Best Practice Audit Survey - Observations About Debt Utilization - #4 in a series
Private Club Debt Utilization
We designed our BPA survey so that a “no” response generally indicates non-compliance with one of our best practices. While operating a club debt-free is certainly optimal, that ship has apparently sailed for most clubs. What’s the proof? More that 70% of the clubs responding employed debt. No other question in our survey came close that number of “no” responses. Furthermore, as mentioned in previous blogs, the managing partner of a prominent CPA firm specializing in clubs shared that 80% of the firm’s clients were using debt. That figure was up from 20% prior to the great recession just over a decade ago.
Using debt is not by itself a bad thing, but when poor terms, long amortization periods, and too much debt come into play, a problem lurks ahead. Of the 71% of the survey respondents using debt, more than one-third borrowed more than one year of dues revenue and more than one-half amortized the loan over more than a ten-year period. We view both of these characteristics as warning signals.
There’s a lot of industry speculation that 20% or more of private country clubs will close in the next decade. Most attribute the projected closings to commonly cited headwinds in golf – “it’s too hard”, “it’s too time-consuming”, “it’s too expensive” – in addition to aging memberships and failure to successfully convert business models and physical assets to family friendly offerings. While we don’t argue that a significant number of clubs will close, we believe the greatest issue and most likely cause of failures will be debt burdens in the face of a future recession.
We use history as our guide in making that statement. Following the great recession, in the face of unstable or shrinking memberships many Boards deferred capital maintenance and improvements and cut capital and initiation fees only to find a deteriorating product without the funds to right the ship and adapt to changing market trends. With interest rates at historically low rates, Boards favored debt as the answer. Some boards responsibly added debt service fees, limited amortization periods to 7-10 years and borrowed prudent amounts (generally no more than 1x dues). Many did not. Those clubs will again find themselves cash-constrained to tackle ongoing capital needs and a debt-service cost that is not going away anytime soon. Some will face a balloon payment over the next decade that sounded so remote when the loan was approved. When the next recession hits and membership counts become unstable, debt will prove to be very unforgiving. Balloon payments may come due at inopportune times and rates will most assuredly be higher for re-financings. Banks may be less willing to lend to clubs. That’s why we promote only the prudent use of debt in the context of a long-term funded financial plan for each club. Debt will prove to be an unreliable and constricting source of funds for clubs not properly positioned.
We refer to debt as a tool, not an answer. We also like to say it’s a tranquilizer, not a cure. For many clubs, it will become addictive. Use it responsibly and only as advised.
For more information on the use of debt by private clubs, please refer to related blogs:
Dave Duval and Joe Abely, the founders of Club Board Professionals, LLC, are both CPA/MBAs with more than a dozen years each of private club board experience as directors, treasurers, and presidents. They successfully honed their skills while guiding highly-successful transformations of their clubs during challenging markets and economic times before forming Club Board Professionals in 2016. They’ve quickly become speakers, consultants, coaches and contributing authors to the industry.
For further information please reach out to Joe Abely at email@example.com or 781-953-9333, or Dave Duval at firstname.lastname@example.org or 617-519-6281.