As a capital planning advisor to hundreds of clubs over the course of my career, one of the most common characteristics among clubs functioning reactively is a failure to understand their club’s capital requirements and how to properly fund them. Those clubs typically lack a forward-looking capital plan, and as a result they are saddled with an accumulation of deferred maintenance and delayed capital asset replacement (obligatory capital). Over time, those factors contribute to increased member attrition and erode trust between the board and membership.
Eventually, club governing bodies in that situation find themselves in crisis-mode where fear drives the decision-making process. Common knee-jerk reactions include surprising members with major assessments, taking on large amounts of bank debt or selling off parcels of land. To break the cycle and resolve the problem for the long-term, we start by determining what led the club into the situation in the first place. Almost invariably, issues around how clubs fund depreciation have played a major role. Specifically, many clubs have a poor understanding of what actually needs to be funded and no plan in place for funding it appropriately and consistently.
What needs funding?
As a line item on your income statement, depreciation represents the historical cost of what was paid for installed assets in the past and the sum-total of the depreciation for the fiscal year for those assets. Book depreciation does not take inflation into account, meaning that it does not consider what it will cost to replace the assets in the future. It also does not account for fully depreciated assets that are still in use.
The most accurate way to define the true cost of depreciation is an independent and professional capital reserve study. This shelf-to-sheet inspection of every capital asset on your property based on your specific use of each asset is the best way to determine the capital revenue needed to maintain your physical plant in a way that fulfills your members’ expectations.
How it gets funded
A capital reserve study report will answer the question of what needs to be funded. The answer to how that funding happens is capital dues. Getting out of the reactive assessment cycle starts with having your existing members fund depreciation as the assets are being consumed. If the capital dues line is set so that the reserve study requirement is matched over time, initiation fee income can be directed toward aspirational or growth capital to ensure the club remains relevant to existing and future members. Initiation fee income may also be used to service any debt needed to leverage project completion in the absence of adequate reserves.
That seems clear cut, so why don’t more clubs embrace this simple concept? History and lack of member education are the two largest barriers. Many clubs have a history of funding projects one at a time, instituting fees and assessments tied to that specific project. This makes it difficult to embrace best practices without properly educating the membership about the true capital needs and resources of the club.
Once they are properly informed of the resources required to maintain a fresh and relevant physical plant for their enjoyment, we find that members respond with overwhelming support. They view themselves as owners and stewards who want to leave the club better than they found it for the next generation. It is up to club leadership to provide this forward-looking capital plan to the membership. If done correctly, the membership will rise to the occasion.
Eric Gregory, CCM, is executive director at Club Benchmarking. He can be reached at [email protected].