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November 2017

Leaving Greens and Keeping Green

leavinggreens.jpg‭By David Gould

The when and how of exiting a golf-course investment

Pat Garvey returned from the Korean War a decorated Marine sergeant, got himself a corporate job, earned promotions, saved his pennies and quit the grind at age 48 to buy a golf course—and later a country lodge—in the mountain town of Ludlow, Vermont.

Over the next 20 years, Garvey successfully ran the golf and hotel business, meanwhile serving on the planning board to help Ludlow navigate a growth spurt and still retain its rural character. Finally ready for retirement, he sold his course to a husband-wife entrepreneur team that cared as much about the town as he did—they own the Okemo Mountain Resort, which to this day includes an updated version of Garvey’s original Fox Run course as a key asset.

It’s an enviable tale of how to enter, enjoy, profit from and then exit the course-ownership game. Jim Remy, former PGA of America president and the guiding force behind Okemo Mountain’s golf operation from the start, can attest to that. The many admiring testimonials to Garvey as a facility owner are “certainly accurate,” affirms Remy, including the praise for Pat’s impact on the people and institutions around him.

A golf course is a commercial asset, and thus an item to be appraised, valuated, purchased and sold. It can also be a pillar of its community, a trove of personal memories and a refuge against brick, mortar and sprawl. Any business that’s family-run will generate strong emotional bonds no matter what it makes or sells—golf courses simply magnify that phenomenon.

Therefore, it’s asking too much for the exit from a golf-course investment to be as cut-and-dried as selling your stocks and bonds. At the same time, there’s a lot to be said for not losing sight of your course’s market value and not hanging on too long. According to Larry Hirsch, president of Philadelphia-based Golf Property Analysts, an owner can, with effort, balance the emotional and financial sides of the coin.

“Look at people who buy other types of assets—they’ll make a plan to exit on day one of that investment,” Hirsch points out. “Too often when we hear from course owners who are selling, the business hasn’t done well for some time, there’s deferred maintenance, and they’re basically throwing up their hands.” Even a brief walking tour by prospective buyers will reveal this, in most cases. “To a buyer of that course,” says Hirsch, “the visual message is that they’ll have to spend a lot of money just to plug holes.”

That scenario is one of your classic bad exits. Hirsch believes that being well-positioned to cash out is a matter of keeping things ship-shape and not losing money. And yet, those very conditions tend to obscure the whole idea of walking away. “When things are going well, the focus is on keeping the machine humming,” Hirsch notes. “A course owner in that position who’s passionate about the game and the business generally won’t be thinking about exiting, not in my experience.” The message Hirsch sends is to try and carve out time and bandwidth for exit planning. You should at least find time to check market values, keep up on transactions and learn what you can about commercial real estate in general, including how it changes hands.

Business owners develop (or fall into) idiosyncratic methods of running the operation, but Hirsch’s formal presentation on exit planning, written in 2015, urges conventional record-keeping and other practices that make it easy for an incoming buyer. It’s vital to report all income, maintain easy-to-read books, be diligent about the debt schedule and capital-improvements schedule, and so forth. Licenses, leases, permits, employee records and anything that responsible buyers would seek to review must be in order.

For the past decade or more, course owners who spoke confidently about planning to exit would prompt eye-rolling in many quarters. With annual closures running high and so many distress sales roiling the market, exit was akin to surrender and it came with sharply negative capital returns. The climax to one’s course ownership stint might well involve foreclosure and a sheriff arriving with padlocks.

The truly classic exit strategy for course buyers or course builders belongs to a period in the middle decades of the 20th century, according to industry veteran Mike Kahn, a principal in the Golf Courses For Sale online brokerage. You bought land 10 or 15 miles out from a populated area—along what appeared to be the suburban growth pattern—and used that acreage for golf until, in Kahn’s words, “it became engulfed by development and the parcel you paid $500 an acre for was worth $20,000 an acre.”

He stresses that low-maintenance executive courses and simple driving ranges were ideal for this style of investment. It’s a much tougher strategy to undertake in the current era, for a variety of reasons that include stricter zoning and land-use laws, but in select markets, under the right circumstances, you could probably take a stab at it.

Kahn, too, has noticed that some of the properties it would be easiest to cash out of are least likely to become available. In 2005, Kahn brokered the sale of The Eagles Golf Club in Odessa, Florida, for $9.3 million—a lovely exit for the sellers, as this period marked the tip-top of the market. Eight years later, he again brokered the sale of the 36-hole property north of Tampa, at the hugely discounted price of $3.2 million.

“The group that took over The Eagles was well capitalized, their purchase price was reasonable, and they have a lot of business acumen among them,” Kahn reports. “They’ve been operating the facility the old-fashioned way, covering all the details and taking care of their people—staff as well as customers.” Clearly the property had appreciated in value since the takeover, meaning the group could make a nice exit with excellent returns on their capital. But that’s not the plan. “These guys are doing what they set out to do—buy a golf course they could own and operate until they died.”
Kahn identifies the gated-community golf course that can’t break even as the worst of all exit scenarios. “You’ve got land that once held a golf course, and now is going to seed, and the acreage is worth nothing,” says Kahn with a tone of lament.

Complex golf assets that include housing and resort amenities tend to bring out the more esoteric deal structures for purchase and sale, as overseen by the market’s more sophisticated players. One of them, Steven Ekovich of Leisure Investment Properties Group (LIPG), did a deal back in 2012 in which the 54-hole Myrtle Beach resort property Sea Trail was shepherded through auction in surprisingly successful fashion. According to an LIPG capsule report, Ekovich aimed for an $8 million-plus sale price, despite Sea Trail’s state of disrepair and dramatic need for capital expenditure.

A device known as a “363 stalking horse sale” was deployed, in which a so-called stalking horse buyer is brought in at a discounted price (in this case $6 million) with certain special allowances, including the chance to remain anonymous. That backstops the bidding and returns some leverage to the seller. In this case, the auction produced a top bidder from China who paid $8.5 million in cash. That’s hardly how most mom-and-pop courses would find a buyer, but it’s something to consider in the case of a floundering major property that needs new ownership.

You can’t count on foreign money pouring enthusiastically into the U.S. golf course market, but this does seem to happen now and again, in the process creating new options for exit-seekers. Scott Oki, the former Microsoft executive who entered the golf business in scaled-up fashion with his software fortune, recently sold 10 golf courses in greater Seattle to HNA Holdings, a Hong Kong-based firm that operates airlines, hotels and golf courses along with other businesses. The reported sale price was $137.5 million. Oki, who spoke of being “approached several times regarding acquisition” over the years, seems to be that uncommon case of someone who wasn’t under pressure to sell but was open to the idea.

“Begin with the end in mind” may be the most useful of Stephen Covey’s “Seven Habits of Highly Successful People.” That bit of advice from Covey’s bestseller applies directly to course ownership as an investment. Former course owner Rudy Duran (he’s famous as the first teaching pro to work with Tiger Woods) didn’t do that. “I acquired land, designed a golf course myself, oversaw construction and never once during that process did I think about someday selling it,” Duran recalls.
He’s referring to The Links Course at Paso Robles, one of two he and his business partner controlled and operated over a decade-plus during the 1990s and 2000s. Interest payments on their construction loan were the one cost item that operating revenues could never cover, according to Duran, who used surplus annual profits from the sister course to subsidize the one he had designed and built. What made his exit viable was the Airport Planned Development zoning it enjoyed, based on proximity to a regional airfield.

“I sold it for land value, and received cash, and made money,” Duran explains. “The buyer was a real estate developer who wanted to use the course as the centerpiece of a commercial-light industrial park amenities by golf.” Sounds strange—and it didn’t actually work—but there are a few projects of this type to be found. It won’t shock anyone to know that Duran’s buyer was a golfer and a regular at Paso Robles course—indeed, the man’s son had been in Duran’s famed junior program. Even owners who aren’t looking to exit will find themselves making mental notes about the customers—or employees—who for various reasons are candidates to come in as purchasers, should the day for selling arrive.

For example, a five-person trust that until last year owned two Massachusetts courses decided to sell one of them, eventually finding a husband-wife duo of golf professionals to acquire it. The teaching professional at the course the trust was opting to retain had a close connection to the couple, Jennifer and Joe O’Connor, who for some time had been seeking an opportunity to own and run their own golf facility.

This particular exit was logical on its face, since the buyers had PGA Class A status and fine resumes, but it was further bolstered by Jennifer O’Connor’s Temple University MBA degree. She and her husband worked with an area bank on financing through the Small Business Association, and Jennifer’s masters in business simply added credibility to their loan application. In a case like this, any ongoing research the sellers may have done into SBA loan trends and likelihood of approval for purchasers like the ones they found is certain to be of value.

The course, Holly Ridge Golf Club, in the Cape Cod town of Sandwich, is a par-54 daily-fee with a generous practice and teaching area. Thus, it’s all the more practical for the facility to be operated by two devoted golf instructors, given the loyalty-building power of skilled and energetic teaching. At the same time, the facility was in very solid overall shape physically and had built a strong customer base through enthusiastic service.

From all their gung-ho statements to the local press, it’s clear the O’Connors are giving their young business all they’ve got and pushing hard to make it a great investment. It’s even possible they’ve put together a bona fide exit strategy, but if so, that would make them an exception to the rule.

David Gould is a Massachusetts-based freelance writer and frequent contributor to Golf Business.

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