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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2013

Take a Realistic Look at Golf-Course Properties

Lenders are unlikely to consider loan modifications in today’s still sluggish market

Take a Realistic Look at Golf-Course Properties

In the wake of the lending crisis that forced many notable lenders to exit the golf-course-finance market, the perception among golf-course owners may be that the financial community is still in trouble, and that now may be an opportune time to negotiate deep-rate discounts or low payoffs of existing loans. Commercial mortgage brokers who work with golf-course owners should develop the skills to sift through these perceptions and provide their clients with a more realistic picture, however.

With all of the changes that the lending industry has gone through in the past few years, a good loan is always a good loan, and a bad asset always may be a bad asset. In some cases, there is absolutely no chance of creating a positive cash flow when working with a troubled course operation. The reality today is that if a golf-course loan is distressed, there may be no reason for the lending institution to consider negotiating a term adjustment or a work out.

Commercial mortgage brokers must keep in mind, however, that prudent lenders are turning to other sources to more accurately evaluate the business reality of golf operations, and when armed with detailed information, they more often are looking at the asset and comparing it to a write-down. If a loan is current and being paid on schedule, it is highly unlikely that a lender is going to consider a discount of the loan.

Conversely, if a loan is in default, and even if regulators have asked the bank to liquidate or take a write-down on the debt, it may not be advantageous for the lender to consider such a write-down immediately. If the loan was structured properly and at a correct verified loan-to-value ratio (LTV) with sufficient debt-service coverage — and if it is located in a good, viable marketplace for golf — then the lender will be less likely to discuss a modification. Even the lenders that are seeking to liquidate a portfolio of golf-course loans may have no reason to negotiate on individual loans, rather favoring to sell them as a cluster.

In today’s market, borrowers — and the commercial mortgage brokers who represent them — should be realistic. Unless the lender is over-extended, or the property is facing imminent foreclosure, there is little reason to expect that lender to consider even a conversation regarding reduction or modification of the loan. There is an axiom that bankers are bankers and golf-course operators are golf-course operators; simply put, a banker does not want to be in the business of operating a golf course.

"Working in a specialized asset class without having the benefit of in-house expertise in that class can be risky." 

Commercial mortgage brokers also should be aware that institutional buyers of this class of defaulted asset must exercise caution. Although there are opportunities in purchasing portfolios of golf-course loans, working in a specialized asset class without having the benefit of in-house expertise in that class can be risky.
Without knowledge of the business of golf, an institutional buyer may fall into the same pitfalls as the original lender, creating a similar tenuous situation by: 

  • Lending too much,
  • Not assessing the operation correctly,
  • Not being focused on market demographics, or 
  • Investing in a course that is located in a less-than-stellar geographic market for golf.

In reality, there are few opportunities on both sides of the lending equation for right sizing golf-course loans in today’s environment. Commercial mortgage brokers who can do the matchmaking certainly can prove their skills and win unique business opportunities.

After years of sluggish performance, the revenue streams in the business of golf are anticipated to return later this year. To put this recovery in perspective, the industry’s revenue has increased marginally in the past five years, growing at an estimated average annual rate of 0.1 percent to  $22.9 billion, according to a report from research company IBISWorld. The industry’s revenue is expected to jump 0.9 percent this year, thanks to a stabilizing economy and increasing discretionary spending, the report says. 

With this relatively stronger recovery still on the horizon, there are countless courses seeking refinancing or debt negotiation today. Commercial mortgage brokers should be fully aware of how lenders perceive these deals to advise their clients on the best course of action, however. In all cases, staying the course and partnering with an experienced team are a must to avoid a challenging situation.  


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