Anticipating Member Needs
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It isn’t just the economy that has affected the way clubs look at paying for major expenditures. Necessary facilities upgrades and improvements or major renovations can prove a bridge too far to be covered merely by dues increases and special member assessments. A hefty assessment can turn members away, says CPA and club industry consultant Mitch Stump, who has seen clubs lose as many as 20 percent of their memberships when assigning assessments to cover capital projects.
This doesn’t mean clubs shouldn’t undertake the capital projects — to the contrary, club improvements are critical to ensuring member satisfaction and attracting new members. And delaying necessary upgrades can cost clubs even more money in the long run, as problems worsen and building and maintenance costs rise.
(Chambers President & CEO and planning expert Rick Snellinger advises clubs to undertake careful and deliberate planning efforts to maximize member buy-in and reduce turnover in times of great change.)
Private clubs are tackling monetary issues — raising it, generating it and wrestling with the related tax issues — in a number of ways, many of which are requiring that clubs rethink the old ways of doing things.
Here, we offer an overview of some of the issues and options. We encourage discussion about this on our blog (via the comments section after this story). We’ll answer the questions we can, defer to the experts on others, and will tackle specific issues in more depth in coming issues.
Henry DeLozier is principal of Global Golf Advisors and one of the club industry’s leading authorities on golf course asset development and financing. More and more often, according to DeLozier, clubs are looking to a combination of financing options to cover capital projects. “Capital dues increases or lines of credit sometimes don’t get clubs far enough along,” says DeLozier, DeLozier and Snellinger, both, are seeing — and helping — clubs pursue a mix of options. In addition to the traditional methods, clubs are turning to high net worth members to play the part of banker, loaning funds where banks now sometimes fear to tread. Snellinger recently worked with Illahe Hills Country Club in Oregon, in fact, to set up a limited liability corporation (LLC) of members and nonmembers willing to step in and the loan the club funds necessary for a major renovation project.
DeLozier points, too, to banks more willing to lend money to clubs where member loans act as a guarantee, of sorts. “Banks are a lot more enthusiastic about lending money when they see accountability on the part of the borrower,” he says, in this case, in the combination of assessments, dues increases, member loans and more.
Stump counsels clubs to build capital reserves to “at least replace what you have,” and encourages clubs to perform reserve studies to determine the amount they’ll need in hand.
When considering financing options, DeLozier also suggests a bylaws review. “It may be time to increase spending limits for capital improvements,” he says.
Many clubs are also turning to new revenue sources, including retail food and wine operations, catering and onsite events to generate income that can be applied toward operations and facilities improvements.
“I’m seeing a lot of clubs point to non-dues and even non-member revenue as the salvation for the industry,” says Stump, who offers a caution. More than half the private clubs in the United States are not-for-profit, tax exempt organizations, according to Stump. “A 507(c)(7) can’t generate more than 15% of its revenues from nonmembers and hold onto that tax exempt status,” he says. And 507(c)(7) clubs are legally prohibited from collecting revenues from “non traditional activities,” such as food-to-go or outside catering. It is best to talk to your club’s tax attorney when considering new revenue options.
Others in the industry suggest that it might be time for clubs to reconsider their nonprofit tax status if they determine they’re better off without the restrictions it brings.
Understandably, it can be complicated, admits Snellinger. “At the end of the day, clubs should make decisions that suit their long-term best interests,” he says. Chambers encourages clubs to solicit comparative financial modeling to determine their best courses of action.