Buyer Sentiment

Investors understand that as a commercial real estate investment, golf competes with all other asset classes for investment dollars. Those who are heavily invested in income-producing properties know that there are plenty of options available for commercial investment. Core assets (Multi-family, Office, Industrial and Retail) are the market trend-setters. Non-core assets, such as golf tend to lag behind their less volatile counterparts. Even as the debt market for traditional income-producing properties began to tighten in 2008, we still saw golf assets trade on multiples of gross income near 2X and cap rates in the single digits in some cases. Currently, traditional commercial real estate core assets are very attractive to investors. Financing is readily available and there is a historically high spread between Treasuries and core asset cap rates. This has put a great deal of downward pressure on non-core assets, especially golf courses. Buyer sentiment is such that a leveraged investment in an income-producing core asset is like a safe layup shot on a tricky par-5. So, what makes an investor want to go for the green in two? The answer is irresistible metrics. In 2011, some courses with negative EBITDA have traded in the 0.5X to 0.7X.  For assets with positive EBITDA we saw courses trade in the 1X to 1.5X thus pushing cap rates to numbers well above traditional core real estate returns which has helped stoke velocity in golf transactions. We are beginning to see buyers who are heavily invested in commercial real estate core assets allocating capital for acquisitions in golf. Nearly 50% of the transactions closed by the NGRPG in 2011 involved principles purchasing their first golf assets. Smart money is betting on what it perceives to be purchasing at the bottom of the market with healthy returns from golf properties on a 5 to 7-year holding period. Buyers are taking advantage of opportunities in the golf market where underwriting courses with unleveraged internal rates of return are in the low 20% range. We believe that investors will continue to buy according to the aforementioned metrics for the next 4-8 quarters or until such time as core asset cap rates begin to compress.

CAPITAL MARKETS / COURSE FINANCING

Like the spring, that is obviously months away, the credit markets continue to show signs of new life forming as the long winter thaws. Banks continue to shed unhealthy assets and warm to the necessity that providing debt is critical to their becoming or remaining profitable. Something they are no longer taking for granted. Trepp reports that banks could be as much as 70% through their loss recognition process on commercial real estate. We see new bank lenders entering the market and rejuvenated bank lenders returning to the market now that the light at the end of the tunnel is clearly daylight and not an oncoming train.

2011 saw the reemergence of CMBS lending in the form of CMBS 2.0, which unfortunately was derailed early in 2011 with a lack of investor appetite for bonds rated below AAA. Currently, the CMBS market appears to be back to where we left off in early 2011 and looks like it could be the darling of the credit market in 2012. That is especially so if you consider the amount of debt maturing this year and the level of debt it will require to renew a significant portion of it. Credit standards for CMBS 2.0 are much more conservative than the original CMBS, especially considering the loss retention aspect, so I do not think we will see CMBS lenders considering “specialty asset types” like golf courses, before filling up enough bonds with their main food groups (multifamily, retail and office buildings).

Life insurance companies expanded their allocations in 2011 and some exceeded their allocations once they realized the high quality of the deals they could do. Life companies hope to lend even more in 2012 than they did last year, but again, they typically limit themselves to trophy properties in large metropolitan markets with low leverage needs.

Improvements in U.S. GDP, employment and consumer confidence will support the notion that 2012 should see more rounds played. In addition, an increase in course sales activity should help stabilize course values, to some degree. These trends should help operators attract lenders to both finance, purchase and refinance transactions. Loan-to-values will remain more conservative than the current favorite, multifamily, but that’s a fact that isn’t likely to change anytime soon. Golf and resort buyers will need to show more liquidity, operational experience and lenders will continue to focus on “global cash flow”. Golf course loan options are improving with local and regional banks as well as credit unions taking up most of the slack. To name a few, PNC and Wells Fargo have recently financed golf assets however, the majority of these loans were credit loans based more on the borrower’s financial strength than the golf asset being purchased. The grass is getting greener on “this side” but we have a ways to go until we can play on it consistently like we used to!