How golf courses can be a great real estate investment
As with any other transaction, one of the most important parts of an investment in a golf course comes down to the acquisition. If you overpay or buy something without due diligence, you’re back to the wall and struggling to generate cash flow.
What does it really mean to own a golf course?
Investing in a golf course attracts all kinds of people: accomplished golf professionals, politically connected insiders, food and beverage specialists, successful entrepreneurs, skilled agronomists, local heroes, and more. Many get involved as investors because they have a passion for golf, but another reason you will see such a diverse ownership track record is because of the many hats that a golf course owner has. must wear.
In the book So you want to own a golf course, published by the National Golf Course Owners Association (NGCOA), Hilda Allen explains that when you buy a golf course, you are not just investing in real estate – “you will own a restaurant, an entertainment venue and the like. ‘a farm.”
To learn more about valuing potential trades and better understanding what it takes to be a successful golf investor, I spoke with John Brown, CEO of Golf Brown, a third-party owner and manager of golf courses in eight states. Brown himself started out as a banker before working for the world’s largest golf course operator, Troon Golf. Brown Golf was launched in 2011 and currently has 28 golf courses in its portfolio.
What to look for when evaluating a potential acquisition
Brown has pretty strict rules when considering offers: If an 18-hole course hasn’t already hit $ 1.5 million in sales, it usually won’t even dive into it. The same goes for a 36-hole golf course with less than $ 2 million in sales.
Like any other business, golf courses can become more profitable by increasing sales or decreasing costs. Brown’s experience has taught him that he can be more effective when a golf course already has sales but may need help to operate more efficiently. And, he adds, “I don’t pay [a golf course] for income potential. This is my advantage. “
Profitable golf courses typically sell for six to eight times EBITDA, while non-profitable golf courses tend to sell for 0.8 to 1.4 times revenue.
Creating value: how to identify opportunities
Once a potential acquisition passes the revenue test, Brown and his team will dig deeper into the numbers. Looking at the income side, he compares “the distribution of income between golf, food and drink, and retail.” In Brown’s experience, profit margins are very slim, with little margin for error on the non-golf parts of the business.
If a course has a restaurant and pro shop, they want to see where most of that income is coming from. If the pro’s restaurant and shop are run efficiently enough but tee sheet management is poor or there is more money to be made in golf, he knows this is a place where his team can work to generate more income and create value.
Another way to add value to operating a golf course is to add new sources of income. Jay Karen, CEO of NGCOA, recently told me, “The most creative development in our business is the addition of ‘golf entertainment’. Course owners are adding simulators and technologies like the TopTracer line to create whole new experiences. These additions can be an antidote to things that can get in the way of activity, like bad weather and sunset.
Golf course indicators
When a golf course has been stabilized, Brown has a few key financial metrics that he examines. Total labor cost as a percentage of sales should be around 40%, while service overhead should be 32% of a course’s sales. And seeing numbers higher than these when evaluating a deal usually means there is value to be created.
On the food and beverage front, he wants food costs as a percentage of sales to be around 36%, 32% for beer and wine, and 26% for liquor.
As for the pro shop, he wants to see the cost of merchandise represent around 60-65% of pro shop sales, whereas he would like to see inventory turn three times a year. This means that at some point, the pro’s store’s total inventory on their balance sheet should equal about one-third of the cost of a year’s inventory of sales.
Although Brown has reversed courses in the past, his team’s strategy typically is to buy and hold an investment in a golf course after turning it into a solid, cash-generating asset. In many cases, when Brown Golf invests in a golf course, it uses a partner to purchase the course, with Brown entering into a long-term lease.
Karen says the most important thing to consider before investing in a golf course is the exit strategy: “What’s the end of the game? The end of the game will determine how you run the business. If it is to someday sell it to another party who wishes to continue their golf activities, it is therefore essential to maximize net income. The value of the course, notwithstanding the real estate value, will be based on your continued financial health. If the end game or the goals are different from that, then your strategy and goals that a trader can change. “
Types of outings
There are traditionally six types of golf outings:
- Hold on for the long term like Brown does
- Sell the property after doing the work to increase the value and make an exchange 1031
- Giving ownership to future generations
- Take out a cash refinance loan and use the money to invest more in the course or make another investment
- Sell the course, but re-lease it via a sale-leaseback (similar to how Brown does it, but does it later)
- Reposition the land for uses other than a golf course
Can I get investment exposure on a golf course without purchasing one?
There’s no getting around it: owning a golf course is a huge business, and you need the financing to do it. That said, it is possible to be exposed to golf courses in other ways. For example, while it is not a direct investment in a golf course, you can also invest in rental property in a golf community. You can also turn to some hotel real estate investment trusts (REITs) exposed to golf courses.
What to consider when investing
Creating value, like any real estate transaction, is key when investing in a golf course. It is a difficult business; 1 to 2% of golf courses close each year, while 25% of them are unprofitable. There is a lot of money to be made for a smart investor and trader, but make sure you know what you’re getting into and what metrics to focus on.