Course Loan Applications - Get it Right the First Time
the Golf Course Loan Process by Lining
AKE A FEW MOMENTS TO REVIEW THIS DOCUMENT WITH MY COMPLIMENTS
my free consultation. Mike Kahn: 941-739-3990
my experience, golf course loan applications are turned down because
the borrower is unprepared to deal with the lender. Believe me, we've
worked with big banks, local banks, insurance companies, Textron Financial,
FMAC (now defunct), and even private sources. Far too often, the loan
request is vague, incomplete, or unrealistic. Some of our failed borrowers
were golf course owners trying to consolidate debt. Other failed applications
were from aspiring golf course buyers lacking experience in the business.
We've watched borrowers naively pay origination fees of $25,000 or more
to lenders and brokers with absolutely no hope of getting funded.
felt this article might be more helpful if I indicate the reasons
golf course loans are turned down. Here's my short list:
Loan to value (LTV) is far too high. DSR too low (financially dangerous)
Not enough verifiable information about the subject property delivered
with the application
Borrower refuses to provide personal signature on loan (wants lender
to take all the risk)
Borrower has little or no experience managing golf courses
Financial history of subject golf course not strong enough
you are ready to start the golf course finance process, click
1) Loan to value (*LTV) is far too high. Debt service ratio (**DSR)
is far too low.
Loan amount as percentage of the total appraised value or purchase
Purchase price of $5,000,000, loan amount $3,750,000, Loan to Value
(LTV) 5,000,000/3,750,000 = 75%.
Net Operating Income (NOI) divided by annual debt service.
earnings or NOI = $500,000, annual debt payments = $325,000. 500,000/325,000
= 1.54 Debt Service Ratio.
THE BANK TO TAKE ALL THE RISK - No skin. No loan!
course buyers too often look for unrealistic loans. It's because they're
not bringing enough money to the table - they are trying to buy a
golf course they cannot afford. I have stated elsewhere on this
web site that (in 2002-6) a golf course buyer should have a minimum
of 35% cash to put down on a golf course and still have plenty
of operating capital on hand after the close.
person buying a $5 million dollar golf course at 10 X earnings
(earnings of $500,000) needs $1.75 million in cash and at least $300,000
in operating capital (in cash) available the day of possession.
At today's 8% interest rates, amortized over 20-years, annual debt
service is approximately $326,211, a safe 1.5 DSR. By showing
reasonable operating capital. This loan will very likely be successful.
Note 2006: Fixed rates for golf courses in 2004 are in the 7% to 9%
range. The DSR and LTV formula, in my opinion, remains the same.
Bankers and lenders
need to see the borrower taking risk ('skin in the game'). Trying to
get a banker to take all the risk will just waste everyones time.
see the LTV varies inversely to the purchase multiple. Below we set
the loan rate at 8% over 20-years for illustration purposes. Today's
20-year rates (2006) are being quoted 7% to 9% fixed.
at 6 X earnings shows the best (healthiest) DSR.
2) Not enough (verifiable) information about the subject
process a loan the fastest way possible, be prepared to provide all
the information the lender needs with the loan application. Every
item must be verifiable, so be sure your source of data and information
can be easily referenced. Be aware that lenders may ask for items not
personal background, or resume
property description including exact location, when built, architect,
yardage, cart paths, acreage, square footage of buildings, etc.
list of all fees, dues, menu prices, etc.
materials, brochures, menu, score card
property history - known previous owners, historical highlights
recent property appraisal
detailed 3-year cash flow history
of accounts payable
list of accounts receivable
statement with balance sheet
statements up to three recent years
of use of funds 12.
detailed history of rounds played
recent market analysis
complete equipment inventory (serial numbers of large machinery)
complete merchandise for resale inventory
of insurance policies, tax returns
of all permits and licenses
of all debts
of irrigation water, consumption rates, and up-to-date permits
of compliance for storing items like fuel and chemicals, etc.
structural report on all buildings
report on the golf course
up-to-date property survey
business plan going forward
summary of key personnel -including salaries, job descriptions
my experience loan applicants don't begin gathering the above information
until after the application has been presented. By not having this information
readily prepared, weeks, or even months will be lost. Many of the above
items take time to obtain: appraisal - two weeks to a month, survey
- up to two months, financial statements - several weeks, engineers
structural inspection - up to three weeks, market analysis - two weeks,
agronomy report - up to a month."
Be sure the information you present to the lender is stated on professional
letterheads - accountant, banker, appraiser, surveyor, engineer, etc.
Attach the source business card where possible. If the information shows
up on your own stationary, the lender may 'red flag' the application.
you need to do is imagine yourself as the lender for a few minutes.
Think about what you would want before you take a 75% risk on a golf
course property for a virtual stranger!"
in 60-days or less! It is possible to achieve a golf
course loan in less than sixty days provided you have the information
available for the lender in a timely manner.
Borrower not willing to provide a personal signature on a loan (wants
lender to take all the risk).
many golf course loan applicants want the lender to accept 80% to 90%
of the risk. Can you imagine buying a golf course and asking a lender
to provide an 80% to 90% loan without the borrower accepting the slightest
risk. Not likely.
During the inflationary period of the 80's, many lenders were comfortable
when property values were increasing by the minute. That is not true
today. If you want to own a golf course in this 2004 world, you need
to be prepared to jump in with both feet - financially and with energy.
to ten years ago a 65% golf course loan would not have required a borrower's
personal recourse (signature). In 2006, lenders are looking for a greater
commitment from the golf course borrower. This demand knocks many golf
course hopefuls right out of the game.
STRATEGY WE PROPOSED - "I participated in a funding last year
where the lender required the borrower's personal guarantee. We negotiated
the borrower's signature to 50% of the note - figuring the property
would always be well worth 1/2 the appraised value. In that case, the
borrower had sufficient financial strength, experience in golf, and
was not at full risk for the loan amount."
believe you need to be prepared to sign personally on a golf course
preliminary information about a golf course I can estimate what you
can expect a course can support in debt. Write Mike@Golfmak.com
for a complimentary consultation."
4) Borrower has little or no experience in golf course operations.
first time golf course buyer may have a problem with a golf course loan
application - especially if the LTV is more than 65%. Many experienced
golf course lenders (like Textron Financial Corporation) want to see
their borrowers with a reasonable amount of experience in the golf course
way around the lack-of-experience issue is to include an experienced
golf course person in the executive summary in the business plan. Some
of my clients have placed me on the management team in their business
plan. An experienced person on your team gives the lender greater confidence
in funding a golf course. You may also find yourself with better terms
because: Experience lowers the lender's risk." Mike Kahn
Subject's recent revenue history not enough to carry debt.
2006 and the coming year you can expect lenders to shy away from golf
course loans if the trailing 36 month cash flows indicate an inability
to carry the proposed debt. Golf course loans are considered business
loans by bankers. Therefore, even if the property is being purchased
for less than 1/2 appraised value, the lender's decision will only
be based on the ability of the 'business' to service the debt.
Not all is lost when a course shows poor earnings and cannot get financing!
"We came into a loan situation as consultant for a golf course
with a poor history of earnings. It's current loan was being recalled
and no lender was interested. We accepted a short-term management contract
to put the business on an earnings track. We successfully reestablished
and implemented an operational business plan that a major lender accepted.
Not only did we achieve a new loan, but we increased funding from $5.2
million to $5.6 million - $.4 million more than the note being recalled.
I remained for a period with the club in an advisory capacity (far less
expensive than a management contract - and they have my expertise on
the team throughout the term of the loan)." See: Case
you're buying a 'fixer-upper' that has a recent negative cash flow history,
be prepared to sign personally - and possibly be asked to put up additional
collateral. Call your rich uncle!
with 50% down payment - it failed: "I recently watched a 50%
LTV golf course loan refused, because the subject property had an unprofitable
trailing 36-month history."
OF UPFRONT FEES! DO YOUR HOMEWORK.
and loan origination sources often ask for upfront fees to begin the
golf course loan application process. I believe you shouldn't be paying
large upfront cash to brokers or lenders without strong assurances that
your application will be successful. You may need to pay a small underwriting
advance, sometimes from $2,000 to $5,000. However, by doing your homework
before you begin the loan application process (assembling the 31 items
or more above), you will have a pretty good view of your chances of
can help you assess your chances for success. Call me: 941-739-3990.
the lender really wants to loan you the money. There is a very
high likelihood that you will achieve a loan commitment if you have
all the materials for the lender's comfort. Red Flags (as I call them)
are issues where the borrower cannot answer the lender's questions about
items, or the material cannot be easily referenced by the lender. Any
show of vagueness, uncertainty, naivety, or lack of experience will
tend to frighten a lender away."
The above article is provided by Golfmak, Inc. President, Michael A.
Kahn, as a complimentary service and guide to readers. Michael Kahn
takes absolutely no responsibility for results.