While I’ve often written about golf and club property assessment issues in this space, it’s important to stay up to date as the market evolves and the relevant issues change for values and their resulting ad-valorem tax assessments.
The past 3+ years have seen a very fluid evolution the golf business. During the first and second quarters of 2020, COVID actually closed golf courses in many states and had all of us wondering if the golf business could get any tougher. When it became widely accepted that golf was a COVID-safe activity, albeit with single-rider carts, devices to avoid touching the flagstick or hole and other precautions, golf participation increased and 2021 and 2022 saw golf transactions and play increasing. 2021, according to our 2022 Golf Market Summary saw multiples of gross revenues for golf property sales hit a 10 year high, which in 2022 receded somewhat with the impact of rising interest rates.
With housing in many markets low in supply, highest and best use becomes a question since assessments in most (not all) states are based on the property’s market value, not necessarily at its present use but rather its highest and best use. What this means is that some (not all) golf courses are worth more as residential development sites. It’s important to note that just because a property can legally be developed doesn’t mean it will be. Highest and best use involves four (4) tests, which include (among others) whether a given use is financially feasible. Thus, in valuing a club for tax assessment, highest and best use must be determined, except in states like New York, where continued present use is primary.
Another important consideration in many tax assessment cases is deferred maintenance. During the pre-COVID period many clubs experienced distress and neglected some maintenance and delayed capital improvements. With the increase in play and membership, many facilities, flush with cash from increased revenues and having greater borrowing power from lower interest rates embarked on often-aggressive capital improvement programs to restore or upgrade their clubs. Since assessors often use building permit information to review assessments, some clubs experienced assessment increases commensurate with the cost of those upgrades or repairs. These improvements, while often appropriate, don’t always contribute a like amount to the market value of the property.
So, where does this leave a club that just spent a bucket of money on improvements, has more play or members resulting in higher revenues and just had their tax assessment increased, sometimes dramatically and out of proportion with any potential resulting increase in value?
While it’s great that many clubs are performing better, there actually are issues that can impact market value (on which assessments are based) negatively. First and foremost is that cost does not equal value. I’m reminded of Warren Buffet’s quote that says “cost is what you pay and value is what you get”. With the inflation and rising interest rates of most of 2022 and the first half of 2023, capitalization rates (which are applied to net income to estimate value) have increased. This can impact market value, which presumes a sale of the property, negatively. Combined with the many clubs that either still have deferred maintenance, the cost of borrowing is now higher limiting the “bang for the buck” with capital dollars spent. Simply put, those improvements now cost more to implement. Those improvements that are required (versus desired) need to be considered in any valuation and would be deducted from the estimated value analysis.
Additionally, it should be noted that many states have an equalization rate, which is the percentage of market value at which properties are assessed. As overall real estate values increase, these equalization rates tend to decline, implying indicated higher market values from the assessed value, which can make an assessment excessive. This alone should motivate any property owner to review their assessment regularly, even if the assessment, or tax liability doesn’t change.
According to most statistics I’ve seen, rounds of golf in 2022 declined from 2021. The presumed reasons for this vary. Some say it was weather-related and others feel that the COVID surge is “correcting”. Regardless, many observers believe that only a portion of the COVID surge is sustainable long-term and combined with higher interest rates will impact golf property values in the foreseeable future. GPA’s 2023 Golf Market Summary shows a decline in the Gross Revenue Multiples of sales along with declines in rounds played for daily-fee courses, while private clubs showed increases in revenues, mostly related to dues increases resulting from increased operating costs.
The primary point here is that despite the overall good health of golf as compared to the years preceding COVID, there are many instances where tax assessments should be reviewed for fairness. With golf courses and clubs, there are numerous elements that need to be considered and the fact that a significant portion of the value of any golf course is personal and intangible property (not assessible as real estate) adds to the complexity of golf property assessments that should be included in any analysis.