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Principles of Strategic Debt Use

Our firm is often hired when a club has reached a crossroads in their strategic path and is seeking a deliverable strategy that has not yet been executed or defined. As a rule, we do not own, lease, or invest sliver equity in the private clubs we manage. Our role is to guide and execute and our value to a client is ultimately determined by the level of success of the club’s strategy. When that strategy calls for the use of debt, we are particularly mindful of the importance of making such a decision and we encourage the club to memorialize their own debt principles in advance of any investment. These guidelines serve as a necessary foundation for future governing members and members at large to ensure predictable outcomes. Your members and future board members will thank you.

Sample guidelines for determining when to use (or NOT use) debt

When the right market conditions exist to take advantage of a unique opportunity.These market conditions are generally time sensitive, anticipatory or reacting to a market opportunity to acquire, build or procure neighboring land, housing or new club amenities designated to grow or protect the club’s long-term interests.  
To supplement or accelerate generational investments needed to protect key club assets.Requires a debt reduction plan that retires the debt in advance of the useful life of the assets tied to the debt.
Investment is widely supported by the membership at large.The membership at large is contributing proportionately by membership category to the retirement of the debt. Ideally, all or the majority of club stakeholders are vested in both the investment and retirement of the debt.
Investment is aligned with the club’s values.For example, if the member experience is a key priority, funding nonmember areas would typically not take a disproportionate amount of the debt obligation.
Emergency use to save the club.First rule of surviving a crisis is to survive the crisis. This should be accompanied by a plan to retire the debt in a reasonable amount of time. Worst case, this money is often to simply buy time until the group can identify a bridge to the next key strategic event.
NOT because the club still has remaining debt capacity.If the Club has existing debt obligations that extend beyond the useful life of assets tied to the debt, any added future debt should meet the criteria noted above. 
NOT to avoid temporary member friction.One-time operating assessments are generally acceptable if they are communicated clearly, and in advance. Ordinary club obligations of today should not be the responsibility of future generations of memberships.
NOT if the encumbrances of the debt greatly limit the club’s ability to conduct business with flexibility.Avoid loan covenants, requirements or punitive interest rates that jeopardize the future of the club.

Rob DeMore is President of the Troon Privé Division