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Golf Course Finance

Net Operating Income, EBITDA, Gross Revenue Multiplier, Cap Rate, Net Income Multiplier, Debt Coverage Rate, Loan To Value; What do these catch phrases mean and how do they impact you as a golf course owner or golf course buyer?

Net Operating Income (NOI): Revenues less expenses including principal payments and depreciation. NOI does not include interest expense and taxes. This figure is a traditional measure of economic performance.

EBITDA: Earnings Before Income, Taxes, Depreciation, and Amortization. This figure is how much money remaining to pay your mortgage and taxes? This amount is different than NOI in that taxes and interest are not included in EBITDA.

Gross Revenue Multiplier (GRM): This is a simple measure to determine value. Historically GRM had been as much as 3 x Gross Revenue. Today that number is much closer to 1x Gross Revenue. The range can vary greatly depending on location, size of clubhouse and distribution of revenue between golf and food & beverage. Often used to value underperforming assets with minimal Net Income.

Cap Rate: The traditional unit of measure for valuing real estate. Varies dramatically by product type. The lower the cap rate the higher the value of the asset class. Golf Properties are at the top end of the Cap Rate range typically.

Net Income Multiplier: The traditional measure for valuing a golf course. The range has typically been between 6-10 times Net Income. However, many lenders deduct 3% for a management fee and capital expenditures from net income before using the Net Income Multiplier. However, most owners prefer to base value using a straight net income figure.

Net Present Value (NPV): A sophisticated and forward looking method of valuing real estate. This type of analysis looks forward using a multi-year pro forma predictions of revenues and expenses to determine the value of the asset based on future cash flows. Not often used in golf course sales.

Debt Coverage Ratio: Traditional lenders look for borrowers to have sufficient funds available to cover any debt service (principle and interest expenses). Historically for the golf industry, a preferred Debt Coverage Ratio around 1.3 is used, meaning that if you have an annual mortgage payment of $100,000 you would need at least $130,000 of income to cover the debt to qualify for a mortgage.

Loan To Value (LTV): The ratio to determine how large of a mortgage a property will qualify for given the sales price. An LTV of 60% would mean that on a $2.0 million purchase price the property would qualify for a $1.2 million mortgage.

Now that we understand the terminology, the question becomes who is lending within the golf industry. Historically Textron, GATX, Nations Bank, Bank of America, GE, PacLife and Capmark (as well as other small institutions) have all been involved in financing of golf courses nationally. Local banks often became involved with golf properties as a result of existing relationships with long term clients.

Today there is no national lender looking to amass a portfolio of golf course debt. Local lenders, in many cases, are still working their way through troubled assets and we see fewer and fewer of them willing to lend within the golf industry.

On the bright side, if a golf course has sufficient positive cash flow and a track record of success there are lenders willing to look at those types of assets. The golf courses that are breaking even or have negative cash flow with a downward revenue trend will continue to struggle in securing financing options.

For more information on the state of golf course finance contact Chris Charnas – chris@linkscapitaladvisors.com.