Is Poor Management an Excuse for Higher Golf Course Property Taxes?

May 19, 2008. According to, over 90% of all privately owned golf courses and country clubs in the U.S. are being overvalued and overtaxed by their county taxing authority. Why? Assessment authorities almost universally rely solely upon the replacement cost approach for valuation purposes. Within this approach little or no consideration is given to such issues as income, value transfer, business value, intangibles, local market conditions, or personal property contribution to overall value.

There are three recognized approaches to appraisal a county could (and should) use to set a value on golf courses and country clubs:

Market (sales comparison) Approach: In this approach, sales of similar property are compared to the subject property with adjustments being made for any value influencing disparities to arrive at market value.

Cost Approach: Replacement cost of material and labor is derived from acceptable cost guides and/or market data. Depreciation from all sources is measured and applied. Land value and contributory value of site improvements is added to obtain market value.

Income Approach: An income/expense analysis of the market is performed to allow conversion of income to a potential worth. This may be done with gross/monthly income with applicable market multipliers or may entail complex discounted cash flow analyses capitalized at market-derived rates.

Most taxing authorities conclude that the best method of determining value, when such information is available, is an actual sale of such property between one who is willing to sell but not compelled to do so and one who is willing to buy but not compelled to do so. There are inherent difficulties when relying on this approach to develop a true market value for a "special use," income-producing property, such as a golf course or club.

One obvious difficulty is the lack of recent golf course sales completed in which the buyer intends to use the land for its current and historical purpose (a golf course). In recent times we find that courses are most often being purchased for the development potential associated with the property, i.e., residential, commercial, or industrial, and not for the continuation of the going concern (a golf course). In some cases, and often when a sale is imminent, we find government stepping in and purchasing the property at or above development prices to maintain green space, or changing authorized land use to restrict re-development by any potential arms length buyer, again usually to maintain green space.

Obviously, relying on the sale price of one property when a change in land use is planned, and then trying to relate that value to another property not planned for sale, can greatly skew the picture.

As indicated above, there are real and inherent problems in relying solely on the Cost or Market Approaches. The best indicator of value, and the one an arms-length buyer should look at continuing the land's use as a golf course, is the Income Approach.

The bottom line for a typical buyer under these circumstances is the return on the investment. A typical and prudent buyer is going to base his/her purchase decision on the current and/or potential financial performance of the business.

Since using the Income Approach necessitates a close examination of a properties financial performance and then equating that performance to potential worth, there is analysis necessary of the factors that contribute to and support that financial performance.

Applying the Income Approach, especially when it is in support of lowering the county's established value, is not without hurdles. As is the case in the overwhelming number of American markets, golf is both oversupplied and coupled with either flat or waning demand. As both fixed and variable expenses continue to escalate, many golf course owners are faced with ever increasing challenges in maintaining revenues and controlling costs just to keep the doors open. These challenges have forced many owners to curtail services, amenities, and even course maintenance practices, once thought vital to compete.

Unfortunately, the erosion of income, which facilitates these cut backs, is often viewed as, and equated to, "poor management practices", by the local taxing authorities. A few examples of this might include the following:

* Water conservation practices enforced leaving some in-play areas un-watered and brown

* Mowing schedules pared back

* Less designed landscaping and more natural landscaping utilized

* Bunkers manicured less often

* No "meter greeters" at the bag-drop area

* Curtailed hours of operation in the golf shop, grill, and range

* Curtailed beverage cart operation

* No complimentary bag tag or free yardage book at check-in

* Changing from 10 minute interval to an 8/9 minute interval tee sheet

All these so-called "poor management" techniques are actually just the opposite. To combat this opinion of poor management, it becomes imperative that golf course owners have established and documented programs designed to ensure and demonstrate that sound management practices are in place and followed.

As an example, the approach we use, and offer as a service to our clients, identifies and segregates the business into four key components or "cornerstones," addressing each one as an essential part of the whole.

Systems, Sales, People and Profit

Systems: Identifies all standard daily operating procedures (SOPs) to include course maintenance, equipment operation, equipment maintenance, golf shop operations, accounting, cart fleet management, food and beverage operations, physical plant maintenance, and security.

Sales: Identifies all management practices designed to increase revenues, including advertising, promotion, and marketing. Specific components we examine include traditional media, internet marketing, in-house promotion, and marketing and business plans. The purpose here is to identify and objectively report the manager's effort to market his business. Where applicable, we provide quantifiable results from those marketing efforts.

People: Identifies all policies and procedures related to both employee resources and customer service/satisfaction. Included within our examination of employee resources, we identify the manager's procedures that address employee recruitment, interviewing, hiring, training, discipline, safety, and retention. Our customer service/satisfaction reporting includes examining speed of play, course conditions, clubhouse conditions, speed and efficiency of service, quality of food and beverage, and willingness to return. We then compare the observations of our audit with the results of a customer survey completed by an independent and unbiased third party.

Profit: Identifies the efforts of the manager to exercise prudent control of all expenses. In this component we looked at both variable and fixed expenses and compared those to established industry benchmarks for the same class of property. Under variable cost centers, we examined labor, cost of goods sold, departmental expenses, and administrative costs. We also examine and compare the change in purchase price of selected goods versus the change in effective average daily rate in the defined market, and quantify that as a potential change in net income.

The income production of a business involves both tangible and intangible components. Tangible components, such as labor cost, average rates, and cost of goods sold are easily quantifiable. The intangible components, such as reputation, customer service, and the customer's perception of price/value are not.

For the owner to successfully challenge the claim of "poor management" by the taxman, he/she needs to identify these tangible and intangible components of management within their own operation, be able to demonstrate understanding that these components exist, and even more importantly, that they are being addressed and managed in an acceptable and methodical fashion.

It's fairly simple for an owner in most any market to demonstrate the ever-mounting issues of oversupply, waning or flat demand and increasing expenses. What's not as simple, but just as important, is to demonstrate to the taxing authority that those issues are "external" to the business. Course owners must show that they are doing the best they can, with what they have, to balance customer service, facilities and playing conditions with paying the bills.

That's not "poor management," it's "prudent" management.

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