Jeffrey Dugas - Wellspeak Dugas & Kane, LLC

Most appraisers struggle with the allocation of going concern value to nonreality components, specifically the business, or goodwill facet. In order to get around this requirement we have seen some appraisers report that NO business value exists, apparently, to make the whole issue go away. The Appraisal Institute published a book by Arthur Gimmy and Buddie Johnson labeled Analysis and Valuation of Golf Courses and Country Club, which includes a section on Business Value. The Appraisal Institute is careful not to mandate a single technique, but instead offers several viable options. The methods described are the Excess Profit; The Sales Approach of Business Opportunity; Residual or Segregation and Management Fee allocation approach. From our review of other appraisers’ work, we find the Excess Profit technique is often employed, but commonly misused. It is nothing more than an allocation of stabilized income to the valuation components of a going concern based on costs contained on the club’s balance sheet. Excess Profit has nothing to do with superior management or enhanced performance of the club, as some would suggest, but rather how its revenue stacks up to its asset value which is an accounting term for costs. This is really an exercise of on cost allocation but it has no relation to market value since none of the figures are derived from the market. Since most appraisers no longer rely on the Cost Approach as a valid method of golf course appraisal because of the presence of Economic Obsolescence, relying on asset value established by the club’s accountant is no more correct. How then can an appraiser omit the Cost Approach as a meaningful valuation technique, yet rely on the “Excess Profit” technique for establishing business value? They can’t or at least shouldn’t. 

Analysis and Valuation of Golf Courses and Country Club

One of the methods described in the book, “Sales of Golf Course Business Opportunities”, is the use of rental comps as the basis for projecting income to the real estate.  Market rental income is converted into a real estate value, similar to the way appraisers value other types of commercial real estate. Once this is done the appraiser can deduct real estate value from the value of the going concern. The difference can be attributed to nonreality, or business and personal property. I have read some criticism of this approach that come from a lack of research and understanding of the development of meaningful rent comps. Similar to developing improved sales, an appraiser must verify and dig into the details.  For instance, a lease rate may appear low, but it may require upfront capital.  Or, the difference in taxes can significantly alter the rate an operator can afford to pay. In New York for instance real estate taxes are extremely high. So when relying on rents from New York and Conn., the rates may vary by a few percentage points but for good reason. When I hear criticism of this approach I know it is invariably a result of shortcuts in research and lack of insight.  For the most part golf course rents typically range between 10% and 20% of gross revenue. Conversely, I’ve seen appraisers present for analysis data ranges that are far more broad based. When carefully analyzed and diligently researched we have found that rental data for golf courses is fairly consistent, it’s also market driven and consistent with the way in which appraisers value all types of commercial property. I will admit the data is difficult and time consuming to obtain, but that should not deter appraisers from developing this approach, or criticizing it with unfounded appraisal theory.

Jeffrey Dugas, MAI, SGA, is a partner in the firm of Wellspeak Dugas & Kane, LLC, and heads the Golf Advisory Group, Cheshire, Conn.