Golf Course Cap Rate

[Howard Klahr]

Every one is focused on the use. The issue here as framed by the OP is leased fee versus fee simple not how the golf course itself is performing. That is like valuing an owner occupied property based on how the industry in which that particular company is involved rather than market for office buildings.

As has already been pointed out, this depend more on the highest and best use of the property as compared to the current use. If the land value is higher than the current use but the implementation of the H&BU is restricted by the remaining lease term. Therefore the reversion is where there is value. Therefore, low risk.

 

[PropertyEconomics]

Every one is focused on the use. The issue here as framed by the OP is leased fee versus fee simple not how the golf course itself is performing. That is like valuing an owner occupied property based on how the industry in which that particular company is involved rather than market for office buildings.

As has already been pointed out, this depend more on the highest and best use of the property as compared to the current use. If the land value is higher than the current use but the implementation of the H&BU is restricted by the remaining lease term. Therefore the reversion is where there is value. Therefore, low risk.

Howard .... how the course is "doing" has everything to do with the lease. The discount rate is directly tied to the risk associated with its continued operation ... Yes I am focused on its use ... for it is its use that has resulted in the lease being in place. The reversion will most probably also be a golf course or will be for residential development .... and guess what .. going forward BOTH appear risky.

In a golf course operation the course IS the business ... and no we are not particularly valuing the business ... but we better darn sure know what the business is doing or we dont know how risky the lease is .....

Im just sayin.

 

[Elliott]

So, everything I know about golf courses.....

Its a hard game. More people get discouraged then stay with it.
It you look at over all played rounds....it declines.

I belong to a CC where they were offered to take on a new course located
a mile away for 1$ and they thought about it and said, no thanks.

Whaz the cap rate. Haven't a clue, but its higher than a treasury bond.

 

[PropertyEconomics]

So, everything I know about golf courses.....

Its a hard game. More people get discouraged then stay with it.
It you look at over all played rounds....it declines.

I belong to a CC where they were offered to take on a new course located
a mile away for 1$ and they thought about it and said, no thanks.

Whaz the cap rate. Haven't a clue, but its higher than a treasury bond.

Sounds like some "market participants" decided the RISK was too great?

 

[krscholz]

Every one is focused on the use. The issue here as framed by the OP is leased fee versus fee simple not how the golf course itself is performing. That is like valuing an owner occupied property based on how the industry in which that particular company is involved rather than market for office buildings.

As has already been pointed out, this depend more on the highest and best use of the property as compared to the current use. If the land value is higher than the current use but the implementation of the H&BU is restricted by the remaining lease term. Therefore the reversion is where there is value. Therefore, low risk.

Howard in this case H&B Use is a golf course due to zoning. And yes we're looking at the lease fee approach due to the fact that it is not owner occupied. Essentially, the tenant pays everything in this case. However, herein lies the problem: where to I get my cap rate - pull it out of my @#$$? My thought was to rank it somewhere between a safe rate and high risk such as a BBB bond? What are your thoughts.

 

[krscholz]

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?

Please see my comment to Howard below. Thanks

 

[Howard Klahr]

My thought was to rank it somewhere between a safe rate and high risk such as a BBB bond? What are your thoughts.

With 10-year Treasury rate around 3.3% and BBB bonds yielding a spread of roughly 140 - 160 over treasuries, this is not likely to be a high enough yield as compared to most real estate investments. Also you need to account for the need for management and lack of liquidity.

What is the current rental rate as compared to market and what is the remaining term of the lease? These will issues influence your discount rate selection the most.

 

[Greg Graybadger]

Hi Ken. If you give Mike Cowan a call, he can refer you to a sale which will provide you a market-extracted cap rate. He could give you some other guidance, too.

 

[krscholz]

Small world, thanks for the tip.

 

[John Glass]

The problem with the income approach in GC appraisals is that it may not have much relevance. Appraisers go though all the machinations of doing the income approach, showing the stabilized value, backing out the cost to stabilize a course in the red and some millionaire investor comes along and buys it for cash as a play toy. What is the cap rate on a negative cash flow investment, like most GC's are right now? Do sales and income and don't put much weight on the income, not right now anyway.

Realty Rates.com reports GC (all types) OAR's from 6.15% to 16.91% with an average of 11.94%, 1Q 2010. BTW, there is virtually no financing available for them right now. That might influence cap rate.