Over the past few years, clubs have renewed their focus on capital reserves, both in replenishment and improvement. The traditional method for accumulating capital was through initiation fees, 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 many assets to maintain, including golf courses, clubhouses, swimming pools and tennis courts, to name a few. For example, having a golf course asset strategy is crucial to attracting and retaining membership.
Troon’s Operations team recommends the steps below to craft a policy that fits your club.
1. Craft a Strategy to Grow Capital Reserves
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. Creating a capital reserve fund policy without direction can lead to inefficiencies and confusion.
The analysis should provide 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, this is a consistent issue and question posed at private clubs.
2. Calculating the Amount of Capital Reserve Needed
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 look will create a view of the current assets and the life remaining on the different components. It is essential that management is involved in the study and is able to identify outdated items that may have a useful life but are not relevant to today’s membership. For example, if the restaurant features old tile, that feature can take away from the restaurant’s ambiance. The same can be said for any visual asset at the club.
3. Evaluate How to Create a Club’s Capital Reserves
The third step is to evaluate ways to create capital at the club. The traditional method for clubs to raise funds is through new member initiation fees. Initiation fees are a win-win for everyone at the club as new members contribute to the future assets of the club.
Another method is to drive a high net income. Club operations 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 this is a one-time transaction. Another option is an assessment, but the main issue is that again, this 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. This 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.
4. Finalize the Strategy and Execute
The final step is for the board to finalize the strategic plan and decide on the best path to create a sustainable strategy for capital reserves. Depending on the club, the amount needed versus what is coming in is crucial. In our opinion, a strong balance sheet with cash reserves is a sign of strength and will attract new members.
Overall, developing the strategy for future funding for a club is key to sustainability and goes beyond a golf course asset plan. Clubs that can grow their balance sheet will have an advantage over those that cannot. The strategic focus of evolving the club and amenities for future generations should be the main priority for most clubs, and Troon is here to support you along the way.