Protecting the Golf Course: Funding It's Future

Michael D. Vogt, CGCS, CGIA, McMahon Group, Inc.

When assembling a long-range plan for properly funding capital projects on the golf course, a club manager, superintendent, and green committee should know when the funds will be required. A sound plan must provide the appropriate amount of funds to meet the needs of each golf course component, feature, or piece of equipment. A stable contribution to a fund that supports capital replacement will guard against the diminishing of the long-term and short-term assets for the golf course. A funding plan should not very wildly from year to year; it is recommended that funding a capital replacement plan be done on a monthly allocated basis to avoid large sudden expenditures that upset a club’s normal cash flow. A reserve study for golf asset replacement is good business and makes good sense.

A Golf Reserve Study consists of two parts, one: Physical Analysis (visual inspection by a course maintenance expert) that result in a comprehensive inventory of design / equipment elements and a prioritized schedule of future replacement costs; and two: The Financial Analysis that recommends a minimum and stable level of funding into a reserve account over the next 15 to 20 years, so your club has the money for capital projects when it is needed. The well executed Golf Reserve Study becomes the basis of your long-range financial plan to provide continuity and dependability for maintaining a high quality course for years to come.
The Process is to accumulate the raw data needed to evaluate your unique golf course operation. Generally, an inventory of all golf assets is developed with appropriate age and condition information, ranging from all golf facilities, buildings, irrigation systems, down to all maintenance equipment. The inventory and condition data is digested into useful tables identifying dates of purchase / construction and original costs.

A Golf Reserve Study is formulated in an easy to use understandable narrative about property conditions, recommended cost saving methods and normal times of replacements. The reserve study is specifically tailored to your club’s goals and objectives and becomes the centerpiece of your long-range golf strategic plan.

The Golf Reserve Study clearly identifies long-term assets and near term replacements, adequate and actual funding for future repairs and replacements, normal routine maintenance, life cycle capital replacements, etc. On-site visual inspection and historical analysis of each property / equipment component determines theoretical useful lives and accurately measures remaining useful lives. A narrative explains the best practice method for:

1. Capital repairs
2. Partial or phased replacement
3. Complete replacement

The goal is to save money and help you with a realistic plan for future capital spending to maintain a consistent, stable financial capital improvement plan, and to assure a good capital improvement environment for years to come.

Two Funding Methods
Cash Flow Funding Verses Component Funding

To protect the appearance, value, playability, and safety of a golf course property, it is essential that the management have a financial plan that provides funding for the projected replacements. In years past, many public and private golf courses typically left the capital funding of assets to the best judgment of management, with private clubs funding capital projects from special assessments or initiation fees, in the public sector, taxpayers voted on bond issues from the municipality, and privately owned golf courses normally made due until funds could be allocated from revenue or in some cases institutional lending. Management of golf businesses in an effort to short-circuit these knee - jerk reactions to capital replacement needs, began funding a special account for asset replacement. In conformance with American Institute of Certified Public Accountant guidelines, Replacement Reserve Analysis evaluates the current funding of Replacement Reserves by two generally accepted accounting methods: the Cash Flow Method and the Component Method. In effect, this look into the future smoothed the highs and lows of asset replacement and made for a better maintained business model and renewed worn assets saving valuable cost of funds and increasing the quality of the product.

Cash Flow Method calculates Minimum Annual Funding of Replacement Reserves that will fund Project Replacements identified in the Replacement Reserve Inventory from a common pool of Replacement Reserves and prevent replacement Reserves from dropping below a Minimum Recommended Balance.

In this method, Minimum Annual Funding remains the same between peaks in cumulative expenditures called Peak Years. This is the preferred funding method for most asset reserve studies. This newer Cash Flow Funding Method provides adequate reserves without the requirement of carrying a large unused balance, thus reducing the annual contributions to the reserve fund. Under the Cash Flow Funding Method, the reserve fund is established as an aggregate pool of funds with no individual line item budgets. Funds set aside to adequately cover all reserve expenditures included in this pool are funded so the reserve pool never drops below zero.

Component Method is a time tested and very conservative funding model developed by Housing and Urban Development (HUD) in the early 1980’s. The Component Method treats each projected replacement in the Replacement Inventory as a separate account and deposits are made to each individual account, where funds are held for exclusive use by that item.
The Component Method overtime reveals some hidden drawbacks. Suppose an irrigation system for example is ten years old and was allocated no funding in the past. Based on a useful life of 30 years and a cost to replace of $1,000,000.00 we have missed 10 years of funding at $33,333.00. To catch – up the business would need to fund the irrigation system $50,000.00 per year to establish funds before our target date to replace. This accelerated funding has a result of becoming financially burdensome and in most cases will not be funded in full. This funding scenario will be especially pronounced at older clubs and golf courses that have not had a reserve funding plan in place.

Conclusion

At golf and country clubs today, the need for long-range golf course planning is paramount to each club’s success. While day-to-day golf course maintenance management is vital, the truly wise clubs have forward thinkers and have a plan for continuous improvement to the golf course and its associated buildings and equipment.

About the Author

Michael D. Vogt, CGCS, CGIA, is a Golf Facilities Consultant with McMahon Group. McMahon Group is a full-service private club consultancy serving golf and country clubs worldwide. Mr. Vogt can be reached at 800-365-2498 or visit www.mcmahongroup.com .