Where Has All the Money Gone?

Golf course lending may be tight, but operators can still find loan sources—if they’re willing to look

By Tom Harack

In certain respects, the search for golf course financing has seldom seemed more daunting and, in some ways, contradictory. Interest rates are at record lows. But most experts agree that, overall, the options available to prospective borrowers are down, both in terms of the number of sources in the marketplace and the sums being floated. And though the flow of capital generally mirrors the volatility displayed by other financial markets, the consensus is that golf course financing has been on a downswing for more than a year.

Despite the current economic conditions, neither borrowers nor lenders seem about to give up, and there also seems to be acknowledgement—sometimes implied rather than stated forthrightly—that the relative scarcity of capital is integral to an adjustment that was probably overdue. The upheaval of last September has hit some industries disproportionately hard, and golf—along with its cousin, travel—is among them. Accordingly, like other businesses (the airlines come to mind), some simultaneous shakeout in both the abundance of golf courses and the way they are financed now seems inevitable, whatever the timing.

The Changing State of Lending

A number of sources note the irony in the present state of affairs, where one of the conditions of obtaining financing, especially from a local lending institution, is a “guarantee.” In other words, borrowers must be willing to offer personal assets as collateral. As an industry driven, to an uncommon extent, by entrepreneurs’ love of the product—golf—this adds a new, if not entirely welcome, twist to demonstrating one’s devotion to the game.

Regardless, Doug Carleton of Small Business Loan Source in Richmond, Virginia, notes that “there’s a different pigeonhole for every deal.” His company is a national lender that offers financing to the comparatively narrow range of owner-occupant golf course borrowers. “Money for the right deal is not a problem, it’s just that there are not as many deals that will fit into the SBA niche.”

Carleton’s comments capture the essence of the current atmosphere surrounding golf course finance: more difficult, but not impossible.

“Lenders are being more conservative and more selective,” says Ralph Little, managing director of Old Saybrook Golf Capital, LLC, a firm that provides “mezzanine,” or supplemental, financing to fill in gaps in capital from larger, “senior” lenders. “We’ve always focused on the underlying economics of the deal, and that is something that a lot of golf course loan applicants need.” Because Old Saybrook acts as an intermediary, Little notes that his company has “plenty on our plate, and we’re looking at a lot of deals.”

Of course, underlying economics can cut both ways. These issues that have increasingly come to define the loan applicant’s prospects. “I hate to be boring,” laughs Jerry Sager, managing director of First National of America, “but it’s sometimes difficult to understand why everyone’s having such difficulty (securing financing). The construction loans we are doing now are the same kind of construction loans we were doing last year and the year before that and the year before that.”

Sager says First National closed approximately $10 million in construction loans last month and has additional deals—some for new construction, some for refinance—currently in the pipeline. Industry-wide problems have arisen, he suggests, perhaps as a result of over-exuberance during the last decade, when the gold rush to enter the golf market sometimes overshadowed prudence in lending standards. All in all, however, things are more alike the recent past than they are different.

“There has always been the guy who thought he could borrow 85 percent of what he needed to build his golf course on his great uncle’s land outside of Chattanooga, and he’s still around today,” Sager says. “Then there’s the guy who can show the lender a good loan-to-value ratio, a sound operating plan and a decent equity injection, and we’re going to do that deal, as is the local bank. A good deal is a good deal.”

Variations on the same theme are sounded by any number of players in various strata in the golf course finance sector or on its periphery. Kevin S. Clark, marketing director for Kennedy Funding, says “there will always be pockets of financiers and finance companies that will finance golf course projects.” Clark is quick to point out, though, that Kennedy Funding isn’t a golf course lender per se. “We are strictly an asset-based lender looking for commercial real estate, and golf courses are among the commercial real estate properties we are not averse to funding.”

Richard Eastlyn, vice president of Pacific Life Insurance Company, espouses a similar philosophy. With more than $3 billion in golf-related assets in its portfolio, Pacific Life is among the larger players in the golf finance game. The company’s client list includes many household names in high-end resort, daily fee and semi-private properties.

“There are certain indicators in the golf industry—such as cash flow and competition analysis—that are the same sort of indices scrutinized in other business undertakings,” Eastlyn notes. “Thus, while other lenders have tended to change the terms of loans to include, for example, more stringent forms of recourse, we have tended to continue to focus on the aspects of a project we’ve always focused on, without substantial additional constraints.”

In certain cases, notably Bank of America, events in the golf industry have occasioned a sea change in lending policy. Once among the largest golf course financiers, Bank of America has suspended the issuance of new loans for golf course financing.

“The manner in which we were lending, which was basically doing non-recourse lending, is no longer an acceptable methodology within the specific context of the bank itself,” says James McNiff, senior vice president. With fewer lending sources, McNiff reminds potential borrowers that lenders will likely be more stringent in their lending arrangements. “There will be fees that will be charged, rates that will be charged and additional loan terms, such as partial or even 100 percent guarantee.”

Money For Everyone?

So while it remains axiomatic that an extremely secure deal—with proven cash flow, a sizeable contribution to equity and a good existing market—is the best position for prospective borrowers, this also tends to constitute the portrait of a property not in need of a loan. If nothing else, this is the type of lending scenario would likely be able to secure financing from any number of sources. But what about the rest of us?

“To be honest with you, it’s difficult,” says David Wells, senior vice president of Legg Mason Real Estate Services, a commercial mortgage broker. “Nonetheless, I’m looking at a couple of deals right now that I think have great potential. They’re turnaround opportunities, but they have great ‘stories’ behind them, and what’s wrong can be fixed fairly easily.”

Wells advises incipient borrowers to understand that the finance process is a sliding scale, with inverse relationships tied to risk. New construction projects, for instance, may require as much as 40 percent or 50 percent equity to be considered. Borrowers may also be required to sign a guarantee for all or a portion of the outstanding debt on top of that.

Considering there are no “solid numbers” to demonstrate revenue and profit potential, expect the deal to include more protections for the lender. “If the application contains assumptions about what has to happen or some far-afield projections for volume, that sort of thing, the rates are not going to be as low as they’re anticipating or expecting,” Wells adds. “They may be 10 percent or more, so all of a sudden they’re not great deals.”

In the absence of the financial paperwork that will get the deal done, one of the resources that cannot be overestimated is the existing relationship with a local bank, particularly one involving an already-favorable credit history. However problematic the situation may appear now, the notion that it is all for the best in the long run should not be just a matter of blind faith. “Management practices in the golf course industry are growing up,” Eastlyn observes.

Still, most industry experts are staying positive. “For people who are passionate about golf, it is a kind of reality check,” says Ray Muñoz, president of the golf division of Textron Financial Corporation, a diversified finance company with $9.4 billion in managed receivables. “In the context of the economic cycle we’re going through in general, we’re holding our own, and I remain optimistic that things will get better.”