Should Equity Clubs Be Run Like HOAs?

COMMENTARY

We have 278 dues-paying members with voting rights.  Nearly all members are millionaires and successful business people, doctors, lawyers and professionals.  Each Fall, several of us volunteer to serve on the Board of Governors, or on a Committee.  Information on the nominees is shared, and we vote on several new Board members who begin serving for the next fiscal year.  We have a decent manager and staff, but we have had to replace prior managers from time to time.  Our annual budget is approx. $2-3 million, and we typically break even or run a small loss or surplus.  Any sizeable new improvements are funded by a one-time assessment or a multi-year assessment, or a higher than usual increase in our annual dues. 

Is this my country club, or my Homeowners Association?  This happens to be my HOA called Pacific Ridge, in Newport Beach, California.  Re-read this paragraph above, and it could also describe one of the 3 member-owned equity clubs where I have been a member dating back to the 1990s.  Does the HOA model make sense for equity clubs?

Simple vs. Complex.  First of all, our HOA is a simple enterprise.  We have landscaping to do and a security guard service we oversee, and some regular annual events such as the July 4th BBQ and the Christmas lights.  That’s about it.  The landscaping and security guard comprise 85%+ of our annual budget, and both are handled by multi-year service contracts with established local companies.  We have no other staff; there are no retail sales; there is no real expectation of service, as homeowners simply use the unstaffed swimming pool and basketball courts; there is no debt; there is not much to plan, other than the new service contracts which come up for renewal every 3 years or so; the budget is balanced by increasing dues by 2-3% when service contract costs go up by 2-3%.  But some of us want some new plants periodically, and others wish the security guard would wave in a more friendly fashion sometimes.  In other words, this is a simple, mostly outsourced function.  A self-funded 501c7 entity with a volunteer Board of people who care makes good sense here.

Let’s turn next to a member-owned equity club.  First, we have 60-100 paid employees who need to be managed on a daily basis, and $5-10 million of annual revenues and costs.  We have a $1.5 million golf course maintenance budget.  It is definitely not “mere landscaping” – the hole-by-hole course conditions are of paramount importance to me and other players, each and every week.  We definitely do not outsource this; it is far too important to all of us at the club, so we have our own agronomy staff and we carefully oversee their budget and their detail work.  We also have a hospitality operation with all the facets of retail (pro shop merchandising) and restaurant operations in multiple outlets, like a mid-sized 5-star hotel.  We members care a lot about the food as well as the service, and the entire membership experience for our families, as well as how our guests are treated.  Nothing about this member experience is similar to an outsourced guard gate contract, renewed once every few years.

Expertise Needed on the Board?  It seems obvious that an HOA needs only “homeowners who care” represented at the Board level.  We own the homes, so we want the common spaces looking good.  But none of us needs to know anything about the security guard industry or the landscaping business to sit on the HOA Board.  So long as we select a top company and ensure they comply with the contract terms, then our monthly volunteer work is done. 

A private country club is a different animal, requiring substantial expertise across several disciplines.  For example, in order to properly hold the Superintendent accountable for top course conditions, someone needs to understand agronomy, and preferably have an agronomy degree and have owned or managed $500,000 fleets of specialized maintenance equipment.  Most equity club Boards do not have this kind of expertise; so, the Superintendent usually gets what he asks for, and uses lots of “agronomy speak” to explain why conditions are good or bad.  The Board doesn’t really know the truth here, like they know how to run their law or medical practice.

Funding Mechanism.  If you have a $1 million annual landscaping budget and a $500,000 guard gate contract and not much else, then you simply divide by 278 homeowners, and split the bill each month.  This is how HOAs are funded – it is a co-op, and we simply split the common area bills equally.  The budgeting process each Fall is a matter of reviewing the cost increases submitted by 2-3 vendors, and increasing the per-home HOA fee accordingly – perhaps with a small tweak to allow for more reserves.

It would be nice if equity clubs could work this way.  But we can’t – it is much more complex.  First, we do not know how many members will join the club next year or leave the club, so we are not certain of our revenues (unlike an HOA, where the homes reliably stay put).  And our costs can fluctuate substantially, depending on weather, unexpected repairs, the need to upgrade some staff, or offer some new services.  Most importantly, though, we have $10-20 million of clubhouse, golf course, swimming pool, tennis and other facilities, and those expensive facilities need to be upgraded all the time – and new amenities need to be added periodically as other nearby clubs add new features.  Splitting a $5 million renovation plan by 278 means each member pays an $18,000 assessment now, which may be more than our annual member dues, or even more than some of us paid to join the club.  This never happens in an HOA – we all paid very large amounts to buy our homes, but our annual HOA fees are fairly low in comparison and we NEVER split an HOA assessment that is more than we pay in annual dues or than we paid for our home. 

This is why equity clubs lose 5-10% of their members (per the National Golf Foundation) when they pass a large assessment, and this is why there is always a difficult debate about self-funding capital projects – and often multi-year delays as the Board rolls over each year.  It is easy to split HOA costs by 278 members, but it is unsustainable to split the facility upgrade costs at a $10-20 million country club property every few years.  The HOA model is a bad fit:  private clubs are too complex, they require actual expertise in multi-faceted hospitality and agronomy operations, and they require large-scale funding every few years that most members are not prepared to keep paying for out of their own pockets.

Comments

Thanks for posting. I enjoyed the comparison HOAs. All roads lead back to full member equivalents, clubs identity, and strength in understanding the financial vision for future years. HOA’s have an easily understood vision. Having all voting members agree on a financial vision is hard. Especially when the board rotates yearly and most of the financial vision is reset to the short term goal of the next operating year. I believe it’s time for a change in governance structure of private equity clubs. A culture of sales takes time to establish and should be the main focus of any struggling club that requires assessments to stay afloat. I believe most private equity clubs have cut budgets too thin on the sales force front to increase measureable returns in periods expected. Zero based budgeting is also a concept not understood by everyone.

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