Poor capital expenditure protocols gut your brand

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By Peter Nanula

Ideally, businesses budget a percentage of gross revenues every month, and divert those funds into a separate bank account earmarked for capital expenditures. This is how businesses maintain the integrity, charm and value of their properties over time.

Alas, this is not the way most clubs fund CapEx, or capital expenditures, these days.

Many clubs do in fact develop a long-range plan for capital projects, usually 5 to 7 years out — or they develop a depreciation schedule that uses income from operations to pay for improvements or future projects. Data from Club Benchmarking indicate that 63 percent of clubs maintain a Capital Improvement Reserve Fund. However, I investigated this figure with my colleague at Club Benchmarking, Ray Cronin. He points out that, of those clubs with a Capital Improvement Reserve Fund, 25 percent have no money in said account. It’s hard to attribute actual CapEx planning to clubs that have reserve funds but don’t fund them.

At clubs that neither maintain reserve accounts, nor fund them, the CapEx scenario is quite different, and dangerous: Board members identify the need to fund a new clubhouse roof, for example. They meet, and the board decides to assess the members — all at once or over time — to cover this theoretically one-time expense. These episodic assessments are called different things: “capital dues” is a popular euphemism, along with “clubhouse dues” or “operating assessments.”  Whatever the term, if deployed incorrectly, the capital dues process can mask a club’s inability to properly fund CapEx reserve accounts from existing revenue streams, year in and year out.

Many private clubs in America have long used episodic assessments. But make no mistake: It’s far more common today because another longstanding CapEx funding method — borrowing — is a less viable option. Since the recession of 2008, local banks and specialty golf lenders have essentially vacated the golf space. 

Capital dues for a new roof may add only $50 to $100 to a member’s monthly dues bill. But these hikes tend to stay in place, permanently, as new CapEx projects are identified each year. I consulted Ray Cronin on this, too. According to his data: “Two-thirds of clubs have some sort of recurring capital dues. The more ‘high end’ the club (as evidenced by a higher initiation fee), the lower the proportion that have recurring capital dues.”

If infrastructure isn’t methodically updated through proper CapEx planning, roofs and furnaces and pools and HVAC systems inevitably fall into disrepair — meaning these recurring, more or less permanent capital dues grow in size. Before you know it, members wake up and the club they joined for $800 in monthly dues is now costing them $1,200 a month. Similarly, the board wonders why its annual member attrition rate has gone up — the typical response to any dues increase. Again, according Cronin, “There is no question that when dues are increased, members leave. This is especially true at less expensive clubs.”

Clubs should consider a 3 to 5 percent profit margin on their gross revenues to fund a rolling capital reserve. It can be accomplished within the existing service levels. If running the club at that level seems daunting, then your club isn’t being operated efficiently enough — a huge and obvious problem, of course, but there are more subtle ramifications, too.

Among that percentage of clubs operating without a proper CapEx reserve, a dangerous myopia can take hold at the board level. In short, the board at a mid-level club tends to forget that its original dues level was $800 a month — because an aggregation of capital dues, over time, has bumped that dues level to $1,200, which is what the top-tier clubs in town are charging. Soon the board of this $800/month club, based on this higher aggregate dues figure, begins to view itself as a $1,200/month club, competing with other $1,200/month clubs for members.

But it’s not real: The level of service and amenities at the $800/month club has not changed. A new roof and functioning AC are not service enhancements; they don’t add to the member experience. So the price has risen to $1,200/month but the club experience — the value for money — remains $800/month. For overpriced, mid-tier clubs in this fix, it’s like a Marriott trying to compete with a Four Seasons.

Over the last 5 to 6 years, private golf and country clubs have fallen into this “out of market” cycle, en masse. There are other ways that clubs fall into this trap, but the big culprit is poor CapEx planning. Once out of market, clubs resort to a step we all recognize for its ubiquity in the market: discounting like mad to maintain consumer interest.

A club board can also misjudge the effect of capital dues and continual assessments on the existing membership base. While the top 20 percent of any membership (in terms of wealth) may not care about another $200 to $400 a month, the bottom 20 percent is another story. These members can become as disillusioned by the dues increase as they are by the unpredictability of this expense from year to year.  When enough customers opt out (or move to the neighboring club where pricing is more in line with the value offered), the critical mass of dues-paying members is lost — endangering far more than your CapEx.

This 20 percent rule is also instructive at the macro level. In good times or bad, the top 20 percent of private clubs in America will survive no matter how they handle CapEx. The remaining 80 percent are walking a much finer line. This majority must develop (or bring in) the discipline to run a 3 to 5 percent profit margin devoted to CapEx. This discipline is not discretionary — today, it’s often the difference between success and failure.

Peter Nanula will speak at the Golf Inc. Summit.

 

 

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