Taking stock of golf club equity deposits

: Sep 26, 2009

Maybe you read about it in the New York Times the other day (here's the link). Club members who resigned from Bonita Bay, the ultra-upscale golf community and club in Florida, are demanding from the developer a total of $245 million in refunds for their equity memberships. According to the developer, this will push him into bankruptcy.

There is a club with no refundable membership fee, no non-refundable membership fee, no green fees, no waiting for tee times, no one asking to play through, no gophers, and no warring club members.

In that case, everyone will lose -- the developer, of course; the former members who may get pennies on each dollar they plunked down; the current members who want to see the lush club survive (and protect their investment and golf game); and residents whose multi-million dollar properties will plummet in value if the golf club goes under. The situation is pitting members against members.

I am not a big fan of most equity arrangements. In limited cases, equity memberships are justified if the initiation fee includes a say in how the club is run. But those who pony up three to four times the amount of a non-equity fee just to eventually get their money back are asking for trouble. If they eventually do get their fee refunded, it could take years.

Recently, I stopped at an exclusive club in New England where the top "fully refundable" fee is $190,000, and the non-refundable fee is $40,000. No voting privileges are included with either. The refund plan, which is better than most, repays the fee whenever a like amount of money is collected from new members. That is, when new members pay a total of $190,000 in initiation fees -- regardless of the type of membership they sign up for -- you get your money back. Other plans pay off when a specified number of new members join, typically three or four new members in order for the first former member on the waiting list to be paid.

I was not a math major, but it strikes me that "throwing away" the $40,000 is a better deal. You don't join a private club with the idea of leaving in a year or two; you join for multiple years. Give any halfway savvy investors the $150,000 difference between the refundable and non-refundable fees and let them invest it over five to eight years, say, and they will probably make the $40,000. Put the money in a plain old CD for the eight years and you will get pretty close, without the risk of a market collapse (or the collapse of the golf club).

Or you could do something my brother wrote me about the other day after reading the piece on Bonita Bay. "The wife of a friend," he recounted, "was recently relieved of her employment and occupied her time by converting their backyard to a three-hole mini golf course. She said she learned how to do it by watching a YouTube video.

"Now they have a golf course with no refundable membership fee, no non-refundable membership fee, no green fees, no waiting for tee times, no one asking to play through, no gophers (yet), and no warring club members.

"They just play the course six times in a row and call it 18 holes."