By Robert Parker III, CPA
Many private clubs experienced membership growth as a result of the pandemic. To maintain this level of club engagement for current and prospective members, clubs are recognizing the need to upgrade their facilities and create new amenities.
However, in light of recent spikes in interest rates, it’s imperative to carefully evaluate various funding options.
In this article, we’ll outline the pros and cons of various funding options and explore additional considerations for club managers to consider.
Funding Options for Club Construction Projects
When private clubs decide to pursue large construction projects, an important first step is understanding the pros and cons of various funding methods.
Because each club is unique, the best financing method will vary. Depending on the membership breakdown and the specific needs of the club, some clubs may find that combining several funding options works best.
Funding generally comes from an external lender or from the members in one form or another.
Borrowing from a bank is a common financing method that is typically easy to access. However, it’s important to note that this option can trigger new compliance and reporting requirements.
A few other considerations about bank funding include:
- Rate negotiations. Securing favorable terms for a bank loan can be a time-consuming process.
- Loan term alignment. It’s important to ensure that the life of the loan aligns with the length of time members will recognize value from this project.
In order to provide the best experience for a club’s members and to keep the club competitive, private clubs must levy capital assessments upon those members from time to time.
Capital assessments are typically used to fund construction projects or deferred maintenance projects, or cover projected budgetary shortfalls.
Naturally, capital assessments are a sensitive topic and can be controversial. When considering capital assessments as a way to fund a construction project, there are several considerations to keep in mind:
- Members who deeply understand the various benefits of the project are more likely to get on board with an assessment.
- Upon completion of construction projects that add significant value for the club, the club will typically experience increases in membership and usage.
- When handled properly, capital assessments can cultivate pride of ownership among members.
Using the Reserve Fund
To pay for capital expenditures, many clubs establish a reserve fund using initiation fees and other income streams. Using such a reserve fund to pay for construction projects can help avoid controversy.
During the pandemic, many private clubs experienced membership growth, which boosted operating income, initiation fees, and other capital revenues. So, reserve funds might be a solid funding option for many clubs.
Considerations when creating and tapping into a reserve fund include:
- The Board should designate how funds are to be used.
- Income and expenses should be carefully accounted for.
Issuing Member Bonds
Member bonds can be an effective alternative to obtaining funding from a bank. Sometimes called “friendly debt,” these bonds can be created with flexible terms, fewer compliance requirements, and lower rates than standard bank loans.
Because these bonds provide members with interest income and improvements they can enjoy at their club, members are more likely to view these bonds in a positive light.
Before issuing member bonds, consider the following:
- Member bonds can trigger tax reporting requirements.
- It’s important to maintain accurate records and document payment schedules.
- Check with your current lenders to understand whether member bonds are considered subordinate to any outstanding bank debt.
Securing Angel Funds
Angel funds are donations or pledges from members with no expectation of repayment. Angel funds are ideal because they have minimal compliance requirements.
A few items to be mindful of when considering angel funds:
- It’s important to maintain accurate records about how the funds are being used.
- The angel donor might feel they have the right to heavily or inappropriately influence the project. So, properly establishing expectations up front is critical.
Other Considerations When Funding a Club’s Construction Projects
A club’s physical assets are the primary revenue generators for the club. As a result, construction projects increase the club’s value and appeal to current and prospective members. That being said, your club’s current construction project will likely not be the last.
To take a proactive approach for the future, club management should consider the importance of:
- Capital Budgeting. Developing and monitoring a club’s capital budget that addresses at least the next five years is just as important as the attention the club gives to its operating budget. Some clubs perform a capital reserve study to help guide the process.
- Innovative Strategies to Enhance Member Experience. Should the economy slow down, club membership can be one of the first expenses members eliminate. During times like this, adapting to accommodate trends, member interests, and lifestyles is of the utmost importance. Understanding what excites and motivates members is critical. The club that is able to think ahead and provide a one-of-a-kind experience for its members will remain relevant and thrive — even in times of economic downturn.
Large and small, country or city, PBMares’ private club clients receive industry-leading expertise and support with a complete range of services geared specifically to meet your needs. Contact our team today.