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Financing Capital Expenditures

Q: How should a club structure financing of capital expenditures so that the long-term financial health is not threatened?

A: Clubs strive to have their operations at least break even each year, before depreciation, thus eliminating the necessity of end of year assessments to cover operating deficits. Club management must consider how the club’s capital needs essential to the long-term health of the club are to be financed. The financing of capital projects can, depending on the structure, impact, and possibly deliver a blow to, a club’s finances that could last for decades.

In most clubs, ongoing capital expenditures are funded by a base layer of ongoing capital assessments. They’re also supplemented by initiation fees, which may fluctuate based on membership levels, turnover, the economy and other factors. These two sources of dedicated revenue should be sufficient to fund ongoing capital expenditures absent a large capital project. In a recent survey of 250 private clubs, 84 percent of golf and country clubs, 83 percent of tennis, beach and yacht clubs and 33 percent of city clubs had some form of capital assessment.

Large Capital Projects

Generally, large capital projects require funding above the levels provided by ongoing capital assessments and initiation fees. In certain cases, it may entail a much larger capital assessment, outside financing (bank loan), or member financing in the form of a membership bond, a certificate of indebtedness or membership certificate, or a combination thereof. The singular, large assessment route is usually not chosen, as it typically doesn’t receive the approval of the membership. Obtaining bank financing, coupled with an increase in an existing capital assessment for the term of the loan to pay debt service, has proven to be a popular alternative. Another alternative is to issue or increase the value of a bond, certificate of indebtedness or membership certificate equal to the payment being made.

Typically, members will the get the increased value of the certificate back when they leave the club, provided there is an incoming member to replace them, and the new member pays for the certificate. In effect, the members are providing interest-free financing to the club during their membership and since they receive their money back, they effectively never pay for the project, although they get the benefit of using the facility while a member.

The issuance of certificates is another device to raise funds. Approximately 51 percent of the golf and country clubs and 33 percent of tennis, beach and yacht clubs surveyed issue some form

of stock, bond or certificate. Although popular with members, such a financing mechanism is generally not in the long-term best interest of the club. In the short term it works—but in the long term the financial effect on a club’s cash flow can be drastic.

For example, Club A has 250 certificate-holding members. Over time, capital assessments for projects have added to the value of the certificate. The certificate, originally issued with a value of $1,000, is now valued at $10,000. The club’s total certificate value outstanding is $2,500,000 (250 x $10,000).

If the initiation fee is also $10,000, a new member pays $20,000 ($10,000 for initiation fee and $10,000 for a certificate) of which the club only gets $10,000, because the other $10,000 for the certificate goes to repay the outgoing member. If the membership turns over every 25 years, then over the next 100 years the club loses $10,000,000 (4 x $2,500,000) of available cash flow due to this financial structure. One-third of the country clubs that issue certificates value them at $10,000 or more.

In another example, if Club B has 300 certificate-holding members and the certificate is valued at $20,000, the total value is $6,000,000 and the future negative cash flow impact will be $24,000,000 (4 x $6,000,000).

The more certificate-holding members a club has, and the larger the value of each certificate, the more potential detrimental effect it will have on the club’s future cash flow.

The Solution

There is a solution for clubs that have issued bonds or certificates that have increased in value over the years due to assessments being added to their value. Clubs should consider lowering the amount of a new member’s payment that is designated for a bond or certificate with a corresponding increase in the initiation fee. Using Club A as an example, the new member would still pay $20,000; however, only $1,000 (or possibly a nominal amount) would be allocated to a bond or certificate purchase while the other $19,000 would be an initiation fee. Initially, the club will not benefit from the change, since they will have to redeem the outgoing member’s certificate; However, as new members ultimately leave the club, the cash flow from initiation fees will improve, especially over time. For clubs that have bonds or certificates out- standing, it is a long-term solution to a potential multi-million dollar cash flow issue without increasing costs to existing members.

Daniel T. Condon is a founding partner in the accounting firm of Condon O’Meara McGinty & Donnelly LLP, which currently serves as auditors, consultants and tax advisors to more than 325 clubs in 14 states. He has practiced in the area of private membership clubs for more than 30 years.


 Q: How do you optimize your management team? What are the most critical components of an effective management team?

A: Many managers spend a significant amount of time doing the wrong things very well or the right things very poorly. The responsibilities and goals of a private club management team include accomplishing performance objectives and supporting the mission and vision of the organization. If a club doesn’t have a “real” mission and vision, the first step to success is to define these with clarity. With these in hand, clear direction can be established with the efficient and effective use of resources and human capital.

Clubs across the country are unique in their culture and offerings, but what sets successful clubs apart from the pack are three crucial factors: clarity in vision, a strong sense of identity (who they are and who they are not) and leadership teams with the right set of attributes described below.

People

A club has limited human capital and a limited number of hours in a day to get things done. Clearly defined roles and responsibilities help to ensure that that the right people are doing the right job. The best general managers identify and leverage their staffs’ strengths that go beyond their normal role and responsibilities. Knowing the skills required for each position and applying the strengths and capabilities of the team empowers club leaders to use these individuals more effectively and can maximize individual and team performance. All top executives intrinsically understand that they cannot manage anything else until they can manage their own time and their team.

Equally important, is investing in people. As students of the industry, the best club managers set examples as coaches and mentors. The best managers lead and care for individuals, while not compromising the standards and vision of the organization. They cut underperformers loose after a dedicated but short period of time because they owe it to the high performers to not tolerate underperformance for too long.

Expectations

The planning and goal-setting process starts at the executive level. It is the responsibility of the chief executive to ensure his or her goals and objectives are conveyed to and reflected in the work of all team members in the organization.

Each department head must clearly understand their individual and departmental role in accomplishing these objectives and ultimately achieving the club’s mission. When the organization has a comprehensive performance plan in place, the management team needs to celebrate it by sharing it with the board along with periodically reporting the results once the plan is implemented. Boards respect management teams that focus on results that make a direct impact on the member experience.

Communication

Communication is important in any relationship, but the best leaders excel at it. They understand that there are many ways to communicate: Quantitative, qualitative, formal, informal, writ- ten, verbal, emotionally or with the relative absence of emotion … one size does not fit all. The best managers can quickly assess the most effective way to relate to a group or an individual.

Goals and objectives must be well defined and communicated effectively so everyone is clear about expectations. Consistent feedback is essential and should be provided formally and informally on a regular basis. The most productive management teams allow for open communication and input as well as feedback and ideas from all departments. Constructive criticism is useful and necessary. By establishing an environment that supports a meritocracy of ideas, the club wins overall.

Leadership Planning

Peter Drucker and Yogi Berra were pals in the early 70s. They each seem to view leadership and planning in different, yet similar ways. Drucker: “The best way to predict the future is to create it.” Berra: “Prediction is very hard, especially when it’s about the future.” The takeaway is to create a clear vision, develop a plan to achieve that vision and acknowledge that there will be bumps along the way.

Dan Denehy is the president of DENEHY Club Thinking Partners, an executive search and management- consulting firm that has handled nearly 300 projects for more than 100 private clubs and boutique resorts. He can be reached at [email protected]m or learn more at www.denehyctp.com.

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