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January 2013

Capital Conundrum

Capital Conundrumby Steve Eubanks

Short-term gain or long-term pain

The hardest thing to do is spend money in tough times. It fights the hand. All your instincts tell you to hunker down, squirrel away cash, and attempt to ride out the storm. No matter how much those bunkers need to be reworked or how badly those cart paths need to be paved, many course owners find the idea of making capital improvements in a recession to be almost repulsive.

But the alternative can be equally disturbing. In fact, a facility plagued with a withering infrastructure and mounting maintenance problems could find itself viewed in the same light as Lady Aster’s 1945 description of Savannah, Georgia: “A beautiful woman with a dirty face.”

The problem for most owners is simple. Money. In the private arena, initiation fees were once the funding mechanism for capital improvements, and in their heydays, clubs were spending small fortunes on buildings they didn’t really need. Funding wasn’t a problem because the club had a waiting list of people ready to shell out five-figure sums for the privilege of joining. Those days are now as ancient and quaint as the persimmon driver.

Public courses have similar cash troubles. Even those operations disciplined enough to set aside a percentage of revenues for capital improvements saw the available funds dwindle. Saving 4 percent to 7 percent for major expenditures is wonderful, but when revenues plummet by 30 percent, so too does the contribution to the fund.

Then, of course, there’s the “right now” problem all operators face. Even if you have $100,000 set aside for a bunker renovation next winter, when the oven in the kitchen breaks, the plumbing in the locker room bursts, or one of the tractors blows a head gasket, what are you going to do? Most operators will do what every white-collar criminal does: rob a little here to pay for something really important there, with every intention of paying that money back.

Unfortunately, the more prolonged the downturn—and the industry has experienced one of the longest in the game since the 1930s—the more difficult it is make that capital expenditure fund whole again.

“It’s a vicious cycle, but you have to do the right thing or your member retention numbers are just going to go down and down and down,” says Tim Dunlap, operational vice president of Sequoia Golf Management. “It’s hard to tell this owner that you need to spend $500,000 on clubhouse improvements or bunker renovations or greens conversions when they’re looking at revenue trend lines that have been cratering for months if not years. But you have to do it to stop the bleeding.”

In some cases, “just doing it” has yielded revenue spikes. One of those turnaround experiences took place at Rancho Vista Golf Club in Palmdale, California. Owner Sally Rajcic wasn’t keen on spending $55,000 on new sand and drainage for her course’s bunkers. In fact, she thought the idea was borderline crazy, given the economy and the perilous state Rancho Vista was in.

But biting the bullet proved to be the best thing she ever did. The club saw a one-year increase of $100,000 in gross operating profit after the capital improvements were completed. And this came during a time when many competitive clubs in Los Angeles County struggled to stay afloat.

“It’s something you have to approach very carefully,” advises golf course architect and course owner Mike Young. “I’ve lived both sides of it, and I can tell you that you can make capital investments work if you pay attention and do it correctly. Or it can backfire.” 

As a course owner, Young opted to retool the bunkers and add irrigation to his course, The Fields at Rosemont in Lagrange, Georgia, during the height of the downturn. “We had to do it,” he says. “But we were smart about it and didn’t do it in such a way that we broke the bank and then couldn’t maintain the place.

“And it paid off for us,” he adds. “People noticed.”

On the flip side, Young points to Athens (Georgia) Country Club, an old-money club in a city of 116,000 people that boasts a private, Donald Ross-designed course. The club hired an expert in Ross designs and launched a massive renovation project that included completely rebuilding the greens and bunkers, taking much of the severity out of the putting complexes and lowering some of the bunker faces. They also commissioned numerous upgrades to the clubhouse.

“It turned out to be a $6 million assessment,” notes Young, who’s a member of ACC. “Right afterward, they lost 200 members.”

Some clubs can afford to make sweeping improvements all at once. The Farm in Dalton, Georgia, host site of the 2005 United States Senior Amateur, embarked on a full-scale drainage upgrade and then converted the entire golf course from Zoyzia to one of the sturdier hybrids during the peak of the downturn. Once that work was complete, they fully renovated the clubhouse.

“We were 25 years old and getting a little dated, so it was time,” says director of golf Deck Cheatham.

But no one at The Farm had to worry about cash flow. The club was built and is owned by billionaire Bob Shaw, founder of Shaw Industries, the largest carpet manufacturer in the world.

Of course, most facility owners don’t have the kind of capital Bob Shaw has to spend on his club. But there is some good news. Even though capital improvements are expensive and often squishy in terms of straight-line payoffs, recent news suggests the fever of the Great Recession might finally be breaking. According to the National Golf Foundation, golf revenues in 2012 increased by $13 million versus the previous year, and rounds grew 8 percent. That makes it a little easier to spend the money needed to keep a club viable.

Meanwhile, those who had the foresight to complete their renovations during the downturn now have an edge. They can watch as others scramble to catch up to the work they’ve already completed. 

“Just look at the clubs that did things like convert an empty banquet room into a health club, or those that bit the bullet and converted their greens, or those that installed drainage or embarked on major tree-cutting projects,” Dunlap says. “Those are the clubs that had the greatest retention rates during the toughest period of our lives. And they’re the ones now poised to grow without having to invest another major chunk of capital. They’ve already done the heavy lifting.”

It’s hard to quantify, but members and guests get a good feeling when they see capital improvements. Whether it’s an overhanging tree finally being cut (a $200 to $300 cost), a bunker being leveled and rebuilt (a $6,000 investment at the high end) or something as simple as a new door and a space heater in the on-course restroom, improvement breeds happiness. And happiness keeps golfers coming back to play.

“People just have to change the way they look at capital improvements,” Young says. “Rather than budget half-a-million for bunker reconstruction, the smart operator is going to budget $20,000 to $30,000 a year and redo six, seven, eight bunkers a year in-house.

“That’s the way all clubs used to do things,” he adds. “And it’s the way we’re going to have to do them again if you want to survive.”

Steve Eubanks is an Atlanta-based freelance writer and former golf course owner.

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