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Glossary of golf
appraisal terms
The income approach
18-hole design options |
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Golf
course appraisers must be knowledgeable about factors such as
course design, quality, maintenance and market analysis.
The price is right
Golf course appraisers need a wealth
of knowledge
and market analysis techniques that are unique to the golf
industry.
Stephen R. Hughes
Appraising a golf course's value is always a challenge. In addition to the real estate, there's the significant component of tangible personal property, such as furniture and equipment, as well as intangible personal property in the form of business value.
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Furthermore, golf facilities have several departments that operate differently, and no two facilities are alike. An appraiser must have a thorough understanding of the departmental operations, including their potential, to reliably estimate the value of the entire property.
Golf courses are appraised for a variety of purposes: financing of new construction, purchase or refinance; providing buyers or sellers information; bankruptcy, litigation and estate tax purposes; and ad valorem tax valuations.
A golf course appraiser may also be consulted for other reasons: to conduct a market study to determine optimal positioning and pricing; to conduct a feasibility study for new development, expansion or renovation; to determine asset allocations for corporate transfers; to assist with due diligence for buyers or lenders; or to assist with offering packages for sellers.
What is an
appraisal?
The principles of golf course appraisal are
similar to those for other commercial real estate. However, additional
necessary knowledge unique to the golf industry includes design,
quality, maintenance and market analysis.
A full appraisal report is usually 50-100 pages and includes the purpose, function and scope of the assignment as well as a brief history of the property. The definitions of market value and other terms are included. The ownership interest being appraised and the operating structure must be specifically delineated. For private clubs with a variety of membership rights and privileges, ownership rights become even more important.
The valuation process is generally orderly and leads to a value conclusion. In the process, the appraiser first identifies the type of appraisal, then gathers available pertinent data. Once data are obtained and properly analyzed, that information is used to estimate value through three approaches: an income approach, a sales comparison approach and a cost approach.
The appraiser reconciles the value estimates from each of the three approaches. After careful examination, emphasis is placed on the approach or approaches that appear most reliable, and a final value estimate is determined.
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Golf course buyers focus on income potential, so that's also most important to the appraiser. Five factors stand out as critical when estimating the value of a property: competition environment and location, quality/layout, conditioning, marketing/positioning and aesthetics/designer.
Property and
market
Before the appraiser can gather data, he or she
must thoroughly understand the property being valued and how it fits
into its physical and competitive market environments.
The first step is to learn about the area, the neighborhood and, particularly for golf, the climate. The next step is to inspect and understand the property being valued.
The property description will include:
Land analysis (location, topography, flood plain,
water rights, governmental or deed restrictions, size/shape and
utilities)
Golf course (age, grassing, hazards, course
aesthetics, designer, car paths, irrigation system and range/practice
facility)
Buildings (size, use and materials)
Other improvements (parking, tennis, pool, etc.)
Personal property (maintenance equipment, golf cars
and clubhouse equipment)
Quality, condition and functionality of each asset
Environmental issues, if any
Next, the appraiser will conduct a market analysis, including:
Definition of market area
Population and golfer demographics
Competitive golf facilities in the market area
(primary and secondary competition)
Courses under construction and planned
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Income approach
After data are gathered, the analysis begins.
The income approach uses procedures that convert future income from
the property into a value estimate.
The discounted cash-flow model is more precise. This method considers anticipated future income and the sale of the property at the end of a projected holding period. Each annual cash-flow estimate is then discounted to a "present worth" figure through the capitalization process.
Another method, less precise but still valid, is to apply an overall capitalization rate to a stabilized net operating income (where rounds and green fees reflect current market and the operation is stable). The appraiser restates financial statements that are typically provided by accountants to estimate operating cash flow before debt service. The related article, "The income approach," illustrates this method.
In this example, the payroll is split among appropriate departments. Non-cash depreciation is backed out. The analysis assumes no mortgage debt, and therefore the interest expense and principal payments are ignored. A future replacement reserve for capital items is included. The net operating income is $160,000 after reserve, and the capitalization rate is 11 percent. The income value indication (the net operating income divided by the capitalization rate) is therefore $1,454,545.
Sales comparison
approach
In the sales comparison approach, a market value
estimate is predicated upon prices paid in market transactions of golf
courses that have been sold. It's a process of finding and analyzing
sales of similar, recently sold properties to determine the most
probable sales prices of the property being appraised.
The reliability of this technique depends on several factors:
Availability of comparable sales data
Verification of the sales data
Degree of comparability or extent of adjustment
necessary for differences
Absence of nontypical conditions affecting the sales
price
In most markets, there are not a lot of similar golf courses that have sold recently, especially upscale equity clubs.
The appraiser also must determine the rights conveyed with each sale. For example, the sale of a non-equity private club -- after membership sellout -- is really a partial interest sale. The initiation or entry fees have been exchanged for lifetime use rights granted to members. The sales comparison approach provides the framework for a range in value, but it's less useful than the income approach.
Cost approach
The cost approach is based on the proposition
that an informed purchaser would pay no more than the cost of
producing a substitute property with the same utility as the subject
property.
It's particularly applicable when the property being appraised involves relatively new improvements that represent the "highest and best use" of the land, or when relatively unique or specialized improvements are located on the site and there are no comparable properties on the market. It's of limited usefulness except for new golf courses in a strong market (i.e., where new courses are financially feasible).
For this approach, the appraiser collects actual construction costs for golf courses and other improvements, as well as the purchase costs for furniture, fixtures and equipment. Deductions are made from the replacement cost estimate for physical deterioration resulting from age or lack of maintenance.
In some cases, an improvement may have a value less than the cost. This is called functional obsolescence. An example would be a maintenance building constructed with a concrete tile roof and stucco siding, when a less expensive metal building would offer the same utility and value.
A functional deficiency can be anything that causes extra maintenance. Examples of functional problems are:
Poor design or too little land area, resulting in
dangerous intersections where players can be hit by golf balls
Improper irrigation design
Poor soil drainage
Inadequate green or bunker drainage
The master plan and golf course routing involve trade-offs among optimal play/outing management, real estate lots with golf frontage, maintenance costs and acreage required. The chart "18-hole design options" summarizes those relationships.
Before completing the appraisal, the appraiser needs to consider the "highest and best use" of the site. This analysis involves determining whether a golf course is the use that supports the highest present value on the land, compared with other reasonably probable, physically possible, legal and financially feasible alternate uses.
This analysis usually comes into play when the course is a core design with a good location, and it would be feasible and provide a higher return to redevelop the site with a more dense use. I recently appraised a golf course that was worth about $2.5 million, but with commercial zoning already in place, the redeveloped land put to its "highest and best use" would be worth more than $8 million.
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How
superintendents can help appraisers
Equipment
Appraisers value golf course equipment along
with the real estate because it's required to operate the golf course.
A list of the maintenance equipment, preferably with the acquisition
date and cost, is necessary. A summary of capital replacements over
the last three to five years is helpful as well. Appraisers also need
advice on the adequacy and condition of existing equipment. The income
approach replacement reserve includes estimating what needs to be
spent on new equipment, car paths, bridges and irrigation in the
coming years.
Golf course
Appraisers must evaluate the adequacy and
condition of the course (grass, drainage, erosion, etc.) as well as
identify future capital needs on the course. The superintendent's
information and judgment are critical to the process. Appraisers don't
have specific expertise on turfgrass and maintenance technology, so
they must rely on those who do.
I recently valued Terradyne Country Club in Andover, Kan., which had a limited water supply. The ponds were being dredged and enlarged to add capacity. The superintendent, Mike Jordan, a 13-year GCSAA member, provided a map with calculations on the volume of the impoundment expansion and an estimate of the annual water cost savings. I was also given letters from other superintendents regarding an electrostatic precipitator that was being installed. This was extremely helpful in completing an appraisal to finance those and other renovations.
Ways courses can increase value
Pay close attention to the number and type of golfers
for each time segment of the weekday and weekend. Raise green fees for
peak segments, especially if competing courses are sold out at the
same time. Lower fees for time segments that are underutilized (maybe
discounted senior rates on weekday mornings).
Cut back on bunkers (or other hazards) that slow play
and increase maintenance, especially if they require hand mowing.
Lower maintenance payroll by hiring part-time
retirees (such as pro shops often do with rangers). This isn't
recommended for higher-quality facilities.
Beef up your practice range; add lighting if you can;
install a pitch and putt if you have good visibility.
Don't forget about fixed expenses. Make sure your
real estate taxes are not based on a value that's too high. Check to
see if you're over-insured.
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How appraisers can
help superintendents
Many superintendents have told me about the
capital needs they have regarding equipment, irrigation, grassing,
renovation, erosion, etc. Sometimes golf course owners will consider
the advice of an outside expert on these improvements.
Experienced golf course appraisers think in terms of payback and value added from new equipment or renovation that can lower water or labor costs. Some owners who come from a business background don't fully appreciate the need for good conditioning. Because of the size of the maintenance budget, some owners look there first when they need to reduce expenses. Golf course appraisers understand, however, that revenue generation begins on the golf course.
Stephen R. Hughes is president of Hughes & Co. Inc., of Leawood, Kan. He is a member of the Society of Golf Appraisers, the Appraisal Institute and the National Golf Foundation.