News
Good news on the horizon PART 1
7/21/2006
By Michael Lednovich
as published in Golf SuperNEWS
MONTEREY, CALIF.
Golf course group owners have an affinity for meeting by Monterey Bay, where the setting June sun bathes the Pacific waters in a golden hew that washes over the landscape.
The news they heard June 29 inside the Cypress Ballroom at the Monterey Plaza Hotel & Spa at the 11th annual Multi-course Owner Leadership Retreat was as golden as the sunsets because golf courses suddenly are becoming hot properties with investors.
"It's harder and harder for investors to get equity out of classic real estate. For them, it's all about cash flow. Golf courses have become a very valid class of real estate for major financial institutions," said Mark Elliott of Hodges Ward Elliott, a brokerage and investment-banking firm based in Atlanta. "Investors are putting allocations of money into real estate more than ever before, because real estate has outperformed all other segments of investing - including bonds and the stock market."
Take for example Lynch Investments LLC of San Francisco, which specializes in apartment units, office buildings and industrial properties. Last year, Lynch entered the golf course market, buying the Makalei Golf Club on the island of Hawaii.
"For a long time, the golf industry was redlined and radioactive to lenders, especially after some very bad investments in the 90s. They didn't understand our business, heard the horror stories and treated it as high risk," said Jim Hinckley, CEO and managing partner of Century Golf Partners and Arnold Palmer Golf Management, who moderated a panel of financial experts in a presentation entitled "The Art of the Deal Corral."
The retreat, sponsored by the National Golf Course Owners Association, is limited to owners of seven or more golf courses. That group represents about 1,600 golf courses worldwide and has a combined buying influence of $15.6 billion.
Few investors can forget the Pebble Beach Golf Links fiasco when Marvin Davis sold it in 1990 to Minoru Isutani for $850 million. Isutani sold it two years later, losing $350 million on the investment.
But the 1999 sale of the Pebble Beach Co. for $820 million to a group that includes Arnold Palmer, Clint Eastwood and Peter Ueberroth has faded that memory.
"Now (investors) like us, and they're starting to court us," Hinckley said. "The golf industry can transition from where only the opportunistic, high-risk investors looked at us, to an industry that has stable cash flow; investors understand it, and it then opens the door for some very different capitalization and financial strategies."
These new financial strategies are showing up in recent golf course deals such as the $25 million sale of Stallion Mountain Country Club in Las Vegas last May.
The financing tool for that sale was Tenant in Common, commonly known as TIC. Four years ago, the Internal Revenue Service redefined TICs, allowing multiple investors to purchase property and gain advantageous tax deferrals.
With the TIC purchase, the owners will lease Stallion Mountain to an operator who then has the option of purchasing the golf course at fair market value at a later date.
Another financing method is called the real estate investment trust, otherwise known as a REIT. A REIT is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs often are traded on major exchanges just like stocks.
In May, CNL Income Properties Inc., a REIT focused on lifestyle properties, bought its first golf course, the Palmetto Hall Plantation Club on Hilton Head Island, S.C., for approximately $7.6 million. As part of the transaction, CNL signed a triple net lease with Heritage Golf Group, the owner and operator of a portfolio of private, resort and high-end daily fee golf facilities around the country, to run the club.
"REITs and TICs are relatively new to the golf industry," said Van Tengberg, of Foley & Lardner's San Diego office and co-chair of the firm's Golf & Resort Industry Team. "There is lots of excitement in the air and a lot of wonderful optimism. Who would have ever thought in our careers that both ClubCorp and National Golf would be sold?"
The new focus on golf courses is a result of investors being dissatisfied with the rate of return of the traditional four sectors of real estate investment – office, residential, industrial and retail. Lodging and hospitality, which has emerged as a fifth segment, also is flat. Across the board, investors generally are seeing returns of 4 to 6 percent.
"A golf investment in our opinion should get better than a 9 percent return," Elliott said. "And right now the big investors like CalPERS, GE Asset and PGGM that had targeted 10 percent returns, are seeing actual returns of 4 to 7 percent."
Those firms have billions invested but can't pull out their money because of low equity rates, Elliott said. "That means they're looking at other investments for these huge amounts of money they have on hand, and golf courses are getting their attention," he said.
Earlier this year, PKF Consulting launched a new Golf & Resort Group to provide consulting and planning services in what it believes will be an expanding market.
"Capital markets have returned to the industry, resulting in a growing number of golf course acquisitions, both portfolios and single assets," said Tim Wyman, director of the new division. "Investors are being more thorough with feasibility and return estimates and making more strategically oriented decisions. Superior data and analysis are driving more transactions and attracting more lenders, who largely have been on the sidelines for the past four years. Our goal for the Golf & Resort Group is to provide our clients with the insights to make the most informed decisions and provide the services to create the potential for optimizing returns."
But the owners at the NGCOA-sponsored leadership retreat were made fully aware that it's not a matter of sitting back and waiting to be wooed by deep-pocketed suitors. Conditions must be properly aligned for investors to take an active interest in selling or adding to their portfolios. For investors to take notice, Hinckley said, golf course owners must run their operations in a professional manner.
"The industry recognizes that golf courses that are professionally managed will outperform a golf course that does not have professional management," Hinckley said. "And we're finally getting some metrics. It took us two years just to decide how to count a round (of golf). Lenders understand the business when they understand the metrics."
For example, after buying the Makalei Golf Course, Lynch Investments immediately hired Kitson and Partners, a West Palm Beach, Fla.-based company, to manage the course.
Mark West of Houston-based Holiday Fenoglio Fowler L.P., one of the largest real estate investment firms in the United States, likened golf courses to the hotel and lodging industry as an investment.
"When investors went into hotels in the ྌs and ྖs and they felt like a wildcatter trying to strike oil, sometimes they did and sometimes they didn't," West said. "Now the lodging industry is the focus of our investments. Golf courses are still outside the core real estate groups, but we believe we can create the same kind of compression as the lodging industry."
In his opening remarks, Hinckley said the golf course business is in the same position that hotels and lodging companies were in 20 years ago.
