The Pellucid Perspective - April 2011 - (Page 2)

BANKRUPTCY PROTECTION Cover your asset By Jim Dunlap Owners, operators and lenders increasingly play the bankruptcy game in today’s golf industry t is a rare day that passes in today’s golf industry without a Google alert keyed to “golf course bankruptcy” turning up news of yet another course or operator filing for Chapter 11, 7 or 13 bankruptcy protection. In many cases, that filing is either in response to or designed to head off a notice of foreclosure and sale by the lender or legal collections action from the owner. Increasingly, the bankruptcy codes are becoming the new rules of golf for the folks who own, run and fund U.S. golf courses. In golf ’s halcyon days – the mid-90s, say – it seemed as if owners’ troubles were over as soon as they negotiated a reasonable loan to buy or build the course of their dreams. All they had to worry about was losing a few greens and keeping the carts running while they sat back and watched their asset appreciate. Today, they are increasingly worried about losing their asse(t)s. One of the longstanding practices in golf deals as well as other businesses is the formation of LLCs (Limited Liability Com- I panies) or SPEs (Special Purpose Entities) for either golf course ownership or operating leases. As the term LLC indicates, the purpose of such an entity is to limit the legal or financial exposure of the LLC principal(s) to the terms of the lease or purchase agreement, based solely on the resources of that LLC or SPE, rather than other assets and resources that the entity’s principals or parent company may possess. The prevalence of LLC arrangements in golf can create a potential hazard for lenders or, more commonly, for private or municipal owners who lease their properties to an LLC operator. As happens all too frequently these days, an operating LLC that can’t pay the lease fee, make agreedupon capital improvements or maintain the course satisfactorily, or otherwise violates terms of the lease agreement, can simply file for Chapter 7 bankruptcy and dissolve the LLC. Creditors are often left with a “shell” LLC, with little or no capital remaining to satisfy debts. The principals of the LLC, meanwhile, are free to move on to the next deal with another LLC, while the owner has to swallow at least some of the unpaid lease and/or hurry to find a new operator, and in some cases bring the course conditioning and facilities back up to competitive standards . There are, fortunately, some safeguards to prevent that from happening, although it is up to the private or municipal operator to insure that those are in place. Van Tengberg, a golf practice attorney with the national firm of Foley & Lardner, said owners have three basic means of assuring they won’t be left holding the bag in a lessee bankruptcy filing, or at least mitigating those losses. “Owners should definitely do what they can to get protection and not end up dealing with a shell LLC that has no value,” Tengberg said. “They can either get a guarantee by a corporate parent or an individual, which can be either as broad or as narrow as they can negotiate. Another alternative is a letter of credit which they can draw against as necessary. And a third is what are called ‘cure rights.’ In that case, if a lessee has failed to do scheduled maintenance, make capital improvements or otherwise breached the agreement, you can do those things and charge the letter of credit for that.” Scott Thompson, a golf practice attorney with the Greenberg Glusker national firm based in Southern California, agreed that municipalities in particular, as well as private owners, should look carefully at the financial credentials of any prospective lessee-operator. “If I’m a municipality, depending upon the economics of the deal, I may say I need credit enhancement. In essence, a security deposit,” Thompson said. Both Tengberg and Thompson agreed, however, that getting a personal guarantee is difficult and all but APril 2011 2 The Pellucid PersPecTive

Table of Contents for the Digital Edition of The Pellucid Perspective - April 2011

The Pellucid Perspective
Cover Your Asset
NGCOA Ponders Becoming Southwest Airlines?
Is E-Mail Dead?
Foreclosures Opening New Avenues for Managers
Mar 2011 YtD Weather Impact, Feb 2011 YtD Utilization
An App a Day Takes Your Money Away
Comings & Goings
Golf Deals to Forget
Phoenix, AZ Core Business Statistical Area (CBSA)
Can’t Sell Your Home? Call Tullymore Resort

The Pellucid Perspective - April 2011