Dues and Initiation and Capital Fees in a Long-Term Capital Plan
Funding Capital Projects as part of a Private Club’s Long-Term Capital Plan.
We are strong proponents that Private Clubs should have a 5-10 year Long-Term Capital Plan. A Long-Term Capital Plan should reflect all future anticipated capital expenditures – preservation, modernization and reinvention - and how they will be funded over time. Ideally, these investments are systematically funded through a combination of Operating Surpluses, Initiation Fees, Capital Fees and Assessments and sometimes with the prudent use of Debt. In addition to normal replacement and modernization of assets, those Capital Projects prioritized in a Strategic Plan to help reinvent a Private Club, improve membership satisfaction and attract new members should be an integral part of a Private Club’s Long-Term Capital Plan.
Membership Dues are the engine that funds the operations of a Private Club. As a percentage of a Private Club’s operating revenues (including dues, food & beverage, sports and other amenity charges), Membership Dues represent approximately 50% of the total for the median of clubs surveyed by Club Benchmarking, Inc. (this percentage may be less for a Private Club without golf). The incremental value of an additional dollar of Membership Dues is more impactful than an incremental dollar of F&B revenue because, unlike F&B where there are food, beverage, labor and other costs that need to be covered, Membership Dues have no underlying costs.
A Private Club’s operating revenues must cover operating expenses. If there is a surplus of operating revenues to operating expenses, we recommend that the amount be transferred to the club’s capital account. For club’s that generate a deficit, short of assessing the membership, a deficit is, by default, funded through a reduction in funds otherwise available for capital expenditures. As the capital expenditure needs of a Private Club are substantial, use of capital funds to subsidize operating losses often leads to deferred maintenance. The unintended consequence of deferred maintenance is the possibility of the deterioration of the club’s facilities and other member facing amenities, leading to member dissatisfaction and both the loss of current members and difficulty in recruiting new members.
There is a temptation of the part of Private Club Boards not to raise Membership Dues. Reasons are varied, including:
- A perception - valid or not - that the level of service and/or amenities do not justify an increase, especially where members vote on Membership Dues increases;
- A temptation to reduce dues believing, usually incorrectly, it will attract new members or retain existing ones indefinitely;
- Attempts to compete on price, rather than a strong value proposition, with other Private Clubs in the marketplace.
Unfortunately, the operating costs of Private Clubs generally increase in a 3%-5% range each year and short of reducing operating expenses (which again can adversely impact member facing amenities leading to dissatisfaction), Dues need to be adjusted to achieve breakeven (before depreciation) or better levels.
Initiation Fees and Capital Fees
Initiation fees, along with Capital Fees, special assessments and/or debt, are the fuel for facility updates, improvements and expansions. The ability to adequately fund capital expenditures is hampered when sufficient initiation fee revenue is not generated. Many Private Clubs facing declining membership lower initiation fees in an attempt to attract more members. Most of those clubs subsequently find it difficult to increase the initiation fees to previous levels and, short of substantial increases in Membership Dues or special assessments, are forced to defer capital updates, improvements and expansion. For many, that begins a downward spiral of membership dissatisfaction, facilities decline and too much reliance on golf to attract new members.
Many well run Private Club charge members a Capital Fee in addition to their Membership Dues. The Capital Fee is segregated into a club’s Capital account and is designated specifically to fund the club’s capital expenditures. Capital Fee revenues that in the aggregate equal a club’s depreciation expense can help ensure that a club has a sufficient funding to replace worn assets on a timely basis and keep the facilities fresh. Many clubs also charge enough to allow the build-up of reserves to cover future modernization projects including improvements to the dining facilities, golf course, pool, and tennis. These fees typically run $1200-$2,400 per annum per full member and can be payable monthly, quarterly or annually.
When properly planned, the flow of Initiation and Capital Fees will help ensure that a Private Club can fund the majority of its capital needs. However, when a Private Club has significant replacement projects (such as an irrigation system) or aspirational projects such as a new or significant upgrade to its Clubhouse or a new pool with increased amenities and capacity, special assessments and/or prudent use of debt may be appropriate.
Club Board Professionals is a strategic financial consulting and training firm. The Principals, Dave Duval and Joe Abely, assist clubs achieve excellence in three areas: governance, financial sustainability and membership satisfaction. Contact us for a complimentary initial assessment of your club.
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