By. Phillip Martin, Senior Vice President, Troon Privé
Over the past few years, clubs have a renewed focus on capital replacements and improvements. The traditional method for accumulating capital was through initiation fees for most clubs, but the shift in the amount of initiation fee has changed over the years. As the demand for memberships diminished, the capital fund followed suit. Detailing a successful strategy for clubs became a priority. As we all know, clubs have a lot of assets to maintain; golf courses, clubhouses, swimming pools, tennis courts, the list goes on and on. In order to craft a policy that fits a club, there are several recommended steps.
First, if the club does not have one, create a strategic plan. The plan should be more than just a ten-year capital schedule; it must address the “Why” of the club, market analysis, membership demographics and trends, financial benchmarks and other factors. The analysis provides a complete 360-degree view of the club in its current state. Once the analysis is complete, the question of “Where is our future capital coming from?” arises. In our experience at Troon Privé, this is a consistent issue and question posed at private clubs.
The next step in solving the funding issues is to ask, “How much capital do we need?” The recommended course of action is to complete a reserves study of the current assets. The comprehensive study will create a view of the current assets and the life remaining on the different components. It is essential that management be involved in the study and able to identify outdated items that may have a useful life, but are not relevant to today’s member. For example, the restaurant may feature old tile in the restaurant, but the tile is ugly and takes away from the ambiance of the restaurant. The same can be said for any visual asset at the club.
The third step is to evaluate ways to create capital at the club. The traditional method for clubs is to raise capital through new member initiation fees. Initiation fees are a win-win for everyone at the club as new members contribute to the future capital of the club. Another method is to drive high net income. The operations of the club create enough Net Operating Income to cover depreciation, thus creating reserves for future projects. The club sourcing debt is another option; however, debt can only be sourced if there is enough collateral and financial performance to meet the loan requirements. Clubs can also look to sell assets for capital, but the downfall is that it is a one-time transaction. Another option is an assessment, but the main issues is that it is a one-time event that does not address future needs and is risky in that it requires a decision from the members to pay or leave the club. The most popular method is a monthly capital fee. The pay as you go fee is a great way to raise capital on an ongoing basis and can be used to fund a debt payment if needed. The membership will usually accept the policy if there is a reserve study or capital plan to justify the additional payment from the members.
The final step is for the board to finalize the strategic plan and decide on the best path forward to create a sustainable strategy for capital reserves. Depending on the club, the amount needed versus what is coming up is a crucial decision. In our opinion, a strong balance sheet with cash reserves is a sign of strength and will attract new members.
Overall, the process for developing the strategy for future funding of a club is key to sustainability. Clubs that can grow the balance sheet will have an advantage of those who do not. The strategic focus of evolving the club and amenities for future generations should be priority one for most clubs.