The golf industry has been in decline for over 10 years. The number of rounds being played is going down, the number of courses open in the U.S. has decreased, and the average age of golfers has gone up. Real estate developers that had once planned large master planned communities around golf courses have turned away from that business model. Golf course properties sell at a less of a premium when fewer and fewer buyers play golf on a regular basis. Many golf courses have been shuttered with some being converted to other uses and some just being fenced off or just sitting as vacant land.
Great golf courses and prestigious golf membership clubs like Pebble Beach, Bandon Dunes, Los Angeles Country Club, and many others are still in high demand. If any of these courses went up for sale, major golf management companies (Troon, Trump, ClubCorp) and investments funds would be lined up to get a piece of these very profitable enterprises. However, most golf courses that go up for sale aren’t in great locations and may not even be profitable at all. In the last years, many golf courses are selling based on multiples of revenue (<1) because there aren’t any profits to calculate any type of return on investment. A 10% return might seem reasonable for buying a golf course, but the reality is that the return of many of these courses at the time of sale might be -10%. Also, financing for these courses is either non-existent or requires double-digit interest rates and/or very short terms.
This is a much different scenario then buying other management intensive real estate assets like a hotel or apartment complex. In those cases, you might expect the growth of the surrounding area to allow you to increase room rates or rents over time. Maybe the current rates are below market and even raising them to market will yield you a nice return. In the golf business, the green fees probably cannot be raised very easily as demand in general has been declining and continues to decline in most cases.
Buying an unprofitable or barely profitable golf course and making a profit requires some major changes. There are some things management can do to make a golf course more profitable. These might range from opening a private club at least to some degree to the public. It could be remodeling dated facilities, re-configuring holes to take advantage of improved views, decreasing water usage by xeriscaping or desertscaping the first 100-150 yards of fairways. There might be some marketing tweaks like hosting more events for targeted groups, anyone from minor league golf tours, university students, women’s golf associations, bachelor parties, to corporate events.
There are quite a few courses, however, where making these types of changes would be akin to reshuffling deck chairs on the Titanic. In many cases, the only way to turn a profit is for some or all of the land where the golf course is located to be re-developed into other (non-golf) uses. The number of holes could be decreased from 36 or 27, down to 18 or 9 (or zero if there is a way to completely exit). Or a normal course could be converted into a par 3 executive course. The remaining land could be redeveloped into housing, a hotel, or apartments. Even selling off some open space or a part of one hole to a residential developer that needs the land for zoning or environmental purposes might totally change the economics; a golf course only making $50K a year on a $1 million investment would have a 5% return but being able to sell off $300K worth without affecting operations would yield an increase in the ROI from 5% to about 7.1%.
Doing a full conversion (completely eliminating the golf course) will often result in the golf course-bordering homeowners going ballistic, so besides dealing with zoning laws and possible conversion moratoriums, extensive political aptitude is required. In some areas, you have to offer to sell it to the neighborhood association first, before you sell it to developers. Adding greenbelt, open space or a walking path for those homeowners, in place of the golf course, is one thing that can be done to help mitigate their anger.
While some type of housing or residential use is the most obvious, other conversion uses include one or more of: industrial, office, farm land, timber land, concert venues, driving range, charter schools, parks or conservation easements (donated to lower tax basis), or just letting the land sitting fallow for land banking purposes. Other income sources might include selling mineral rights, selling billboard or cell phone tower easements, or leasing the land for hunting or fishing purposes.