The Pellucid Perspective - August 2018 - 2

GOLF
DEVELOPMENT

Real estate golf supply contraction:
Someone's gotta' pay
By Jim Koppenhaver

I

n any financial misdeed, someone's going to get hurt and often in America it's not necessarily the culprit or initial benefactors, it's parties in the wrong place at the wrong time. In
an evolving trend, the "money" behind golf 's distressed assets
continue to seek creative relief from their bad investments which
puts them in the crosshairs of local residents and homeowners
associations alike. This is a situation and battle that only a lawyer can like and the confrontations and legal wrangling is taking
many different forms and varying durations.
Let's take a recent representative example from the Columbia
SC area as reported on by Jeff Wilkinson in thestate.com. The
Golf Club of South Carolina at Crickentree was built in 1988
as part of the Crickentree real estate development master plan
and was originally a private club. This was the early years of the
era when golf courses were a sought-after amenity for real estate
developers because it benefitted them in selling lot premiums for
as many homesites as they could cram around the 18-hole layout.
As best I can tell from piecing together the history and living
through part of that golf industry era, the math kind of went like
this:
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Developer builds course for $8-$10M as subdivision centerpiece, greenspace benefit, aspirational golf community
living for the potential buyers but with the developer
knowing little or nothing about ongoing operations of a
successful golf course.
Developer sells 200-350 lots adjacent to the golf course,
charges lot premiums of $40-$50K/each for the view and
the presumed benefit of perpetual manicured greenspace.
Inferred was that the initial homeowner could recoup
some or all of their initial lot premium investment at
resale and that benefit would pass down to subsequent
buyers of those homes. Doing the math, this provides
the developer with $11.3M which offsets the initial build
cost. This also accelerated the subdivision sell-through
period (probably somewhere between 3-9 months if I had
to take an educated guess) which was a non-guaranteed
developer benefit but did have quantitative financial gain

*

*

for the developer based on my years of attending the Urban Land Institute conferences and listening to developers' stories onstage about this particular "play."
Developer unloads the course upon completion of the
subdivision and gets near replacement cost in the early
years of the trend (bigger universe of naïve buyers/investors which also included some management companies
initially), but later in the cycle the developers are willing
to unload the courses for $.50-$.75 on-the-dollar of build
cost and some homeowner associations become buyers
at those prices in part to protect the subdivision home
values by ensuring they control the course standards. At
this point our hypothetical developer walks away with a
$2-$2.5M gain on the build/lot premium "front end" and
another $4-$5M gain on the "back end" sale. So let's call
it a $6-$7M pure profit gain per project and some benefit
for faster sell-through; good work if you can get it.
Meanwhile, the purchasers now wake up after 2-3
years of operations and realize that they can't make
the course cashflow positive between the maintenance
cost, staffing, local market conditions and in a period
of limited pricing power. They now have a cash-consuming asset on their hands (losing $200K-$300K per
year as my educated estimate). In many cases there
are significant deed restrictions on redevelopment
and the buyer pool dried up due to lack of financing
and waning interest in speculative golf investments.

Meanwhile, back to our friends at Crickentree. After going
through something similar to the above "spin cycle," the SIM
Group of Companies announces their intent to file for bankruptcy on the property, which sets in motion the lender, E-Capital, to
seek ways to protect or offset their loan, which results in a public
meeting where they inform homeowners and local residents that
they would pursue a purchase and redevelopment path for the
land with the concept of rezoning the land for residential and
finding a developer partner willing to help them subdivide the
land and build up to 450 homes on it. As you can imagine, this

The Golf Club of South Carolina at Crickentree was built in 1988 as part of the
Crickentree real estate development master plan and was originally a private club.
This was the early years of the era when golf courses were a sought-after amenity
for real estate developers because it benefitted them in selling lot premiums for
as many homesites as they could cram around the 18-hole layout.
2 The Pellucid PersPecTive

August 2018
http://www.thestate.com
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