Cliffs member corrects the numbers

: Apr 16, 2010

We wrote yesterday that Cliffs members who opted to lend a minimum $100,000 to the developer would achieve a return of around 14% annually. That calculation included a waiver of dues for Cliffs club members.

Without getting into the complicated details, the true annual return is actually 12% for the seven years of the loan

Cliffs owners who invest in the amenities will earn 12% and be able to curtail the developer's spending if cash flow dips beyond a certain level.

period for both club members and non-members. With the dues waiver, members earn the 12%. For parity, those who don’t belong to the clubs but participate in the loan will receive the 12% rate. Members can decline the dues “credit” if they choose to invest in the loan through their IRAs. (IRA funds cannot be used for such purposes as dues credits.)

To make the loan offer, The Cliffs split into two parts -– a real estate development company and another legal entity that owns and runs the amenities, including the current six golf clubs and the yet to be built designs by Gary Player and Tiger Woods. It is the latter entity that has floated the bond. The Cliffs and developer Jim Anthony have pledged the amenities as collateral for the loan in case of default. The investors will be represented on the board of the second entity, and according to our correspondent, there are strong provisions for slowing spending if cash flow in the clubs drops below certain levels.

“All in all,” our Cliffs member wrote, “I like this arrangement as it

Perhaps the lesson from The Cliffs is that transparency in communication with members is a benefit to developers, even before a crisis."

provides financing at a lower rate than Wall Street or private equity would command; gives strong owner representation in decision-making; and provides the owners with collateral in the event of default (although admittedly this would be complicated and cumbersome).

“It [the loan arrangement] provides professional management, with strong owner representation -- something that a typical developer owned club does not offer.”

We especially appreciate one final point our correspondent makes, that developer-owned and managed clubs might look to the situation at The Cliffs and take away a hard-earned, but important lesson -- that “providing some info on ownership structure, transparency, financial strength, etc. would be a valuable part of any real estate and golf development decision.”