Buying Or Building A Golf Course -- Due Diligence Is Key

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"It took me seventeen years to get three thousand hits in baseball. It took one afternoon on the golf course."
? Hank Aaron

Golf is a difficult business where one third of the courses operate at a loss.

Playing isn't the only thing difficult about golf. Try operating the business and staying solvent. Profitably operating a golf course is one of most challenging of hospitality businesses. At first glance, it would seem easier than most businesses. Not a lot of moving parts. Relatively few employees (average of 30 on season and 10 the off-season). Large barriers to entry to locate available space (average 150-200 acres for 18 holes). Golf is hugely popular. There are approximately 27-30 million golfers in the U.S. Yet, according to a National Golf Foundation survey (February 10, 2012) of about 750 golf course superintendents, only about a third of those surveyed were profitable. Just a third! With the exception of private facilities (35 percent), less than a third broke even, and a third of private courses and more than 40 percent of public courses lost money. See the breakdown of costs provided by Golf Course Industry, GCI's State of the Industry report 2012, which is still relevant today:

Golf%20Course%20Greatest%20Challenge%20.jpg

What is your objective?

Given the challenges of successfully owning and operating a golf course, the first point of any developer or purchaser of a golf course is to get clear on the objective. In other words, if nearly two-thirds are unprofitable, why are we doing this? Will golf be an amenity to a hotel or housing development that will sufficiently increase value to justify the golf course? How will maintenance and operating costs be covered, golf revenues, homeowner fees, club dues, user fees, increase hotel revenues or public support? Or, if the golf course is a stand-alone purchase, can it really stand alone? In other words, how is acquiring or building a golf course justified financially?

Due diligence.

From the available data on those courses that either broke-even or lost money, one can readily see how important due diligence is when purchasing or building a golf course. Not all golf courses are the same. They can be designed, built and operated quite differently. Those differ-ences can mean tremendous value or brutal associated costs that cannot be justified. Some re-quire more maintenance than others. Water is a large variable depending on the part of the country and the source of water. Similarly, there are regional variances depending on grass types and climate for items like seed, chemicals and fertilizers. There are issues with rising fuel costs, labor costs and equipment replacement. Deferred equipment purchases can make ownership more difficult. Increased repair costs and additional downtime for equipment has a cost that also needs to be considered.

The key for any purchaser is to understand where the value is lost and gained. Can labor be trimmed? Will capital equipment purchases or leases make sense if they reduce operating costs, and over what period of time? Are there alternative fuel or water possibilities Can grasses be modified to account for greater sustainability? Are there are creative and viable options for funding equipment replacement? Has the seller/owner taken advantage of all revenue enhancement techniques? What has been the marketing strategy to-date? Are golf fees in line with the current market? What feasibly adjustments and enhancements can be made? A skilled golf course consultant can help a buyer answer these questions.

Liabilities -- hidden and apparent.

Further, golf courses are a breeding ground for lawsuits. Golf and legal issues can be found in every square inch of a golf facility. From defective golf carts to improperly designed fairways; from wetlands to wrongful serving of alcohol to minors. Are all entitlements in place? Are all liquor licenses proper? Will the new buyer inherit some old tax problems? Are there any potential environmental hazards? Streams, wetlands and other water features can create habitat for a number species, sometimes endangered species. Certain fertilizers and pesticides can be toxic. If those toxins are in the water features, there can be run off onto adjacent property, causing liability to the golf course owner. There have been significant environmental claims and lawsuits against golf courses for this very reason. Are there boundary encroachments on or from the golf facility that have been ignored?

Golf is a dangerous game. It essentially involves whacking a bone crushing projectile in unpredictable directions at speeds that can exceed 200 mph. How safe are the golf carts and the terrain they operate on? The liability cannot be ignored, and insurance is not the entire answer. Are there any offsite errant ball conditions that should be addressed? Have there been homeowner claims? Many such claims contend faulty golf course design. Redesigning can be extremely costly. If the golf facility has a club or association, are all books and records kept to date? How viable is the club? How many gift certificates are outstanding that could impact value? Are all employees qualified and legal? Training new employees can be costly? Is the equipment (e.g., golf carts) owned or leased? If the latter, will the leases be paid out of purchase price proceeds? Will the course design subject the owner to possible claims under the Americans with Disabilities Act? These are only a few of the questions. This checklist of legal due diligence is much more substantial and must be investigated. A skilled hospitality lawyer can help a buyer answer these questions.

The bottom line

The point is no buyer should acquire a golf course without having answers to all the necessary questions to determine whether the purchase makes sense. Few buyers are capable of doing this work with their own staff. A Buyer needs to understand the facility's true value, its short-comings, where revenues can be enhanced and costs contained and what it will take to get there, and where the lawsuits lurk. No buyer wants a bag of costly legal problems. The best way to mitigate against a bad purchase is to engage solid consultants with the right business and legal expertise and experience who can handled many golf courses and can efficiently evaluate the viability of the purchase. The right team can identify the key issues and pitfalls and either design a plan to mitigate them or steer a buyer from a poor purchase altogether. Either way, the goal is to help a buyer make a smart decision in a business where it's too easy to end up on the wrong side of the club.

Topics:  Due Diligence, Golf Courses

Published In: General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jeffer Mangels Butler & Mitchell LLP | Attorney Advertising

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