Refundable memberships can be important tools for club development and membership growth, particularly early in a club’s life cycle. By promising to repay prospective members some portion of their joining fees when they resign from membership, clubs are frequently able to command higher joining fees. The higher fees can bring much needed revenue that can be used to finance club improvements, subsidize club operations and reduce overall club debt. Higher joining fees may also cause some to perceive the club as being more prestigious than other clubs in its market.
Are refundable memberships the perfect tool? Follow the laws of supply and demand and keep offering greater refundability and raising the joining fee as long as incremental revenues keep increasing. The refundable membership is an intoxicating elixir, but is it really a cure all? Only if we lived in a perfect world with inelastic demand for refundable memberships. However, the ills of refundable membership programs become apparent, particularly if structured under the unrealistic premise that the market price of club memberships will never fall.
The Premise
In general, a refundable membership allows the member to receive back at least some portion of his or her joining fee upon resignation from the club. The promise of refundability can ease the “pain” a prospective member might feel in writing a substantial check to join a club. The buying decision becomes easier because the purchaser can view the refundable portion of the joining fee as an interest free loan to the club.
Clubs simply view the joining fees as revenue. Generally, they do not offer 100 percent refundability, and the expectation is that the member transfer and refund process can be restricted and managed until the club has sold all of its available memberships. After that, clubs typically expect to receive incremental revenue equal to the difference between the sales price of a transferred or reissued membership and the amount to be paid as a refund to the resigned member.
The Problem
The curse of the refundable membership manifests itself when membership demand stagnates and market forces dictate that membership joining fees be reduced. A developer-owned club with which I am currently involved provides a perfect example. Memberships to charter equity members in the club were sold for $70,000, and memberships to a second level of golf members were sold for $40,000. Resigning charter members were promised 100 percent refundability upon resignation and reissuance of their memberships. Golf members were promised 40 percent. Resigned charter memberships are placed on a transfer list and are to be reissued prior to the initial sale or reissuance of any other golf memberships, including unsold memberships held by the developer.
Unfortunately, the club’s market no longer supports a $70,000 joining fee. The developer now faces the curse of the refundable membership: If the joining fee is reset to a market rate, the developer will have to pay more to refund a charter member’s joining fee than the developer receives from an incoming member. In reality, the developer’s dilemma is even worse because the developer is allowing new members to pay their joining fees in annual installments, which lessens the cash available for charter membership refunds. Not surprisingly, membership sales at the club have screeched to a halt, and the transfer list has been growing. This, unfortunately, is an all too familiar occurrence in the club industry today.
In declining economic conditions, clubs tend to experience an increase in member resignations and a decrease in membership sales. A growing member transfer list can feed on itself because other members may place their name on the list—even if they have no immediate plans to stop using the club—just so that they can receive a refund within a reasonable time after they do decide to leave the club. A long transfer list can signal to potential new members that the club is having problems. Moreover, club members who remain on the transfer list for any extended period of time may become disgruntled, vocal critics of the club, thereby further hampering future membership sales.
Refundability problems are frequently exacerbated if the club has multiple categories of refundable memberships with multiple resignation/transfer lists. Some of the categories may be dormant or even closed because a more appealing category has been created, which means an ever-growing membership resignation/transfer list and no market for those memberships. Hence, no member receives a refund. Add to the mix the club’s financing of membership sales, and the refundable membership curse grows even stronger.
The Solution
So what are clubs supposed to do to break this curse, aside from not selling refundable memberships at all? Fortunately, some options do exist, although success may depend largely on the club’s membership documents. If structured to provide for maximum flexibility, the club’s refundable membership program will only offer the member a specified percentage of the joining fee paid by the new member. In this case, the refund the resigned member receives adjusts automatically when the club adjusts its membership pricing. A club’s flexibility in altering membership refund provisions depends upon whether the refund commitment to the member is contractual in nature. If the refund provision is contained in a membership agreement signed by the member and the club, the terms of that agreement cannot be changed by the club without the consent of the member. On the other hand, if the refund provision is contained only in the club’s bylaws, then it likely can be changed by amending the bylaws by following the applicable bylaw amendment procedures.
Contractual Refundability
Options are limited when the club has contractually agreed on a specified refund amount because a wholesale change in the refundability program cannot be made without obtaining the consent of all of the members affected. However, one recent trend is to have the club file for bankruptcy protection and seek either to avoid or to restructure the club’s refund obligations to its members. Bankruptcy may be a particularly viable option in a developer-owned club where the developer’s efforts to sell the club are being stymied by the burden of the refund obligations.
Another tactic is to create a nonrefundable membership category that offers similar, but somewhat lesser, privileges than the refundable membership category at a considerably lower price point. Presumably, the new memberships will be priced attractively in the market, and prospective members will prefer the lower nonrefundable initiation fee.
Non-Contractual Refundability
A club has much greater flexibility if the member refund provisions are contained only in the club’s bylaws or membership plan and not in individual membership agreements. Depending upon the terms of the club’s membership documents, the club may be able to alter or even eliminate the refund terms. In addition, creative drafting may allow the club to match dollars in with dollars out to ensure that the proceeds the club actually receives from each membership sale do not exceed its refund obligation by stretching out the time period for paying a member refund to coincide with the club’s collection of the requisite dollars to pay it. This is particularly important when a club allows prospective members to pay joining fees in installments.
Balancing cash loss and intake can also be accomplished across membership classes and categories by creating a priority system and paying a refund only when the aggregate dollars from the sale of one or more memberships add up the amount owed to the next person entitled to a refund.
Finally, the club may be able to implement a “market-based” pricing policy that allows members to be placed in order on the transfer list based upon the refund amounts they are willing to accept.
Refundable memberships can be a useful tool. However, over use or misuse the tool, and your club may suffer the curse. If you are developing a new club or new membership programming, consider charging nonrefundable initiation fees. If you have a refundable membership program, now might be an appropriate time to examine the program to see if it needs to be fine-tuned to ward off the effects of the curse.
Ted M. Benn is a partner at Thompson & Knight LLP and a member of the Real Estate and Banking practice. He also serves as a member of NCA’s board of directors.