Before I took on my current role as CEO of Club Benchmarking, I served for 17 years as President and General Manager of a large, gated community club in Naples, Florida. I clearly recall sitting in my office reading a story in an industry trade magazine about a club on the opposite coast of the State that had invested $10M in a renovation. The number is not unusual now, but it was an eye-popping figure back then. I could not fathom any club investing that much money back into the facilities or imagine how my own club would ever be able to accumulate such a large amount of capital.
At the time, my club was in the middle of an ownership turnover from the developer to the members. We had no debt, but we also had no mechanism in place for capital dues and we were facing financial challenges that go with refundable memberships. Meanwhile, our competition in the local market had used the period of economic downturn in 2008-2009 to recapitalize, wipe out their refundable membership and introduce capital dues. It was clear to me that we were operating at a competitive disadvantage and we needed a transformative capital improvement plan backed up by a viable plan to fund that vision.
It seemed logical to assume debt might be part of that equation, but like many managers I had very little knowledge or experience with developing a long-term capital plan and the requisite funding plan to ensure its success. Fortunately, I had access to industry experts and trusted advisors among the membership that included a bank president, a consulting company vice president, a developer and a private equity manager. I turned to them with three essential questions, and the intent of this article is to share my key takeaways from those discussions and some lessons learned over the years:
Question #1: Could debt be an option for our club?
Making sure the facility is up to today’s elevated standards for member experience is a critical part of the general manager’s job. That responsibility includes educating and inspiring the board through field trips to learn from best-in-class clubs, locally, regionally and nationally. But what do you do with that information when the appetite and need for renovation are real, but the club’s capital reserves are insufficient? Taking on debt may be an option, but it is important to understand that it is not a panacea. Before a club heads down that road, the leadership team should address these considerations:
- Does the club have a professional capital reserve study to ensure all stakeholders have a realistic picture of the club’s obligatory capital needs (repair and replacement of existing assets) that must be met alongside the debt service over the life of the loan and beyond?
- Do the board and management have a thorough understanding of the club’s current obligations (existing debt, operating expenses, etc.) and how keeping up with those might impact the ability to service newly acquired debt?
- Has a benchmark analysis of existing sources of capital income been performed to clarify your club’s situation (and options) relative to industry norms and best practices?
- Has a complete, accurate, realistic forecast of increased operating costs associated with staffing and operation of new or expanded facilities been developed and discussed?
- Have the members been surveyed to determine enthusiasm for the project and tolerance for increased costs associated with completing and maintaining new facilities?
The most important step in understanding how or if debt properly fits into the equation is a comprehensive long-range capital plan. That plan must include a professional, comprehensive capital reserve study to quantify obligatory capital needs. The capital plan should also reflect considerations as a result of a master facilities plan including an accurate estimation of associated costs to document the club’s aspirational capital needs that tie to its vision. .
In the short term, debt can be a vehicle for enhancing your club’s capital position, but it is a leveraged play that comes with the burden of repaying principal and interest over time. Each club must make its own determination as to whether acquisition of debt is a viable option that will help the club meet its goals without handcuffing future Boards. A solid, well-researched repayment plan will ensure that the club is able to both cover the debt service while also assuring the ability to meet the additional ongoing obligatory and aspirational investments including the increased capital requirements of the new facilities.
Question #2: How do we determine the scope and scale of our project?
Affordability is an obvious factor, but one that requires context. Aim too high without proper financial due diligence and the results can be crippling. Aim too low and you will deal with disappointed members and, as is often the case, the cost of amending or expanding the project in the future when construction costs are likely to be higher. Operational costs like energy, insurance and labor are also subject to inflation, yet we’ve seen many clubs sabotage their own success by promising to reduce or keep costs flat in an effort to build member support for the project. There is an inherent contradiction in prioritizing efficiency over the member experience in a private club where the business model dictates that the members’ money be used to enhance their enjoyment of the club. Clubs compete on value, not price.
Facility improvements must also be evaluated for their ability to stand the test of time. In most cases, infrastructure improvements are intended to last 10 or more years, so today’s investments must do double duty, meeting the needs and desires of current members as identified by an objective member survey while also being attractive and relevant for future members.
Question #3 Is acquisition of debt an unfair burden for future members?
The reality is that debt exists in the private club industry because so many clubs find it easier to ask a bank for money than to ask their members. The question of fairness comes down to whether you are asking the right group of members and asking for an appropriate reason.
Ideally, debt is introduced to the capital mix as an infusion to fund aspirational projects outside the scope of the club’s obligatory capital requirements. Aspirational capital requirements, forward-looking by definition, will benefit the younger members and members to join in the future more than they will benefit more tenured members. As such, it would be fair and equitable to fund aspirational investments more from initiation fee income which is thus less taxing on the more tenured members.
Conclusion: As a component of the club’s overall capital mix, debt can be a viable part of the solution, but it is a decision that is not to be made lightly. As stewards and fiduciaries, the club’s board and manager are obligated to be thorough in their due diligence and to ensure the club has a robust and sustainable capital engine that will fund both its current and future capital needs.