Appreciating Depreciation...
A Plan for Funding Capital at Your Club

Many clubs are trying to create a capital plan to ensure assets are maintained and amenities, both now and in the future, meet the needs of its membership. The plan would have been relatively easy to create and maintain had the appropriate process been followed from the onset.

However, economic challenges, directors’ personal agendas and not appreciating the impact of depreciation, have left clubs with both deferred maintenance of assets and a lack of appropriate cash reserves to fund the club’s capital needs.

A common miscue by most clubs is not to consider depreciation of assets as an operating expense. Put another way, all members of the club should pay for this use the same way they pay for golf course maintenance expenses, clubhouse expenses or any other expenses based on use. These operating expenses are factored into annual dues to fund operations - why not think about capital maintenance in the same manner?

Unfortunately, many clubs chose to ignore depreciation, as a non-cash expense, and charge members for only cash expenses. As such, there has been no matching of “use costs” per member for the capital assets of the club. This results in those clubs having to fund capital expenditures based on absolute need and current cash surpluses. As assets deteriorate over time, this often leads to choices being made on which assets to maintain - leading to deferred capital costs - which then needs to be addressed using other funding methods such as assessments to the membership. Continuously raising capital dues can put clubs outside of the market, especially when competing with non-equity clubs who typically do not charge capital dues. This form of funding capital expenditures can impact both financial sustainability and a club’s brand in the marketplace.

Below, we outline steps to ensure support the financial sustainability of your club:

1. Understand Maintenance Capital Needs: clubs need to understand the annual cost to maintain their existing assets over a 20-to-30-year period, similar to a reserve study for a condominium.
This study is more than just a financial exercise, as professional engineers will be able to opine on the impacts that weather, improper installation or unusual usage, among others, can have on the useful life of an asset. After examining the life expectancy of existing assets, factoring in the costs to repair and replace assets at the end of their useful life or the extension of life span of certain assets to smooth annual costs your club can develop a plan to fund the maintenance capital to maintain the conditioning of your existing assets.

2. Quantify Your Sources: evaluate your incoming cash flows that can be used for funding maintenance and growth capital expenditures.
With your reserve study providing a thoughtful estimate of maintenance capital expenditures, it is time to understand how this can be funded under your current funding structure and begin to contemplate changes, if needed to fund the depreciation of your club’s assets. This includes an estimate of expected cash to be received from entrance fees, operating surpluses, and any other capital fees, net of required debt servicing costs to service existing debt.

Since many clubs did not historically charge members the depreciation cost, then over time deferred capital has occurred. In light of this methodology, new members must contribute to both capital maintenance of existing assets and new capital. As such, from a matching principle perspective – one would suggest that entrance fees should be used to fund both capital maintenance and new capital projects.

3. Comprehensive Strategic Planning: understand and document member’s expectations for the Club, including an in-depth study of current and expected utilization of club assets.
Steps 1 and 2 ensure an understanding of the “now”, but clubs are dynamic organizations and the members of today will look very different in 2, 5 or 10 years. This is where a strategic plan, informed by market trends, operational efficiency, member’s expectations, vision and importantly utilization of club assets, becomes critical to capital planning. This plan will help answer important questions in capital planning such as:

• What do my current and future members want from the club?

• Based on current and projected utilization do we have the right assets? Are they of sufficient quality to continue to meet and exceed expectations?

Determining and documenting who you want to be as a club will guide your capital planning and focus. This is a critical step in planning the growth capital expenditures that will need to be funded to meet member’s expectations for the future of the club.

4. Facility Planning: develop a comprehensive campus(es) plan for your Club allowing members input and understanding of the master plan.
Utilizing what you have learned from the strategic plan and utilization study, engage relevant architectural experts (i.e., structural, landscape, golf, etc.) to develop a facility master plan. This will help ensure that capital projects are phased and completed in a way that is not detrimental to future projects or your campus.

The facilities master plan needs to be approved by the membership and any new capital improvements would be approved by the membership along with the funding plan of each such improvement.

This should include periodic communication throughout development, including explaining the research and findings to members so that they are given enough information to vote intelligently on the plan and individual projects.

Key themes to communicate to members include:

• Maintenance capital is funded in an understandable manner (I use it, I pay for it) based on an informed plan to ensure management is not missing and not planning for critical capital expenditures. No longer is it based on absolute need, it is based on a comprehensive plan with the future in mind.
• The strategic plan for the future is clear and socialized with membership. Those charged with governance have a clear mandate and the research to back decision making to continue to enhance the club’s value proposition. Current and projected utilization, market trends and club vision are defined to inform future capital planning.
• A facility master plan ensures the continuity of the campus remains (or is improved!) and growth capital projects (and importantly funding plans) are approved by an informed membership.

Overall capital planning and funding of capital expenditures are key to maintaining a club’s brand, financial sustainability and member satisfaction. Do not fall into the trap of funding by scarcity, instead take the steps to clarify capital funding for members, management and those charged with club governance.

This article was written by Founding Partner Stephen Johnson and Evan Van Eerd.