The Repayment of Debt at a Private Club
Does Your Club’s Long-Term Financial Plan Factor in the Repayment of Debt?
The problem with debt is that it needs to be repaid.
Debt in a private club can take on many forms. In addition to bank debt, clubs can have debt in the form of capital leases (mostly for golf course related purchases), refundable debt to members through bonds or certificates and, for some, unfunded pension liabilities. All forms of debt need to be repaid.
A club’s operations generally do not generate sufficient surpluses to fund the repayment of debt (not to mention pay for on-going capital expenditures). Even clubs that experience an increase in membership find that significant increases in operating surpluses don’t materialize because along with new members comes increased costs of serving the members, including increased wear and tear on facilities. For many private clubs that enhance or add to amenities, there are resultant increases in operating costs.
How, Does a Private Club Repay its Debt?
While operating surpluses might help, at the end of the day repayment needs to come from the membership in the form of capital income:
- From new members in the form of initiation fees
- From existing members in the form of on-going capital fees and/or assessments
We believe that each club should have a long-term financial plan going out 10-years that addresses all of sources (initiation fees/capital fees/assessments) and uses of capital including:
- On-going capital expenditures (maintaining the club’s Capital Base)
- Implementing strategic and/or master plans
- Principal & interest payments on debt
- Payments on capital leases
- Refunding membership bonds/certificates
- Funding unfunded pension liabilities
Unfortunately, Many Private Clubs Don’t Have A Long-term Financial Plan
In our “Report on the 2017 Best Practices Audit Survey of Private Clubs”, we found that over 30% of clubs surveyed do not have a long-term financial plan. Of those clubs that reported that they had a long-term financial plan, over 30% reported that it did not reflect expected capital spending requirements and almost 40% reported that the plan was not funded. We found many of those clubs had insufficient sources of capital income to both service debt and keep up with capital expenditures. As a result, many of these clubs are experiencing some combination of flat to declining membership dues and a declining Capital Base (which is evidence of increased deferred maintenance of a facility). Extending the term of debt is not an answer as it does not address insufficient capital income and further hinders a club’s ability to reinvest in its facility.
Debt can be an important part of a private club’s funding of the implementation of a strategic or master plan. We recommend clubs do this in the context of a fully-funded long-term financial plan that addresses all of a club’s long-term (10-year) capital and debt repayment needs. We also recommend that clubs consider implementing an on-going capital assessment to both get ahead of future capital needs and lessen the need for special assessments in the future.
Best Practice Audit Survey of Private Clubs
Each year we conduct our Best Practice Audit survey. It helps us evaluate practices in the industry and helps both the participants and us rapidly identify opportunities for improvement at each club, including the use of debt. We seek responses from club management and one or more board members. Please invest 5-10 minutes and complete our Best Practice Audit survey. Click Here.
We help private clubs develop fully funded long-term financial plans and navigate the effective use of debt. We help clubs plan for a sustainable future. For further information please reach out to Joe Abely at firstname.lastname@example.org or 781-953-9333, or Dave Duval at email@example.com or 617-519-6281.