Golf Course Cap Rate

[krscholz]

I'm doing a tax appeal and looking at the income approach for a golf course that leases the course and improvments to a tenant. I need some help with determining an appropriate cap rate. Can you help.

 

[Michigan CG]

Welcome to the forum.....sorry haven't appraised a golf course in a while. Expect some replies Tuesday when more CG appraisers check in to the forum.

 

[PropertyEconomics]

I would nearly bet the cap rate would be pretty hefty. The risk associated with Golf Courses now is pretty high in my opinion. Have you thought about building up a cap rate?

 

[Howard Klahr]

PE - the OP is looking for cap rates where the entire course and facilities are leased to an operator. I would think that this would be a fairly low cap rate in that the fee owner has limited risk. More comparable to land leases than golf courses in evaluating rate of return.

Now the cap rate for the leasehold would be very high in that there is the risk of operating the golf course business but without the benefit of the reversion.

However for tax assessment purposes most jurisdictions are based on fee simple and not leased fee/leasehold valuations

 

[PropertyEconomics]

PE - the OP is looking for cap rates where the entire course and facilities are leased to an operator. I would think that this would be a fairly low cap rate in that the fee owner has limited risk. More comparable to land leases than golf courses in evaluating rate of return.

Now the cap rate for the leasehold would be very high in that there is the risk of operating the golf course business but without the benefit of the reversion.

Howard ... lease or not .. the risk is great in this economy ... take a look at the number of courses that are not making it ... walking away from a lease is probably not a big deal .... unless it is a MAJOR golf course operator .... then the risk may be less .. but it is still pretty stiff in my opinion.

 

[Howard Klahr]

The risk in this case is more a function of the terms of the lease (contract rent vs market rent and remaining term) and the reversion value. It may be a situation where the fee owner is better off with the tenant defaulting on the lease. These are unknowns to the equation.

But yes, golf courses overall are struggling as an asset class compared to prior periods.

 

[PropertyEconomics]

The only golf courses I see that are sustaining are one of three types ...

Municipal Golf Courses .... relatively lower fees with government subsidy for operations.

Casino Golf Courses ..... subsidized by the casino operation and typically uses as a lost leader to get gamblers into the casino while offering them another form of entertainment.

High Profile Courses ..... attracting golfers because of their Golf Digest Ranking, renowed courses, named designers, etc...

Other than that ... I think the balance of courses are struggling. Maintenance costs are very high often when compared with income .... its just a fact of the current economy. It is a bit uncomforting when acting as an appraiser that two of the three classes appear to require some form of subsidy to assist in operation expenses.

 

[Terrel L. Shields]

In a court case where Pinnacle (called Champion's then) in Rogers, AR appealed their assessment, they hired an appraiser who weighted the income approach. The Assessor uses their hybrid cost approach of course. The appeal to the Board of Equalizaton was resolved by the Board finding out what the highest valuation of a golf course in the state was. It was an exclusive golf course in Little Rock. They set the value at about $8 million. The appraiser for Pinnacle appraised it for about $5 million. The assessor had it at $14 million. The assessor appealed to the county judge who simply passed it on to the chancery courts.

The assessor then hired a golf course appraiser/consultant out of Florida who testified that the best approach to value a golf course was the Cost Approach and then went on to impeach the income approach since selling lots off a development was a wasting asset...once sold, it generated no more income outside a small membership fee.
I have a copy of the appraisal prepared by the golf course. It is inadequate, to put it mildly. But that was in about 1997 and you could get by with a lot.

The court sided with the assessor and set the value at $14 million. I tend to agree that the Income Approach is wrong. The Income Approach is pretty weak and the cap rate would be awfully high. Most will not cash flow and we've had 2 in bankruptcy and one that sold is not making a dime. I think the Board of Equalization had it about right however. It simply was not worth $14 million, nor is it now.

 

[LACKLAND27]

It's worth more than a golf course.

There was an appraisal done on a golf course on Long Island NY. The appraiser determined the fee simple value @ $450,000 per hole ($8,100,000), however as vacant land it came it @ $11,000,000. Vacant land for development is not worth much now days, but it's worth more than a golf course.

The lease fee postion is actually stronger if the course is able to maintain the rent and it is close to market. But I agree with PE the cap rate is going to be high. 10-13%+ would be a guess, depending on the market demographics.​

 

[The Warrior Monk]

There was an appraisal done on a golf course on Long Island NY. The appraiser determined the fee simple value @ $450,000 per hole ($8,100,000), however as vacant land it came it @ $11,000,000. Vacant land for development is not worth much now days, but it's worth more than a golf course.​

That's the issue we have here on the east end. The land underlying these golf courses isn't just worth a lot, but a real, real lot. Of course, all the most valuable ones are private.