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The commercial loan market has been squeezed like a bottle of Ketchup with a clog at the opening of the bottle. We can see there is Ketchup in the bottle, there are loans that can be made, but the restriction in the end caused by lender uncertainty, government regulation and lack of a secondary market has stemmed the flow of loans to a few drips and drabs. With the $2.2 Trillion of commercial Properties acquired or refinanced from 2004 through today, it is tough to have them refinanced since the reduction in values would cause most owners to come to the table with cash.
Prices of all properties across the board have dropped 37% from the peak. Values for golf courses have dropped even more. Since Revenue is down and expenses are up, it is a double whammy to course owners. All commercial property sales reached only 7% of the volume achieved in the first half of 2007, according to Real Capital Analytics. The volume of all distressed properties has doubled in 2009.
According to the NGF/Allied Golf Associations August Report, a survey of 2,100 golf facility operators showed that rounds fell 2.7 percent nationwide on a same-facility basis in August 2007 vs. August 2006. As a result, the year-to-date total is down 0.8 percent through August. The premium public segment is slightly more positive.
Severe weather in the Midwest was the primary cause for the drop in U.S. rounds. However, five of 11 NGF climate regions were actually up slightly. But the Lower Midwest, the hardest hit region, was down 8.6 percent. South Central region has the poorest performance year-to-date, even though the area had a relatively good August.
There have been 71 closures (in 18-hole equivalents) year-to-date as of June 2009. (There were 106 for the full year 2008.) The leading reasons for 2009 closures have been the economy, lack of financing and over-building followed by conversion to real estate. Closures continue to be disproportionately public, stand-alone 9-hole, short courses (executive and par-3) and value price point. However, in general, the private courses that have been hit with members who have lost jobs, members who move and members who can no longer afford to pay dues, are seeing declining memberships, lower revenue and many are at risk of staying open. There are of course exceptions to this. There are private courses in markets not over saturated with good owners or good boards of directors who are increasing memberships and flourishing. In as much as the real estate business is a local business, golf course ownership is a microcosm of that. We have seen two private courses next to each other where one is bankrupt and the other is flourishing; it comes down to debt structure, customer service, good management, cost containment and reputation.
Closures have far outpaced openings in 2009 - so far only 16.5 courses (in 18-hole equivalents) have opened. As a result, the total net supply of golf facilities is continuing to decrease, from a high of 16,057 in 2004 to 15,931 as of this writing (126 fewer).
For golf course owners, the realities of the fact that the “big three”, Textron, GE and CapMark have exited the airspace, has left a vacuum. When loans come due, lenders have a choice, work with the investor and extend the loan or foreclose. Since there aren’t many lenders out there willing to take out the existing debt, especially when Loan to Values, (LTV’s which are down from 70-75%) are currently in the 50-65%.
For new golf course acquisitions there are a few more options. There is SBA financing, hard money and community banks. If a buyer desires an SBA 504 loan which provides 90% LTV, the debt is structured thusly:
Bank - 1st mtg. (50% of purchase and closing costs) – 25-year term, no balloons. Rate is 450 bps over 5-year treasury (currently 7.16%) and it will adjust every five years at the same index and margin.
SBA - 2nd mtg. (40% of purchase and closing costs)- 20 year term with no balloons. Rate is fixed for twenty years
Hard Money loans are 9.5-12% over Libor or other indexes, typically 3-5 year terms.
Community banks that make loans more on the individual’s net worth rather than the property, are offering loans in the town in which the course resides, at approximately 7.5% interest rate, 20 year amortization and a 5-year term. In addition, these banks want to see a certain level of deposits to be kept on hand by the borrower. That amount is usually in the $250K plus range.
While times are tough and the Ketchup bottle is clogged, we can still squeeze new financing out for the right buyer and the right golf course.
Steven M. Ekovich is the Director of the National Golf & Resort Group of Marcus & Millichap. As director, he is in charge of golf courses for sale, consulting and acquisitions for the firm’s clients. Mr. Ekovich has brokered or overseen as a an executive of the firm over $3 billion in transactions. His partner Chris Karamitsos is a PGA professional who also has brokerage experience and has been in the golf industry for over 20 years. The website for the National Golf Group has information on golf courses for sale, finance, and research that may help the interested reader.
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