I’ve always believed in specialization. However, over the years, at times when sale product was in low supply, I envied some of my peers who also sold land or marinas. But, given the fact that most of the land associated with golf courses is deed restricted, and because our company has a deep field of land specialists, I would refer land deals to those specialists to better serve the client when conversion to a higher and better use was possible (I can’t think that I’m better suited to sell a golf course than our land specialists without believing the land specialist is better suited than I am to sell land. To think otherwise negates the entire value of specialization). Marinas can be the home of leisure activities, but the underwriting of and sales process for marinas is different from golf course valuation and sales and as with land, we have experts at our company who specialize in the asset class. I saw brokering those asset classes as straying from our company’s client-first mantra.
Golf as an Investment Asset Class - Core Commercial Investment
My start in commercial brokerage began with office and retail leased investment sales. I’m very familiar with the asset class. Golf courses don’t have the consistent month to month income associated with leased investment assets. The income can vary month to month based on seasonality and a whole host of factors not the least of which is weather. This is not unusual. The majority of businesses have some sort of pattern or inconsistency to monthly revenue.
Core commercial investment assets are lease-driven, and the tenants can range from those with AAA credit ratings from Fitch or Moody’s to “mom and pop” tenants with minimal track records and poor credit histories. Applying cap rates, a numeric metric for unleveraged returns that are reflective of risk (a 4 cap extremely low risk, a 12 cap very high risk) to leased investment income, with basis point spreads based on risk of vacancy or tenant default, makes sense for core commercial assets such as retail, office, industrial, multi-family, and single tenant NNN. While there are plenty of golf course assets with historic financial track records that indicate stronger returns over a 5 – 10 year period than many leased investment assets, I haven’t seen many golf courses with 12 months of the same monthly net followed by another 12 months of the same monthly net income plus 3% bump for CPI and then repeated for a 5 – 10 year term. That said, we won’t see a NNN single tenant with an AA credit rating increase revenue under new management by 30% in one year, as is possible with golf, or a 20% decrease in revenue year over year due to inclement weather. Ultimately, core commercial real estate, leased investment assets, and golf courses, shouldn’t be compared as apples to apples or even apples to oranges. It is more like apples to steak – different food groups entirely. With few exceptions, cap rates, given their context of use within the leased investment property class, are not appropriate to use for golf assets. Again, this isn’t minimizing golf as a worthwhile, potentially very profitable investment, it’s just recognizing the differences between the asset classes.
Where does Golf fit?
Given the unique nature of the business, multiple revenue centers, management intensive, high employee count, and a large physical plant to maintain, golf courses fit more into a transaction type than they do into an asset class.
The sale of a golf course is primarily the sale of the ongoing business concern. If there is an underlying land value as it relates to a higher and better use, then the only metric for asset value is the land; the business of the course is irrelevant. We are selling the ongoing business concern and all improvements and personal property that support the trailing 12 and historic financials performance of that ongoing business. That places golf courses transactions firmly in the M&A world, but the land and improvements involved still place the asset within the scope of commercial real estate brokerage.
Getting Familiar with M&A
I’d lived in Utah, while working remotely out of Colliers Las Vegas office, for 5 years before making the jump over to the Utah office. It happens to be the only Colliers office in the country with an M&A team.
I have found, from working with the M&A division, that the practice for underwriting and marketing assets we just sold, or other companies we’re selling, while almost identical to golf course sales, is less complicated given there are fewer moving parts and typically far less physical plant square footage, infrastructure, and land issues to deal with.
Some other differences include the separation of the real property from the business in valuation, the tighter, lower range of multiples applied to most businesses, and the fact that almost every deal is purchased with SBA loans and seller notes. The availability of SBA financing relative to conventional financing for golf is pretty good support for golf as M&A. Underwriting pre-multiple is similar, 3 years financials, proforma is of no value, trailing 12 highest value but less attention is spent on deferred maintenance or capital project needs as a reduction to value post multiple. This makes sense given that the physical plant is much less extensive, and in most cases, less integral to operations as almost all other business types can be moved to another location. Transactions also involve providing working capital for the buyer that covers 2-3 months of expenses, and, in some cases, management staying on for the transition and a set time beyond.
Value in M&A sales, multiples, are driven by how common the business is, barrier to entry, how easy the business is to replicate, specialized knowledge, licensing, and potential for heavy cap investment so that more leverage can be applied. Manufacturing accounts for only 6.4% of total businesses v. restaurants at almost 50% while golf accounts for .5 of 1% of the 31.7 million small businesses in the US (small businesses account for 99.9% of all business in the US). Manufacturing meets all the criteria that drive value, and it trades at higher multiples than food service industry companies. Golf courses more than meet the criteria that drive multiples (they almost define it), and the improvements, real estate component of golf drives multiples in a way that isn’t associated with other M&A deals. M&A valuations will be multiple driven for the ongoing business, but the real estate component, if owned, will be valued under commercial real estate guidelines and then added to the value of the ongoing business. Unless a golf course has land that is available for an additional use carve out for commercial or residential, or lots, the value of the land and improvements, buildings, is included as part of the overall multiplied value of the ongoing business. That is an additional factor that pushes course multiples above other M&A asset classes.
Golf as M&A and Dispelling Illogical Practices
Land Value
Appraisers will attribute a “stabilized value” 5 years out for golf course income and then often attribute a land value even when the land is deed restricted. A golf business can’t be moved. The land and improvements are unique to the business and contribute to the business value. They are what push golf course values to 8x v. 4 x for businesses where the land and improvements are valued separately, and the business can easily be relocated. Land that is not deed restricted, and a course that is positioned for conversion, with a land value that overrides any business value, is a different asset entirely, it should be handled by a land specialist.
Using Different Multiples for Different Income Streams
I’ve had buyers who want to use a lower multiple on F&B income that they felt was too significant a part of total revenue. They noted M&A multiples for stand-alone restaurants of 4-5x with that size revenue. While they were close on the multiple for a stand-alone restaurant with that revenue volume, they were forgetting that the restaurant was on a parcel that had value and in a building that had value. When we added value for the real estate and improvements under commercial real estate guidelines and comps, and then added that value to the business value, the total value was the same as the 8x multiple result. You may use different multiples for different income streams, but the real estate and improvements must be considered for the approach to be logical.
Using Cap Rates on Golf Courses
As I’ve outlined earlier, cap rates are an integral part of core commercial real estate investment language. For a multitude of reasons, they typically shouldn’t be used in golf. However, if the asset is in a strong MSA with great golf demographics, and it’s been a stable producer over 5-10 years, it could be attractive to commercial real estate investors, and we want to speak their language. To speak that language clearly, we would use the cap rate on net operating income. If we calculate a market value through an EBITDA multiple first, we can then use that value to back into a cap rate and have a value that translates for both traditional golf industry valuations and commercial real estate. In a case like this, we aren’t trying to make direct risk comparison to leased investment property; we are just backing into a cap rate through our multiple.
Proforma Valuation
We’ve all seen budget projections that are off considerably year to year. I’ve sold assets where management over-estimated budget 5 straight years. I’ve also seen countless appraisals with 5-year stabilization periods where the owner is in that 4th or 5th year and the EBITDA is nowhere near the appraiser’s projection for that year. If we add in weather and other risk factors, valuing on proforma doesn’t make any sense. It makes sense for core commercial leased investments, but Golf is in the M&A asset class. The primary source of funding for Golf and M&A is SBA. The loans are underwritten on trailing 12 and the last 3 years of P&L. They don’t use proforma.
In Summary
Golf courses as a traded asset class are far more similar to the sale of other businesses than they are to land, core commercial real estate, or other “leisure” specialty assets. Understanding this allows me to better position for-sale-assets and stay true to my belief in the importance of specialization, while refining my craft through the broader M&A asset class.
This article originally posted by Keith Cubba on LinkedIn August 24, 2022
