9.1.A. PRSR 12-14-2005Item # 9.I.A.
ver
MEMORANDUM
TO: Parks and Recreation Commission
FROM: Bill Maertz, Parks and Recreation Director
DATE: November 1, 2005
SUBJECT: Pinewood Golf Course: Financial Analysis
Please find attached the analysis of market and financial factors for Pinewood Golf
Course.
PINEWOOD GOLF COURSE
Elk River, Minnesota
ANALYSIS of
MARKET and FINANCIAL FACTORS
November 28, 2005
The City of Elk River has been engaged in discussions concerning a possible acquisition of Pinewood,
a nine hole golf course located in the northernmost portion of the community. The City has retained
McMurchie Golf Management, Inc. to provide analysis of the existing golf course operation and the
dynamics of a potential acquisition. From a review of the facility, and subsequent analysis, the
following findings are offered to assist the City regarding the feasibility of purchasing Pinewood Golf
Course.
Prepared: November 28, 2005
All inquiries regarding this document should be directed tc:
McMurchie Golf Management, Inc.
AI McMurchie
1810 W. 31st Street
Minneapolis, Minnesota 55408
(612) 825-4285
FACILITY DESCRIPTION
Pinewood Golf Course lies on the northern border of the City of Elk River, a town of just over 19,000
people located in Sherburne County on the extreme northern edge of the Minneapolis/St. Paul
metropolitan area. The golf course is a nine hole executive length course on approximately 27 acres of
land. Course length ranges from 1,497 to 1,832 yards with a par of 30.
A site visit on November 16, 2005 was limited by poor winter weather conditions. However, the golf
course appeared to be modern in design with small greens, small tee stations with two (2) platforms on
some holes, and no observable bunkering.
The small size of the site may create ball flight problems on several of the holes on the boundaries of
the property. Ball flight into neighboring properties and roadways on holes #2, #3, #4, #5, #6, #7, and
#8 may be problematic but was difficult to determine during the site visit. If ball flight problems are a
problem from any of these holes, due to the small configuration of the property no reasonable solution
exists either in terms of hole redesign or barrier construction.
Turfgrass condition was unobservable due to snow cover but was reported to be good. A Toro single
row irrigation system installed approximately 20 years ago at the time of course construction covers the
nine holes. The irrigation water source is adequate with the overall system supplied directly by a well
and 160 gallon per minute pump system.
A pole barn of approximately 1,350 square feet serves as an adequate maintenance facility. No
specialized facility exists for either gasoline storage or pesticide storage.
The inventory of maintenance equipment must be considered dated with the majority of day-to-day
cutting equipment five (5) to ten (10) years old or older. Turf cutting equipment including greensmower,
fairway mower, and rough mower will be due for replacement in a two (2) to three (3) year period.
Other equipment pieces including tractor with front end loader, teemower, utility vehicles, and sprayer
attachment are all past industry replacement standards in terms of either age or hours used. Equipment
such as aerator, top dresser, and fertilizer spreader are not part of the observed equipment inventory.
A clubhouse consists of approximately 1,700 square feet and is dated in its decor. A golfer check-in
area with counter and snack sales occupies the front section of the building with a small area for tables
and chairs. Two (2) small rest rooms, men's and women's, are towards the rear from the counter area
and are not handicap accessible. The building also contains a simple party room accommodating
between 30 to 40 people toward the rear. The parking lot is adequate in size and is in fair condition
but will require sealcoat and crack repair in the near term.
Overall the physical viability of this golf facility can be rated as good. Any potential new operator
would need to be aware of the following physical limitations:
1. The size of the site and proximity of neighboring properties may cause problems in the areas of
ball flight and trespassing pedestrian traffic.
2. There is no available land for driving range expansion.
3. The clubhouse will require some level of investment in order to update its decor and comply with
ADA requirements.
4. Golf course items such as maintenance equipment and irrigation system are nearing the end of
their useful life and represent significant investments in the next two (2) to ten (10) year period.
MARKET ANALYSIS
On a national basis in 1990 there were 11,178 golf courses for 23 million golfers. By 2003, course
supply had increased to 14,827 or 32 percent with the majority of that increase coming in daily-fee
facilities. Meanwhile, the number of golfers rose to 27.4 million, just 15 percent. Rounds per year in the
U.S. have shrunk from the all time high of 518 million in 2000 to 495 million in 2003. The chart below
illustrates the national golf market trend through the early 2000's:
Demand 2000 2001 +/- 2002 +/- 2003 +/-
Golfers (in millions) 25.4 25.8 2% 26.2 2% 27.4 5%
Rounds in millions) _ _ 518.4 518.1 (0%) 502.4 (3%) 494.9 (1 %)
SuPPIY _ ._._ ._.
- -_ _.
18 Hole Equivalents _. 14,268 _.. 14,549_ 2% 14,725 __1% .14,627 ___1%
Source: National Gott Foundation
Within the Minneapolis/Saint Paul metropolitan area, demand and supply factors have caused a
parallel downturn in the golf market. Metro population growth from 1990 to 2004 increased by 567,000
people or 22 percent. The metro supply of golf holes meanwhile increased by 954 holes or 44 percent.
Supply has clearly out paced demand in the market causing less rounds available per golf course.
In addition, a significant portion of metro population growth has occurred in minority segments that
are characterized by low golf participation rates. Also as the area population ages, there will continue
to be more senior golfers in the market. This segment by nature demands discounted senior rates
making the protection of core green fees more and more problematic.
On the supply side, private owners of public golf courses in the metropolitan area will continue to take
advantage of rising land values, liquidating their golf businesses and selling the land for residential or
commercial development. Government units will be largely unable to stop these transactions from
either a legal or financial perspective. In addition, development of new golf courses by both the private
and public sectors has ceased due to market factors, land costs, and financial challenges. As a
consequence, the metro golf market is experiencing a decrease in the supply of public courses.
While the condition of the national and metro golf markets has declined, the condition of the localized golf
market is more critical for the future of this golf course investment. The chart below summarizes key
local market data for the City of Elk River and Sherburne County:
City of Elk River 2000 2005 +/- 2010 +/- 2020 +/-
Population _„_ 16,447 19,112 16%
__ 21,611
_. 13%
_. _2_6,313 22%
_.
Sherburne Count _ _
Population 62,797 75,890 21% 86,350 14% 105,630 22%
Households 21,581 26,020 21% 30,530 17% 38,920 27%
Age-5to19 16,370 18,450 13% 19,660 7% 22,620 15%
Age-60h~79 4,964 6,210 _ 25% 8,270 33% 14,430 74%
Source: Minnesota Deoarlment d Plennino
Population growth is the main indicator of future demand for golf. With the projected growth trends
shown, this market area must be considered excellent for future golf participation. In addition, forecast
growth in the senior and junior golfer age groups is also an excellent indicator for this profile of golf
facility. By 2020, the 60 to 79 age bracket will increase by 8,220 potential senior golfers and comprise
close to 14 percent of the overall county population. The number of potential junior golfers also
increases in the time period by 4,170, comprising 21 percent of the population in 2020.
OPERATING PROJECTIONS
Audited financial statements for previous years of operation were not available for analysis.
To determine the value of Pinewood as a golf course business, a projection of future net operating
income is necessary. The projections depicted in the following chart assume three (3) percent growth in
the facility's financial performance. This conservative growth assumption is based on stabilizing round
volume at 18,000 rounds annually, 10 percent below the facility's previous peak volume performance
of 20,000 rounds. In addition, the following assumptions were utilized for the projection:
1. Golf car rental revenues assume 20 percent ridership beginning at current rate of $11 per car rental.
2. Food and beverage sales are projected at $1.50 per golf visit (round).
3. Clubhouse personnel expense projected as:
200 day season ~ 12 hours/day = 2,400 hours ~ $12/ hour = $28,800 ($30,000 rounded)
4. Golf course maintenance expense projected as:
Maintenance Supervisor: 40 weeks ~ 40 hours/week = 2,400 hours ~ $20/hour = $32,000
Laborers: 3 laborers ~ 20 weeks ~ 20 hours/week = 1,500 hours ~ $10/hour = $15,000
5. Payroll taxes and benefit costs are projected as 25 percent of total personnel expense.
6. Food and beverage cost of sales equals 50 percent of projected sales.
7. Merchandise cost of sales equals 85 percent of projected sales.
Projected Projected Projected Projected Projected
2006 2007 2008 2009 2010
Rounds
Average Green Fee
3.0 % 16,000
$10.50 16,500
$10.81 17,000
$11.14 17,500
$11.47 18,000
$11.82
Green Fee Revenue 168,000 178,448 189,371 200,789 212,721
Golf Car Rentals 3.0% 18,000 18,540 19,096 19,669 20,259
Food & Beverage Sales 3.0% 24,000 24,720 25,462 26,225 27,012
Merchandise Sales 3.0% 5,000 5,150 5,304 5,464 5,628
TOTAL REVENUE 215,000 226,858 239,233 252,147 265,620
OPERATING EXPENSE
Personnel-Clubhouse 3.0%
Personnel-Maintenance 3.0%
Payroll T_ axesBenefiLs X25% 3.0%
Total Personnel
ClubMuse Other Expense 3.0%
30,000 30,900 31,827 32,782 33,765
47,000 48,410 49,862 51,358 52,899
__ 19,250 19,828 20,422 _.21,035 21,666
96,250 99,138 102,112 105,175 108,330
30,000 30,900 31,827 32,782 33,765
Maintenance Other F_xpense 3.0% 50,000 51,500 53,045 54,636 56,275
Cost of Sales 3.0% 16,250 16,738,___ 17,240 _ 17,757 18,290
Total OHler Expense 96,250 99,138 102,112 105,175 108,330
_ TOTAL OPER. EXPENSE _ _ 192,500 198,275 204,223 210,350 216,660
NET OPERATING INCOME 22,500 28,582 35,010 41,797 48,960
NET OPERATING MARGIN 10% 13°/, 15% 17% 18%
Due to current market factors, significant revenue performance is limited due to flat demand for rounds
and by probable market resistance to significant rate increases. The resulting net operating income
prediction is in the range of $22,000 to $48,000 for the near term. Projected margin performance is
stabilized at 18 percent, approximating the industry average for comparable nine hole facilities.
SUPPORTABLE PURCHASE PRICE
The following chart illustrates the method required to calculate a supportable purchase price. Financing
is based on a 20 year amortization period with five (5) percent interest.
NET OPERATING INCOME
YEAR N.O.I.
_
2006 $22,500
2007 $28,582
2008 $35,010
2009 $41,797
2010 $48,960
FINANCING ASSUMPTIONS
Debt Coverage Ratio 1 3
Amortization Period 20.00
Interest Rate 5.00%
Finance Closing Cost $47,000
Short Term Investment Rate 5.00%
Operating Reserve $50,000
Annual Loan Amortization Rate 0.0802425
SUPPORTABLE LOAN AMOUNT
Stabilized N.O.I. - 2010 48,960
Coverage Ratio _ 1 3
Income Available for Debt Service 37,662
Annual Loan Amortization Rate _ _ _ _0.0802425
$469,347
Supportable Loan Amount Rounded $470,000
SUPPORTABLE PURCHASE PRICE
Less
Finance Closing Cost (47,000)
Reserve for Operating Shortfalls (50,000)
Add:
Reserve Interest Income (Year 1) 2,500
Net Deductions _~ _ (94,500)
375,500
Supportable Purchase Price Rounded $375.000
Based on the stabilized net operating income projection, the project has a supportable loan amount of
$470,000 (rounded). After deductions for closing costs and the establishment of an operating reserve,
the supportable purchase price is $375,000.
a
CONCLUSIONS
As the purchase of Pinewood Golf Course is contemplated by the City of Elk River, the City must be
aware of the following factors that limit the value of the property as a golf business.
1. Market Conditions. Analysis of both national and local market characteristics indicates a
combination of declining participation rates, declining rounds played, and a correction to golf course
supply in its beginning stages.
2. This type of golf facility draws from a relatively small localized market only. The majority of
golfer visits will come from within the local community or immediate border community. Golfers
participating on a short length nine hole course will tend to limit their travel time to fifteen minutes or less.
3. Executive length golf courses appeal to beginner and intermediate level golfers who tend to
participate on good weather days only. In a typical season, the number of effective business days for
an executive length nine can be 20 to 30 percent less than that of a full length eighteen hole golf course.
4. By nature, the business size of a short length nine hole golf course is limited due not only to
volume factors but to localized resistance to rate increases. Further, this golf course will become more
and more reliant on senior age golfers into the future. In order to attract and retain this category of golfer,
discounting rates in the range of 10 to 20 percent is inevitable. As a consequence, the average rate
achieved may very well decrease over time with no appreciable upside to round volume.
5. Revenue from ancillary businesses is also very limited. No driving range, or space for a driving
range exists on this property. With a short length course and minimal terrain challenge, demand for golf
car rentals is minor. Food and beverage sales are confined to basic snack and beverage items due to
the short length of the average golfer visit.
6. Required Property Improvements. Beyond the supportable purchase price of $375,000, the
City would need to be aware of an additional $175,000 of equipment replacement and property
improvements necessary in the next three (3) year period:
CATEGORY4TEM __ _ OUANTITV ESTIMATED COST TOTAL_
GOLF COURSE
Irrigation System Upgrades
MAINTENANCE EOU/PMENT
Triplex Mower with Reels
Fairway Mower
Heavy Weight UGNty Vehicle
Sprayer Attadvnent
Light Weigh lm4ty Vehicle
Turf Ae2br
CLUBHOUSE
Parltirg Lot Seal CoaVCradc Repar
~ 30,1x10 30,000
1 25,000 25,000
t 35,000 35,000
~ 20,000 20,000
1 15,000 15,000
1 5,000 5,000
~ 20.000 20,000
1 5,000 5,000
Interior Upgrades _ 1 _ 20,000 20,000
TOTAL IMPROVEMENTS $175,000
7. Replacement cost. The City must also be aware of the probable development cost of a new
facility of similar size and scope. A sample development budget for a comparable executive length nine
hole golf course including a driving range is depicted by the following chart:
VA 1 GG V M T/11 CM COST
DEVELOPMENT COSTS
Lard 35 Acres ~ $20,000 per Acre 700,000
Loan Cbsng E~erse 150,000
Constrlcdon Interest 150,000
Corstrlc6on BaxSr~_ __ _.._ 1.25% _. _ 21,000
DEVELOPMENT COSTS-SUBTOTAL 1,021,000
GOLF COURSE
PertrYmrg 20,000
100.000
MohilizaEONSi[e Preparetion 1 pp Opp
Excavafiav('radng 150,000
Draurage 50,000
Feature Cors6vtion 200 ppp
Irtigation 250000
Cart PatttsKJtlter StrucWres 50,000
~~ ~'~ Co~bt/ction 100,000
Grow-iryMaturation _. .. 150,000
GOLFCOURSE-SUBTOTAL 1,170,000
CLUBHOUSE
uiaia+se c:onsmcoon 1,800 square feet ®$200 per square foot 360.000
Parking waY 100,000
~ 20,000
FumiNre, FaWres_ & Equiprrrent _ _ -. 30,000
CLUBHOUSE-SUBTOTAL 510,000
MAINTENANCE FACILITY
Maintenance BuBdrg 1,500 square feet®$100 per square foot 150,000
~~~~ - - _ _. _ 200,000
MA/NTENANCE FAC/L/TY-SUBTOTAL 350,000
START-UP COSTS
PreOf>enirg MarkeOrg 15,000
GoH Course Fudures 10.000
Driving Range Equpment 15,000
Inventories
15,000
R Canbn9erl~Y _ _ _ _ 5.00% _ .. _ _ 155,000
START-UP COSTS -SUBTOTAL 210,ppp
TOTAL DEVELOPMENT COST 3,261,000
This budget represents a fully developed government unit golf course and driving range that in
the end would be superior in quality and design to the existing Pinewood Golf Course. Combining the
purchase price and required property improvements for Pinewood, the City would need to invest
approximately 2.6 million as a minimum in order to own and operate this existing facility. The gap of
$660,000 between a new course and a used course may prove to be minor in the long term when
considering the business value of a driving range component on the potential new facility.
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