Foresight: Risk management advice for golf course community investors and developers
Nov 19, 2012
If you fly over the Miami/Palm Beach area, you’ll see the landscape dotted with planned unit developments (PUDs). If you’re unfamiliar with PUDs, they’re developments that can include single family residential properties with similarly priced homes, homes of various types and price points, or mixed residential and commercial properties. In some cases all the buildings are uniform, and in others there’s some variety in style but the buildings are tied together with common architectural elements.
Some PUDs include golf courses. While golf courses certainly make a picturesque backdrop to any yard, some of these communities are struggling to keep their golf courses operational due to lack of membership. This has created a thorny issue for homeowners, homeowners associations, developers, and investors: What role do each of these stakeholders have in insuring the viability of the golf courses and what actions should they take if the courses fail? Here’s some insight into how to manage some of the most common risks of having a golf course in a PUD.
Common PUD risks
In the face of financial difficulties for their golf courses, some PUDs are changing their bylaws and requiring homeowners to become mandatory golf course members. Others are enacting mandatory memberships for new homeowners when a house within the community is sold or transferred, making them difficult to sell.
Many homeowners are reluctant to pay increased membership fees, and as a result, some golf courses have failed. Some of these communities have subsequently sold their courses to private operators or developers, which have tried to redevelop the golf courses with additional homes instead of retaining the fairways and clubhouses. Homeowners, who paid for a house adjacent to a golf course, bristle at this possibility. Many times, there are legal restrictions prohibiting the conversion of the golf course to alternate uses.
We have not seen too many successful attempts to redevelop existing golf courses with new homes. This is somewhat impacted by the recession and current lack of new housing demand, but it is also definitely a result of strong resistance from residents and municipalities to permit redevelopment against the will of existing homeowners.
Perhaps the most significant issue currently affecting some newer communities is non-ad valorem taxes, such as direct or special assessments. Special assessment taxes cover the installation of roads, utilities, or other infrastructure, and can be a result of bonds used by developers to finance their up-front costs. Now some properties are so heavily burdened by debt that they are literally worth nothing under current market conditions, as their debt is greater than their value.
Owners and purchasers of properties with bond debt are negotiating directly with the bond holders, and sometimes pay off the debt at pennies on the dollar. However, special assessment taxes by municipalities for infrastructure improvements are not as easily reduced, and the complexity of this problem is just beginning to be understood. As a result, some of these properties are just sitting, not even worth a foreclosure for the time being.
How PUD risks are affecting home values
These risks can affect home values in a variety of ways. For instance, we recently researched and analyzed sales of single family houses within a community that changed from having voluntary golf memberships to mandatory golf memberships. We compared sales within this community to sales within five other golf course communities (four with voluntary membership programs and one with mandatory memberships), and with the entire town in which these six golf course communities are located.
Our research and analysis show that the establishment of mandatory golf club memberships at our subject community in 2004 has resulted in a loss in value of about $120,000 for typical houses within the community, as compared to other similar clubs with voluntary memberships and the town overall. This diminution in value risk must be balanced against the available options of the golf course owner/operator. If the homeowners association is responsible for shortfalls in the golf course operating costs, this could drive homeowners fees skyward — which could also have a direct impact on future home pricing.
How investors and developers can manage PUD risk
Before taking on a new project, both developers and investors must understand the inherent risks of operating the common area elements and have carefully considered strategy for repositioning or redevelopment that doesn’t rely on a quick turnaround. Also, it’s crucial to understand a property’s debt and obligations, and avoid those with significant bond debt or special assessments. Or, at the very least, make sure there is a long enough due diligence period to work through these issues so an investor isn’t stuck with costs for which they didn’t plan. With so many investment opportunities available, don’t get stuck in a deal that doesn’t make sense.
Right now there are so many PUDs that have to work their way through the pipeline that I don’t expect to see many new planned communities in the near future. Of course, that changes with the higher demand areas that are more fully developed, as they will recover faster and support new PUDs much sooner. However, the tertiary areas have enough supply either in their pipelines or proposed that planning for new developments might not begin again for up to another decade.
Author: Scott Powell
