massage and personal health training. Facilities that can provide these services will have a tremendous market advantage in the years to come.

In anticipation of that gradual return, the industry has aligned with an effort that entails a series of carefully specified steps designed to provide an environment at the golf facility that is safe for players, employees and the non-golfing public at large. Golf is uniquely positioned to make a comeback. It’s also a great opportunity to sell the game as fun, good for the environment and conducive to public health.

At the time, I thought Mr. Kelin was wrong about the long-term effects of Covid and wrote (5/1/2020):

Every item in your description of the future (Golf positions...Morning Read, April 29, 2020) implies less profitability for courses and less enjoyment for players.  Taken together, you are predicting a death spiral for the industry.  But you conclude "Golf is uniquely positioned to make a comeback.  It's also a great opportunity to sell the game as fun, good for the environment, and conducive to public health."  If I were your English teacher, I would red flag your ending as a non-sequitur and give you a courtesy C+.

Mr. Klein responded (5/1/20200:

Thanks for writing. I appreciate the note.
I'm not predicting anything other than that things will need to change for courses to thrive.
That's long been the fault of an overcrowded market; now add to that completely altered conditions of public health. Some will lose out, but all have a chance to be creative in adapting. You seem to want to attribute that to sensible changes to longstanding practice. Not changing is a sure fire way to go bankrupt.
Good luck in managing golf as we move forward.
I still disagreed and wrote (5/4/2020)
I see you take criticism as well as I do.  In your next article, write about how you sell the game as "fun" when:
1. Stringent social distancing is enforced that reminds a player his partners pose a death threat.
2. Flagsticks and other objects should be treated the same as toilet seats if not a third rail.
3. Motor cart use is restricted.
4. There is limited availability of bathrooms.
5. There is a mandated reduction in aggregation of golfers before and after rounds.
6. My caddy is dressed like a long-term care nurse

I hope your model of the future will not come to pass.  Various levels of government are certainly pushing for it.   The history of pandemics, however, demonstrates that in the long-run business reverts to the mean.  I'll check back within couple of years (hopefully) to compare notes.

Your fan and mid-tier club member (for now),
Mr. Klein responded (5/1/2020)

So what would you suggest for golf, then?

Here was my response (5/4/20200)

We seem to differ most on our level of optimism about the future.  You argue a new business model is needed.  I am not so sure.  In the short-run a club has no choice but to follow government mandates to assuage the fears of its customer base. The new motto for America is "We are all in this together but keep the f... away from me."   In the long-run (two years away), there will be either herd immunity or a vaccine.  Golf courses need to act prudently to see themselves through this period.  It would be presumptuous of me to prescribe how this can be accomplished. I would think, however, any survival strategy would not include hiring sales staff for membership and banquets that "will be less relied upon," creating an on-site mini-market, or adding additional staff for nail care.  Those actions would not be "simplifying the employee flow chart."  An important objective should be to convince the customer base to remain loyal.  "Hang with us and we will get back to the golf we all love" should be the daily mantra. It goes without saying keeping the restrooms' open should be an important part of any loyalty program.
Thanks for the interesting article.  You may be right on all accounts.  If in two years I find myself playing pickle ball, it will be an admission of your omniscience.

So, in the end who was right.?   Here is a test.  Go to any club and try to find any evidence a pandemic occurred.  Maintenance practices, food service, and playing procedures are back to what they were in 2019 contrary to Mr. Klein's predictions.  It does look like the pandemic increased the demand for golf resulting in higher daily fees and membership costs.  But that is the one thing Mr. Klein failed to predict.

## Saturday, June 25, 2022

### The Life Expectancy of LIV Golf

Most of the discussion about LIV golf centers around the main sponsor (the Saudi Sovereign Wealth Fund) and the ability and character of those players it has recruited.  Few if any have examined the long-term viability this new organization.  The life expectancy of LIV golf will depend upon the staying power of the Saudis.  That staying power will be determined by how well LIV golf contributes to the Saudis’ objectives.

And just what are those objectives?   LIV golf may be an attempt to clean-up the image of the Saudi government (sportswashing).  Giving millions to existing millionaires is hardly the altruistic gesture that will change perceptions.  Add to that, at every stop players will be asked about Jamal Khashoggi and other human rights abuses.  Each LIV tournament becomes a public relations nightmare.   If it is a better image the Saudis wanted, LIV golf simply cannot deliver.

Another objective for the Sovereign Wealth Fund would be to make money.  Will LIV yield a return on investment?  It seems unlikely.  Major television networks will not risk their relationship with the PGA Tour to air LIV tournaments.  There may be a minor network willing to carry the tournaments, but the rights fee would not be large.  Sponsors will also avoid LIV like the plague.  Even “My Pillow” will pass.  Who wants to be associated with the Saudis when even LIV’s major ambassador calls them “scary motherf…..rs.”

A recent advertisement (June 24, 2022) in the Wall Street Journal cited other objectives such as “to energize the game, create new opportunities, (provide) teams to root for, and we believe golf is a force for good.”  Let’s examine this puffery:

Energize the game – Shotgun starts and limited fields will make play faster but not necessarily energize the game.  The winner will no longer be guaranteed to finish on the 18th green.  The excitement of a car crash or superlative play on the 18th hole is lost.  Fans will ultimately decide if a shotgun start energizes the game.  It seems unlikely they will.  Golf fans could perceive LIV events as mere exhibitions and not worth the time and money.  If initial LIV events are not well attended, it could be the beginning of a death spiral.

Create new opportunities – There is an element of truth to this claim.  As players leave to join LIV, more players will have a chance to be in the field at PGA Tour events.  In essence, LIV is giving its players an early retirement buyout so younger players have a chance to succeed.  It is doubtful this is what LIV planned. It just worked out this way.

(Provide) teams to root for - I might root for a team from my home city, but it is unlikely.  Will I have an allegiance to a 4-man team chosen by Graeme McDowell even if they are wearing the same-colored shirts.  This is more doubtful.  Did LIV organizers learn nothing from the failure of Team Tennis.  Introducing two simultaneous competition creates other problems.  Suppose a player should lay-up to ensure a team victory but needs to make a heroic shot for an individual victory.  What does he do?

We believe golf is a force for good – The advertisement implies the Saudi objective is to make the world a better place by an investment in a golf tour.  How LIV golf will contribute to the well-being of the nations of the world is not detailed.

It is not unreasonable to assume Crown Prince Mohammed bin Salman will tire of losing money and being hammered by his critics.  How soon will he pull the plug?  A life expectancy of two years sounds like a good bet.  The Crown Prince will then start looking for scapegoats who got him involved in this mess.  Note to Greg Norman:  If you get an invitation to a Saudi embassy, don’t go.

## Monday, April 11, 2022

### The Selling of a Country Club Part 3

Introduction – This post details the problems with trying to integrate the newly purchased club into the HOA budget process.  The HOA sent out a budget packet that showed the Master Association Budget, the Division Budgets, and the Drive Budget.  It is difficult to discern the Association’s fiscal position due mainly to poor accounting practices.

Master Association Budget – The first thing to notice is the 2022 Budget is the same as the 2021 Budget   Equality between budgets was necessary to keep the dues the same level.[1]

More problematical is the failure to consider any impact due to inflation.  The budget for 2021 shows the Master Association breaking even.  With rising costs in 2022 any deficit will have to be funded by a transfer from the Operating Reserves or a reduction in one or more of the expense categories.

It is possible the Master Association had a large operating income last year that it can be used to counter any inflationary cost increases.  There is no indication that is the case.  What happened this year will be detailed in the financial report for 2021 and is not published until 2022.   That report does not report on budget variances and does not use the exact same expense categories as the budget.  As an example, in the year 2020 (the last year available) the expenditure on landscaping was reported to be \$719,712.[2]  The budget for landscaping in 2020 was \$604,164.[3]  The overrun of approximately \$100,000 is not contained in any report made available to the members.  In essence, the budget is not a control document but merely a general idea of where a member’s dues will go.

The budget package includes the Reserve Study completed for 2021.[4] That study states the Master Association reserve account is expected to be only 40 percent fully funded as of December 31, 2022.  The Drive Budget reserves are only 57 percent fully funded as of that date.  The Master Association Board has made an effort to increase the reserve expense to decrease the shortfall.  What is missing in the budget package, however, is any mention of reserves for the recently purchased Club (Cantina, Club House, Tennis Courts, Golf Course, etc.).  Even the divisional budgets (discussed below) for the golf and racquet facilities do not have a “reserve” cost element.

Division Budgets – There are two divisions—Sports and Fitness and Golf Club.  The budgets for both are shown in Table 1.

Golf Club Budget – It is strange the Golf Club is not a cost element in the Master Association budget.  Instead, it is shown as a separate entity and not the most important asset owned by the Association. Nothing in the budget indicates there is an approximately \$8 million liability for refundable member deposits.  A prospective golf member would not know he is accepting this liability when he joins.

The budget is also mute on estimates of the expected membership fees and refunds to departing members in 2022.  If, for example, all 68 Premier members decide to become full members they would pay approximately \$1.97 million to the Golf Club.  Will any net membership fees be set aside for capital expenditures?  The answer does not lie in the budget packet provided by the HOA.

Table 1

Division Budgets (\$)

 Description Combined Sports & Fitness Golf Club Membership Income 9,858,896 3,611,771 6,247,125 G/L Sale of Assets Golf Shop Net 130,199 130,199 Golf Services (244,044) (244,004) Golf Course Maintenance (4,898,114) (4,898,114) Sports and Fitness Net (688,833) (688,833) Dining Room (154,083) (154,083) Kitchen (923,404) (923,404) Cantina Net (152,135) (152,135) The Turn Net 23,177 23,177 Banquets 11,244 11,244 Clubhouse Operation (337,222) (337,222) General and Administrative (1,069,365) (695,087) (374,278) Department Expenses (8,302,541) (2,916,344) (5,386,198) Unadjusted Net 1,556,355 695,428 860,927

A budget should be sufficiently detailed that it can be used for planning and control.  That is not the case for the Golf Club.   That budget only shows the Golf Club has a big pile of money as income and a slightly smaller pile of money for expenses.  The budget gives no indication of what is driving income and expenses as would be expected of a multi-million-dollar company.  The five-line budget prepared for the Golf Club would not even pass muster as a Junior Achievement project.

A closer look at membership income figure will illustrate the inadequacy of the budget.  Membership income is projected to be \$6,247,125.  This equals the dues for 348 members, but it is not clear that is the basis for the budget estimate.   If it is, the estimate neglects trail fees, guest fees, credit card fees, and Premier members who will not pay full dues for the entire year.[5]

Sports and Fitness Budget – This budget suffers from the same lack of specificity as the Golf Club budget.  The food and beverage operation is projected to lose \$1.2 million.  Most of this loss is due to a budget category termed “kitchen.”  What are the components of “kitchen” that are driving the cost?  The budget does not tell you.

The membership income is apparently based on 912 members (890 HOA members plus 22 Invitational members) though even that is not clear.  Also hidden is any revenue from the dining room. The Cantina and the Turn are given net estimates while the dining room is not.

It is also curious the Sport and Fitness divisional expense of \$2,916,344 does not reconcile with the Racquet Club expense of \$3,524,400 shown in the Master Association budget.  There is a \$600,000 difference.

Drive Budget – This budget is arcane and has outlasted its usefulness.  This budget was intended to allocate joint costs among the Club, the Ventanas, and the HOA according to the 2009 Drive Agreement.   With the Club gone,[6] it would be more understandable to have a unified budget that displays all income and expenses.  There no longer is a need to separate costs such as landscaping and security into two separate budgets.  A unified budget would be more transparent in informing members where their dues are being spent and would also allow for year-to-year comparisons.

Table 2 demonstrates the problems with the 2022 Drive Budget.[7]  It is clear something is amiss as shown by the large differences in cost categories between the 2021 and 2022.  It is possible landscape personnel were classified as administrative in 2021.  If so, it raises the question of why any accountant would approve of such an allocation.  The two budgets indicate the HOA has budgeted \$2,657,949 for landscaping in 2022.   This differs radically from the reported expenditures for landscaping in the 2020 Financial statement (\$719,712).  This lack of consistency in budget assumptions makes it impossible to determine the efficacy of expenditure decisions.

Table 2

Drive Budget Comparison (\$)

 Drive Budget 2021 2022 Difference Operating Income 4,018,390.12 4,018,390.12 0.00 Costs Administrative 970,082.51 52,367.45 -917,695.06 Professional Services 271,120.12 281,120.12 10,000 Utilities 749,060.00 749,060.00 0.00 Landscaping 178,400.00 1,096,565.06 918,165.06 Repair & Maintenance 116,515.00 113,140.00 -3,375.00 Access Control 1,387,935.49 1,391,310.49 3,375.00 Taxes 3,911.00 3,911.00 0.00 Reserve Contribution 330,916.00 330,916.00 0.00 Total 4,007,940.12 4,018,390.12 10,470

In the brochure promoting buying the Club (Better Together), it was never mentioned the Club owner  paid the HOA approximately \$300,000 a year as its share of the Drive Expenses (e.g., Security, landscaping).  How was the HOA to make up for this drop in income after the purchase?  It simply charged the Golf Club that same amount in the Drive Budget.  Whether the Golf Club actually incurred this charge cannot be determined because the Golf Club budget does not show that level of detail.

[1]Staff had some problem in copying the 2021 Budget.  For example, the 2021 Budget expense for utilities is \$280,000.  The 2022 Budget package shows the 2021 budget for utilities to be \$290,000.  This is not a major error but does indicate a lack of care in preparing the 2022 budget.

[2] Beck and Company, Master Association Audited Financial Statement for 2020, May 17, 2021

[3] The Operating budget has a landscape expense of \$425,764. The Drive Budget has a landscape expense of \$178,400.

[4] SCT Reserve Consultants, Temecula CA, November 11, 2021

[5] The Club has 68 Premier members in 2021 as reported in the sales contract.  T.D. Desert Development kept the initial membership payment for these members leaving a liability of 468 months of foregone dues to the new Golf Club

[6] T.D. Desert Development still operates the real estate office so it should make a reduced payment under the Drive Agreement.

[7]It was not possible to get the 2021 total expense to match what was reported in both the 2021 and 2022 budgets (i.e., \$4,018.390.12).