THERE IS NO QUESTION, clubs continue to spend money on capital projects at record rates. Country clubs are spending almost 36 percent more than they were eight years ago, but that was also a result of clubs curbing spending after The Great Recession of 2008. Today, clubs are paying for these improvements by borrowing more. Easy enough, however we all know that members ultimately are paying for it one way or another: The old saying, “pay me now or pay me later.”
There are two reasons clubs are borrowing more to pay for improvements. The first is that money is cheap, and members would prefer to pay over time as opposed to paying a large, one-time, upfront assessment. The second is that initiation fees, which were a large source of capital for clubs, are down more than 20 percent. Since this source of revenue typically funded half of capital expenditures, it’s not hard to figure out that the difference had to come from somewhere. Hence, clubs are borrowing more from third parties in the form of bank debt.
According to our 2018 edition of “Club Operating & Management Data,” the average bank debt in a country club was $3.75 million and 87.5 percent of country clubs have bank debt. This compares to $2.7 million ten years prior with 74 percent of clubs having debt. This begs the question: How much debt is too much? There is not a simple answer to this question, however, let’s examine the possibilities.
Let’s assume the average debt of $3.75 million at a 4 percent interest rate over a 15-year period. Under these terms the monthly debt payment (principal and interest) would be approximately $28,000. If the average club has 250 equivalent members that would require a monthly debt repayment assessment (fee, for those who don’t like the term assessment) of approximately $112. Annualized that comes out to $1,344 per equivalent member. The question then is, can your member afford an additional $1,344 on top of the dues they already pay? I do caution my clients not to extend the borrowing period for more than 15 years—with a best case at 10 years. The reason for this is that over a period of 10 years, most clubs will have a major capital project and having a loan that extends more than 10 years would cause financial strain. The bottom line is that clubs in areas that have a resource of prospective members that are paying initiation fees are doing significantly better than clubs in areas that do not have the resource of new members.
James J. Hankowski CPA is a partner of Condon O’Meara McGinty & Donnelly LLP. The firm specializes in the auditing and accounting for more than 325 private clubs in 16 states. He can be reached at [email protected] or visit comdcpa.com.