How Can Private Clubs Afford Major Capital Projects?
Long-Term Financial Planning and the Affordability of Major Capital Projects
In order to retain existing members and attract new members (especially younger families) Private Clubs are increasingly looking to add amenities and/or enhance existing ones. They can range from adding services such as golf and tennis mentor programs for children, which are relatively inexpensive, to reinvention of facilities such as informal dining, upgraded aquatics centers, and multi-purpose fitness facilities, which can not only be expensive but increase future operating costs.
As Private Clubs evaluate what amenities to add or enhance, they need to determine how these will realistically funded. We strongly advocate that Private Clubs have a Long-Term Financial Plan (preferably going out ten-years). Within that ten-year plan, not only does the Club need to pay for new and/or enhanced amenities (Modernization and Reinvention) but for normal replacement of existing assets as they wear (Preservation). The latter should run a club approximately 8% to 10% of its annual operating revenues. Additionally a Club needs to provide for the servicing of its debt.
Club should be segregating their operating and capital accounts. Funds allocated to capital accounts generally include operating surpluses (which are generally small); initiation fees; capital and debt service fees; and proceeds from debt.
What a Club can afford is largely dependent on the number of Full Members Equivalents (“FME’s”). Assuming similar membership dues and fees levels a Club with 400 FME with capacity to add 80 new members can afford more than a Club with 250 FME’s with capacity to add 50 new members. The larger Club should be generating more capital income.
Long-Term Financial Planning
While it is important for Clubs of any size to be keeping their facilities fresh and providing amenities that new members want, the reality is that smaller Clubs have fewer resources to work with. While there is a temptation for Clubs of any size to increase long-term debt to add amenities, it is important that Clubs live within their means. How can a Club do this?
- Have a 10-Year Long-Term Financial Plan that lays out reasonable membership projection goals, capital income, and all desired capital spending including Preservation, Modernization and Reinvention needs.
- Match annual capital revenues with capital spending and prioritize those capital spending projects that the Club believes will result in the biggest impact on recruiting new members. To the extent that the Club takes on debt be sure it is paid off within the 10 year plan.
- Many Clubs are hesitant to raise dues and capital fees. We recommend that Clubs benchmark their dues and fees among a representative peer group. There may be room for increases.
- Make sure that on the operating side membership dues cover operating expenses. As membership grows, a Club can invest in better services and amenities. Remember that adding physical amenities does increase operating expenses. Again, benchmarking is recommended.
- The primary reason behind a Club increasing/enhancing its amenities should be to drive member count and dues. Clubs doing so to drive other revenue sources (such as functions, golf outings, etc.) may find they do not add materially to the bottom line.
Irrespective of size, it is important that Club Boards clearly communicate to membership their Long-Term Financial Plan. For Clubs who will be staging new and enhanced amenities over a multi-year period, selling the excitement of what is coming may motivate existing members (your greatest sales force) to sponsor new members sooner.