Fore! Cast

Golf Course Development Is on the Upswing.

While Tiger Woods is the most recent golfer to capture the nation's affections, it's John and Jane Doe who have developers' attention, as a large number of players teeing off nationwide has helped spur myriad new golf course development and expansion in recent years.

Demographics including a bevy of Baby Boomers, longer life expectancies, and more interest in the sport from women and younger players have contributed to the surge. Developers are working to meet the demand, while sidestepping the hazards along the way.

"I see golf being a strong development vehicle for most areas of the country, based on the fact that...there are not enough golf courses to service the number of golfers that we have," says Rowland Bates, president of Golf Realty Advisors Inc., a Norwell, Massachusetts-based golf real estate and financial consulting company. "But, that's a market- area-by-market-area statement."

Course Numbers Swell
Generally, golf course development in the United States has been on a roll in recent years. New course construction more than doubled during the past decade, according to the National Golf Foundation (NGF). In 1995 golf course development reached a record high of 468 new and expanded courses, the fifth straight year of increased activity. The 1995 developments represent investments of roughly $1.3 billion, the NGF reports. The five-year total for new courses was 1,912, averaging 382 courses a year; 10 years ago, the nation averaged just over 150 courses a year. The pace slowed a little last year. Preliminary NGF figures put total new and expanded golf courses in 1996 at 442, close to anticipated levels. Still, many developments remain under construction or in planning stages.

The cost of building a new 18-hole course typically starts at $2 million to $3 million, experts say, not to mention additional costs, including permitting and clubhouse and parking facilities. Typically, total budgets start around $5 million, but can go 10 times higher, Bates says. There's "no rule of thumb as to what someone can pay for land on a golf course," he says. "The value of the golf course is based on the income stream."

The sale values of golf courses have fluctuated in recent years, says Gene Stuard, CCIM, a vice president at Realty USA in Evansville, Indiana. "There were a lot of courses bought in earlier years by some of the foreign establishments thatŠprobably overpaid for them," he says. "The market is settling in somewhat." Many foreign investors, including the Japanese, bought U.S. courses, some at "far above their ability to produce an income," Stuard says. "They were more a prestige ownership."

Other new development includes the expansion of existing courses. About a third of the courses built in the last five years have been additions to existing facilities, the NGF reports, saying expansions can be easier to finance because lenders have a track record on which to base the decision. Tom J. Kilker, CCIM, president of Tom Kilker Realty, Inc., in Albuquerque, New Mexico, is working on a deal in Casa Grande, Arizona, "trying to squeeze another nine holes in, because 27 holes is more economical. You can make more money with it."

Golfers Galore
Why the fast-paced expansion? There's no shortage of golfers, according to the NGF. There are about 25 million, who play about 490 million rounds of golf on 15,390 courses nationwide. About 11.6 million golfers play eight or more rounds a year; of those, 5.5 million play 25 or more rounds a year.

"The trends are up overall in the entire United States," Stuard says. "It's projected that they can open one to two new courses per day." Interest in golf has been spurred, in part, by television coverage of the sport, Kilker says.

And while the typical golfer is a 39.6-year-old man with a household income of $56,920 who plays 20 rounds per year, according to the NGF, more women and younger golfers have been drawn to the sport.

Financing Availability Improves
Golf courses are different than many other types of commercial real estate developments and can experience several impediments to development, including finding enough land on which to build, acquiring financing, and obtaining the required permits, Bates of Golf Realty Advisors says.

Financing difficulties, in particular, stifled developments a few years ago, the NGF reports. From 1986 to 1991, despite participation increases, fallout from the failure of many big residential community developments during the 1980s caused golf course development to move slowly. As funding became more available, development began its recent climb. When Bates' company started several years ago, "The real estate industry in general suffered from a lack of financing alternatives for golf projects," he says. "In the past 24 months, that has changed." Institutional investors have entered the market area and real estate investment trusts (REITs) are used as a vehicle for acquiring more properties, he says.

In fact, the nation's second golf-oriented REIT is under organization, with David J. Dick, CCIM, of Newport Beach, California, slated to serve as its executive vice president upon its finalization. According to Golf Trust of America's S11 filing with the Securities and Exchange Commission, the REIT plans to own 10 golf courses to start and will buy more, leasing them back to their owners, who will continue to run them. "The company believes the United States golf industry is entering into a period of significant growth," the filing says. The REIT plans to capitalize upon consolidation opportunities in the industry, as course ownership is very fragmented, the filing says. The other golf-related REIT, National Golf Properties, is based in Santa Monica, California.

While financing has improved, lenders still find golf courses to be risky, according to Harrisburg, Pennsylvania-based Golf Property Analysts, a golf course appraisal company that recently reported survey findings showing that golf courses pay higher loan rates than other real estate projects, averaging 1.5 percent to 3 percent more than the prime rate.

"Usually, the lending community perceives golf courses as being a little bit more risky than other investments," says Larry Hirsh, CRE, MAI, the company's president. "There's a valid reason for that. Golf courses are very management intensive-they're as much business as real estate-and they're susceptible to weather." Moreover, he says, golfers' use of discretionary income is susceptible to the economy.

"There are some banks that won't lend on [golf courses], there are others that see them as a very attractive investment," Hirsh says. "That's a great change from five years ago."

Other Barriers to Development
Moreover, finding enough land on which to build a golf course is more challenging than many other types of development. A high-quality 18-hole golf course's acreage demands start at about 160 to 200 acres, industry professionals say.

Developers also face a challenge in some people's perception that golf is not environmentally friendly, including concerns about the usage of fertilizers and pesticides. "It's not like developing a 200,000 square-foot suburban office building," Bates says. "You're dealing with a 160-acre site which could have any number of environmental issues relating to it.''

Specific concerns vary by topography. For instance, in Kilker's southwestern market, environmental pressures include concerns over the area's massive saguaro cacti-which often must be dug up and replanted if displaced by a development because they take so long to grow-as well as water supply issues, he says.

Return on Investment
In terms of return on investment, golf courses don't cut it for all investors, Hirsh says. "A lot of institutional investors are finding that golf doesn't meet their criteria," he says. "For instance, I had some discussions with one very large capital company that was looking into golf and came to the conclusion that for their purposes, the rates of return were not sufficient. They found rates in the mid-teens and they were looking for rates of return in the mid-20s."

Nonetheless, golf also has a special allure, he says, including that of courses designed by certain architectural firms or golfers. Further, course development has become more sophisticated, he says, including the proliferation of more companies like his that do in-depth analysis. He notes that the existing golf-related REIT has done "very well. I guess the moral of that story is this is now a business that's safe for the general public to invest in, because there's good management," Hirsh says.

Demand Dictates Development
In determining whether a particular area needs another golf course, feasibility studies explore the potential for courses and related developments. Stuard, who conducts such studies, looks at demographics such as population, housing stock, and residents' age. Studies also can examine golf course competition within the marketplace, comparing things like charges, usage, and waiting times. "A golf course feasibility market study and appraisal are all part of the process for the lender or the investor who's going to put its money into the project," Stuard says. "Are there enough people to support it? Is there enough money to support it? They're doing it to make sure their investment has limited risk involved."

Stuard's analysis includes a general rule of thumb that it takes roughly 1,400 to 1,500 area residents to support one hole of golf-or about 25,000 people for one 18-hole course. He calls his home market of Evansville "pretty well balanced at this moment" after a couple of new courses opened in recent years.

However, there's more than sheer numbers at work. The Phoenix area-a popular retiree mecca-has about 136 golf courses, Kilker says, and still, "You can't even get a tee time," he says. "The demand far exceeds the supply."

Midwest Expansion
Demand in the Midwest, too, has prompted increased development. In fact, the area with the highest rate of new golf course development activity lately is what the NGF calls the East North Central region, including Michigan, Indiana, Ohio, Wisconsin, and Illinois. Along with the South Atlantic region, the area accounted for about half of the new construction between 1991 and 1995, the NGF reports.

In 1995, Michigan experienced the most course openings, with 33, followed by Illinois with 27, New York with 26, Ohio with 23, and Texas with 22, the NGF says. At the end of 1995, Michigan also had the most courses under construction, with 66. California was next with 48, followed by North Carolina with 41, Ohio with 38, and Wisconsin with 34.

The organization pegs the East North Central's golf participation rate at 16 percent, surpassing the nationwide average of just over 11 percent. The area has inexpensive land, favorable development topography, and an easier process for permitting than some other regions, according to the NGF.

Richard E. Lobenherz, CCIM, president of Vacation Properties Network, a resort property developer and broker in Charlevoix, Michigan, also cites the area's economy and demographics. "The economy in the Midwest has been pretty bullish for the last few years," he says. "Because of the type of climate that we have, our golf courses are in immaculate condition," because it's not as hot and they're not exposed to year-round use, he says. On the flip side, he concedes that the area's cold climate also limits the area's playing time and reduces the courses' income-"We're dealing with six months a year at most." But that's not stopping people from developing courses. Moreover, Lobenherz' area's increasing position as a market for retirement or buying a second home has brought in more players, he says.

Beyond the Fairway
Golf course development may or may not include related developments such as residential or resort properties. In the early 1980s, nearly 50 percent of all golf course construction was associated with a real estate development, according to the NGF. Today, real estate development is driving only about 30 percent of all golf course construction activity.

However, trends in this area vary. "From a...commercial investment standpoint, the development of a golf course property as a real estate investment is a bit of a different animal," says Joe Garrell, CCIM, who owns Litus Properties in Myrtle Beach, South Carolina. "I think the major point of golf course development is being an amenity that enhances the value of surrounding real estate." In Myrtle Beach, that means as part of both residential and resort developments. The Myrtle Beach area had seven new or expanded courses open in 1995 and five in 1996, according to Myrtle Beach Golf Holiday, a local firm. Garrell says he has worked on some freestanding courses, but many of them have land that is likely to become a related development, he says.

Michigan's Lobenherz agrees. "It's the same as a shopping center where [you] put several uses surrounding one parking lot," he says. "Golf course development and residential development can go hand in hand and compliment each other."

However, in Florida, which not surprisingly has seen numerous such developments already, Peter Connelly, CCIM, sees a different development drive. Connelly, a senior investment adviser at Brodeur and Company, a real estate economics and analytics firm in North Palm Beach, explains that in the 1980s and early 1990s, the state gained numerous upscale planned residential communities with golf courses that offered ownerships through equity memberships. In short, developers in his market would sell home buyers memberships in the course for additional fees-typically 7 percent to 11 percent of the home's cost, he says, often ranging from $25,000 to $75,000, he says.

Now, Connelly says, developers are getting away from the golf course component in residential communities in his market, instead offering other amenities such as swim or health clubs. The demographics are changing, he says, and retirees don't have as big a nest egg as they used to. "I think you're just going to see less and less equity golf courses being built," he says. "It's probably a nationwide trend. If anything, Florida's probably leading the U.S. in that area.

"I think there will always be a demand for golf courses because [golf has] always been popular-but I don't think [course development] will be the same as it has been in the past."

Other Trends
However, Connelly has seen more daily-fee courses built in Florida to accommodate people not in top income brackets who can't swing equity or pricey club memberships. "Also they're being used as vehicles to be sold to real estate investment trusts based on their cash flow," Connelly says. With a fee-income course, "your income will increase as your rounds increase," he says, with the revenues coming from greens fees, cart fees, and food and beverage services. "Then you have the opportunity to sell it in the future, and in that instance, it's more like an income property because you can capitalize the income and come up with a value of what someone might pay for it."

As NGF figures indicate, another nationwide trend is that golf courses are being developed by municipalities, Bates says. "I would say that half the projects that we see right now are municipal-proposed projects. Municipalities are viewing golf as a way to provide quality-of-life enhancements," he says. "They can make money running a golf course. They have access to the bond market where they can borrow for less than the private sector and at 100 percent debt."

However, an August 12, 1996, article in Forbes magazine reported that half a dozen cities have defaulted on bonds issued to build municipal courses in recent years. The Forbes article also questioned the viability of more and more towns building courses near one another, operating on the assumption that more courses increase the convenience of playing and attract new players to the game.

Bates discounts the negative spin, saying he sees a definite future for this market segment. "We work for far more people who say, 'Get me another one,' " he says.

Future Prospects
Along with golf courses, related projects including golf learning centers and driving ranges also are increasingly sprouting up. Famous names on any of these projects don't hurt, either. For instance, professional golfers including Jack Nicklaus, Arnold Palmer, and Tom Watson have been involved in course development, and the ubiquitous Michael Jordan lends his name to a chain of golf learning centers.

The future of the sport-and subsequently developments-seems rather bright, though observers aren't exactly sure what the saturation point for such developments might be. "That's like the old fear where everybody gets a hold of the same feasibility study that says you need another apartment building, so everybody builds one," Lobenherz says. "I can't tell you how many golf courses the world needs. I think you will see golf courses continuing to be built where they're complimentary to other types of development."

Hirsh of Golf Property Analysts also calls the golf course outlook good. "You're going to have some lemon projects," he says. However, in general, "the people who are building most of the projects now pretty much know what they're doing. The industry itself is more knowledgeable. The architects are more conscious and sensitive to controlling costs. The developers and the banking people have ensured that in-depth analyses. I think golf is still growing and I think it's going to grow some more."

Barbara Bronstien

Barbara Bronstien is associate editor of the Commercial Investment Real Estate Journal.