| “It is important to have limitations placed on boards for capital spending,” says Albert B. Antonez, CCM, general manager and COO, The Country Club of Rochester, Rochester, New York. |
| “Based on the club’s overall assets and ability to generate revenues, a reasonable limitation seems not only prudent, but should be required in the club’s by-laws. It’s Governance 101, checks and balances. |
| “Ideally, club member committees working with the professional staff, finance and strategic planning committees, should identify, develop and recommend to the board, annual capital budgets to provide for the maintenance and improvement of the club facilities. The need for extraordinary projects or considerations like major reconstruction to the golf course or clubhouse, should be evident to all members and their active participation and support, emotional investment as well as financial, should be both understood and welcomed,” he suggested. |
| “The inclusion of and participation by the entire membership is critical components to the long term success of clubs. Should boards determine there is a need, and clearly communicate the benefits, as well as the associated costs to the membership, approval and enjoyment should follow.” |
| All this, in this GM’s opinion, comes with a caveat. “Clubs that seek to strategize around, and maneuver to avoid seeking and gaining membership approval for major capital projects, will soon have other more pressing issues than aging facilities,” he warned. |
| “The limit on capital spending without membership approval should kick in if it is outside the normal annual capital funds, for example, requiring long term borrowing to fund,” says Jack Sullivan, CCM, GM of the Naples, Fla.-based, Bay Colony Golf Club. “Long term borrowing requiring the pledging of assets requires the approval of the membership.” And if there are capital assessments at Bay Colony, they are limited to no more than three months dues, without the approval of the membership. |
| The Country Club of Rochester has an annual capital spending limit determined by a number of factors, which are outlined in the club’s bylaws. The board, for example has the authority to approve capital expenditures and capital lease payments in any fiscal year up to an aggregate 200 percent of the annual depreciation, including what the depreciation on leased assets would have been if it had been purchased rather than leased. Anything more than this amount requires membership approval, Antonez said. The authority for assessments is more restrictive. Anything in excess of one month’s dues requires members’ approval. |
| In addition, any spending, leases or other contract obligations totaling more than $250,000 and not payable within a year requires membership approval, Antonez explained. And any mortgage or sale of property cannot be done without the members approving these transactions. |
| Dolly Ammann, CCM, general manager, Meadow Springs Country Club, Richland, WA feels there should be no limit on the capital spending the board can approve without membership approval. “Any limits placed on the board authority greatly impact a board’s effectiveness, “ she argues. Ammann’s club does not have a capital spending limit. However, “our bylaws prohibit the board from borrowing money for any project that is over $250,000, without membership approval.” The club’s bylaws, she says, are “very restrictive. All dues increases and special assessments must be approved by the membership. |
| “I would strongly recommend that clubs eliminate any bylaw restrictions on the board's fiscal authority, other than assumption of debt, and this limit should be set very high, perhaps in the $1,000,000 to $2,000,000 range depending on the club's financial position,” she opined. |
| The Beach Club of Santa Monica, CA is a somewhat different subject for discussion. The club’s bylaws don’t require that members vote on capital spending projects, regardless of limit, but simply stated, “debt and assessments are a no-no,” says Gregg Patterson, GM of The Beach Club. |
| “The Beach Club is a very, very conservative fiscal environment. We put a premium on planning for the future, identifying needs well in advance, putting cash aside to finance those needs, proceeding with projects only after the cash is in the bank and never, ever using debt or assessments as part of the funding equation,” Patterson stated matter-of-factly. |
| To accomplish this, Patterson works closely with the entire management team to identify projects, life expectancies and needs. These are reviewed with the various club committees to the priority for projects into "must do", "should do" and "would like to do" categories. |
| “I work with my controller to align dollars with projects, then review this facility fund report with the board of directors and finance committee each month as part of their normal review process. We always have an ‘unscheduled’ line item with cash to pursue emergencies or ‘opportunity projects’ of a modest nature,” Patterson observed. “Knowing what's coming is the big deal; having patience when pursuing enhancements and having a firm conviction that ‘cash is king’ is the real deal at The Beach Club.” |
| In Patterson’s words: “It doesn't get more conservative than this,” and given this conservative position, the money will always be in the bank before any project moves ahead. |
| “Monies accumulate from admissions fees and overages from operations, which of course are driven by the dues. Since ours is a very transparent club, members know what's going on, they give feedback through the various committees and directly to the board. They are not hesitant in their demand for continuous explanations – the real ‘brake’ on spending is as much cultural (it's part of our club physche and has been for decades) as it is legal via the bylaws,” Patterson explained. |
| Members, he says, accept a club culture of “continuous incremental improvement rather than a home run project kind of place.” In addition “the momentum to avoid debit is so overpowering that the issue has never been raised,” Patterson added. |
| Another unrelenting factor is the fact “the future will come. And money needs to be accumulated now to realize the future. The future is acknowledged when dues are raised, admission fees are adjusted or goods, services and program are priced,” Patterson suggested. |
| In many cases, this prudent saving of funds can be turned into a “rainy day” fund, but a fund generally that can’t be devoted to operational costs. |
| “Our club has a monthly special assessment that was initially approved by the membership as a way to finance a new clubhouse,” Ammann explained. “The project was financed with a bond and the interest rate was projected at 8.5 percent. Over the last two years, the interest rate… has only been in the 1-2 percent range. This has generated additional funds. Last year we obtained membership approval to use these excess funds for other capital improvements. Now we have built up cash to fully fund our annual capital programs.” |
| Antonez says rainy day funds at the Country Club of Rochester have been set aside because there has been no need for the capital in a given period of time. |
| “If these funds were accumulated from initiation fees, future boards or the membership should not be restricted” from using the funds for capital projects, or “to fund unusual expenses, such as uninsured storm damage,” Antonez said. |
| But, he says, under no circumstances should “rainy day” funds be used to offset ongoing regular expenses. “Doing so only masks temporarily, operational realities that should be addressed with appropriate dues increases and revenues from normal operations. If the club was unable to break even from operations in a given year, the board should institute the practice of charging the membership with an operational assessment to cover the loss. Having the discipline to do so will show the membership the true cost of operating their club,” Antonez related. |
| Bay Colony has a “reserve fund” but there are certain restrictions tied to its use, but more clubs are moving to a philosophy of earmarking funds for more specific use, says Sullivan. |
| “For example, many boards say we won’t fund depreciation. But now at Bay Colony we build it into our monthly dues, which amounts to a capital fund of $1,200 a year per member. It gets us away from surprises and assessments,” he commented. By funding depreciation, the fund allows Bay Colony to replace existing assets, i.e. replacement of existing furniture or a new roof. |
| Bay Colony also uses initiation or transfer fees to fund new capital improvements, i.e. a new wine cellar or new sand bunkers on the golf course. And capital assessments, approved by the membership are used to fund new capital improvements that exceed annual initiation and transfer fees, i.e. expansion of the clubhouse or major improvements to the gold course, Sullivan outlined. |
| In the Naples area, none of the clubs followed this line of thinking a few years ago, but it’s catching on now. “I’d recommend people look at this philosophy,” Sullivan concluded. |
| At the Beach Club, the entire facility fund can be used as a “rainy day” fund, if needed. “However, most needs can be identified years in advance and big bucks aren't as a rule needed unexpectedly. However, smaller needs crop up and ‘opportunities’ arise – a great deal on playground equipment, etc. – and for this we have an ‘unscheduled’ line item in our facility fund. This runs about $50,000 and has always exceeded the actual expenditures in any given year,” Patterson said. |
| Publisher's final thoughts |
| So the name of the game for capital budgeting is vision, planning, anticipating needs, saving money by whatever means and what Gregg Patterson calls the “Depreciation Mindset.” |
| Private clubs are communities of people with like minds and like values and clubs are fortunate in their “inherently high level of values alignment,” Patterson says. This thinking continues through with the club’s financial planning. There should be an emphasis on the future, limiting debt, which then allows clubs to keep their options open, avoiding assessments, which generally reflect poor planning because needs can be anticipated, and defining priorities. |
| The Depreciation Mindset acknowledges that things you can never anticipate happen. Some are good and others not so, Patterson suggests, but often-unintended consequences rise from the mundane, which add to the sense of community and increase the market value of the membership. |
| Clubs must continually redefine their priorities in the “depreciation cycle” because priorities will change in response to changing boards, committees, managers and even economic indicators. Change is a healthy response to changing needs, wants and expectations. |
| Strategic planning and direction, priorities, capital budgeting and the “depreciation mindset” are a never-ending process because clubs will never arrive at a place where this philosophy is no longer required. |
| At least, that's the way I see it! |
| What's your opinion. If you wish to respond to the Publisher's Perspective, or other BoardRoom articles, contact Publisher John G. Fornaro by email at johnf@apcd.com. |
| John Fornaro Publisher |