Mandatory membership is an amenity!

Mandatory membership is an amenity!

Planning and implementing the conversion to a mandatory membership community.
Publication: Club Management
Publication Date: 01-FEB-05
Author: Patasnick, Robert M.

COPYRIGHT 2005 Finan Publishing Company, Inc.
Editor's Note: In the December issue of Club Management, Lee Hoke, Ph.D., a professor of economics at the University of Tampa, argued against the trend that is emerging in the Florida golf community economy. Here, accountant and club consultant Robert Patasnick takes an opposing view.

In today's uncertain economy, the not-for-profit private club industry is not immune to suffering from lost revenues like their commercial counterparts. Mandatory club membership programs are fast becoming a healthy solution for country club communities struggling to support their clubs.

Whether it be as a result of existing members participating and spending less at their clubs, members stepping down their membership category to lower dues paying levels, or members resigning from their clubs at an alarming rate, more and more financial pressure is placed on the diminishing number of members who remain committed to their clubs. For residential golf and country club communities that used to enjoy high levels of support and participation from their community residents, matters are made even worse when new home buyers choose not to take membership in their community's country club.

How long the remaining members can carry their clubs is anybody's guess, but everyone has a breaking point. Dues and fees cannot forever be adjusted upward without risking a further fall out of members, so cost cutting measures must inevitably be employed to keep their clubs from failing. But here is the rub. Cutting services, reducing maintenance levels, lowering quality of products used or served, and reducing hours of operation will also hinder a club's ability to retain existing members and seriously hamper attracting potential new members.

In the case of a residential golf and country club, the declining financial condition and eroding image of the club can quickly harm property owners' real estate values, feeding a downward spiral that is frequently unstoppable. Consequently, country club communities that have implemented mandatory club membership programs are now being viewed as far more financially stable than those without such programs, thus attracting future homebuyers who seek to sustain a high quality social and recreational country club lifestyle.

That Was Then, This Is Now

Years ago, private country club communities thrived and enjoyed high levels of participation. Most homebuyers felt it only natural to seek club membership when moving into their private country club community thinking, "Why else would someone buy in?" What's changed? For starters, demographics and certain economic dynamics have revealed a flaw in the design of older country club communities that were conceived with an expectation of high participation. The original assumption was that new buyers would ALWAYS desire club membership, and club participation would thus remain stable.

Now, property owners realize that they can enjoy many of the aesthetic benefits of living in a country club community--open green space, beautiful views and vistas, and generally less density--all without having to bear the financial obligation for maintenance and upkeep of the country club amenities. An inequity starts to appear when residents who are club members feel they are carrying the torch for the nonmember residents in their community. Particularly when the nonmember segment of the community population starts to grow at what many believe is an alarming rate.

A key economic dynamic in the marketplace is changing the demographics of many clubs--historically low interest rates. Individuals and younger families, who in the past were not financially able to buy a home in a country club community, are now able to stretch further to get into their dream house. Again, these individuals may be attracted to the beautiful aesthetics of a country club community, but may not be interested in the social aspects and lifestyle that the community was designed to provide to its residents. Older clubs are struggling to adapt to the needs of young families with children, and many of these young parents are not ready for "club living," as they are still fully immersed in the "corporate grind." Many are buying their "pre-retirement homes"--skipping home buying steps that previous generations had to make before arriving at their life's dream of a high quality, recreational retirement lifestyle.

Another economic dynamic, rising expenses, accelerates the erosion of the club amenities while membership in the club is declining. In particular, big-ticket costs such as insurance, real estate taxes, and labor are rising quickly and are nearly uncontrollable. This lethal mixture of a rapidly declining revenue base combined with rapidly rising costs puts exponential pressure on dues rates to keep pace, eventually pushing the dues and fee structure to an uncompetitive level in the marketplace--and an unaffordable level for the remaining members. In other words, the club can no longer attract new members, nor can it retain existing ones.

Such a scenario clearly puts everyone's real estate investment at risk as the club amenities continue to erode in both physical appearance and perception by outsiders. What's the alternative? Interestingly, many new country club developments are now being designed as mandatory club membership communities from inception, thus preventing the scenarios previously mentioned from ever occurring.

What is Mandatory Club Membership?

Conceptually, mandatory club membership is a community structure that is widely believed to be the key to stabilizing revenues and sustaining the economic viability of the community in a fair and equitable manner amongst all who benefit from the existence of the country club amenities. Fundamentally, it requires every resident to financially support the country club amenities at some level in a manner, similar to the way a homeowners association maintains all of its common areas and common elements in a community through mandatory maintenance fees and assessments.

Alternatives That Didn't Work

Because boards and community leaders are volunteers and usually have limited tenures in their positions, they often don't notice these gradual demographic and economic changes until the club finds itself in a critical situation. Add to the equation that community and club leaders are more inclined or pressured to choose a short-term alternative that is less painful, less complex, and more widely accepted politically than mandatory club membership. Here are some common alternatives that simply don't work in the long run to sustain the private country club image of the community.

It's management's fault, we just need a marketing expert: This first alternative is based upon two misconceptions:

1. That the club is suffering from poor management, causing the club's leadership to constantly make changes to key personnel and positions, perhaps causing even more instability; and

2. That a professional marketing director will alone turn the club around. Both are fundamentally flawed. Management takes directives from the club's leadership as to how to run the organization, and the membership must be diplomatically reminded that as the owners of the club, they have a fiduciary responsibility to act in the capacity of the club's sales force with regard to membership marketing efforts.

Granted, hiring an experienced membership marketing professional should be considered, but more importantly, a strong relationship must be established with the local real estate agents encouraging them to properly position and promote the community. Deep down, these individuals recognize that a thriving, vibrant, financially healthy country club will, in the long run, continue to attract future buyers to the community, which will best sustain and enhance property values, not to mention everyone's quality of life.

Upgrade and expand the country club amenities: Some may suggest that the club should perform a major refurbishment to its facilities to attract new homebuyers and members to the community. A common trap is that these clubs rely solely on a "build it and they will come" philosophy to attract these new members. While everyone agrees that upgrading the club amenities is important to remain competitive in the marketplace under any circumstance, it has rarely been a community's salvation. The club members usually incur substantial debt to make such an investment with repayment terms that are dependent on noticeable increases in membership levels. When new members don't show up in droves as expected and existing members don't substantially increase their use of the facilities, the debt burden often actually increases the financial pressures placed on the remaining members.

Admit nonresident members: This alternative assumes that nonresident members will make up for lagging club revenues. The problem with nonresident members is that they do not have a financial bond with the community, namely a property value interest and investment. Most communities would rather not be dependent on outside nonresident members for their existence. They and their guests add traffic into the community and diminish the security aspects of a gated community. Yet many communities have no choice but to market to and become financially dependent upon nonresident members. This even includes mandatory membership communities that still have excess capacity and are not fully utilizing their facilities until which time their resident membership base is replenished to pre-existing levels when nonresident membership categories usually become recallable.

If a club community becomes too dependent on nonresident members, they may find themselves living in a volatile financial structure whereby the nonresidents are "here today and gone tomorrow" or the nonresident members fail to support capital reinvestment in the community through the club. Nonresident members have less incentive to vote to assess themselves for capital upgrades in the community when they can go on to find another deal elsewhere. If the voting block grows to such an extent that power and influence shifts outside the gates, the residents (both members and nonmembers alike) can wake up to find that their community is being held back by the influence of the nonresident club members and, ultimately, the property owners wind up losing control of their most significant and influential asset, the country club, within their own community.

The window of opportunity is lost: Of greatest concern is in the case of a club opting for the quick fixes just mentioned that may work in the short-term but don't completely cure the problem for the longer-term, merely prolonging the inevitable. The inevitable can be a shift from a private club to a semi-private club to a public or daily fee golf course. Worse, it could mean selling off some or all of the amenities for development, thus resulting in losing open green space and increasing density and congestion. When the short-term solution is consistently taken over by the long-term solution, communities come to realize too late in the game that a mandatory membership conversion is no longer available to them as an option once the population of nonmember residents increases to too large a percentage of the overall community. In essence, it leaves them trapped to face the aforementioned "inevitable." These obvious alternatives certainly need to be incorporated into a club community's strategic business plan in some manner, but to supplement rather than save it.

Why nonmember residents should be concerned: What this all boils down to is a case of knowing more today than we did yesterday, and no, this is not the club members' fault. You should actually thank them for doing more than their fair share for far too many years than they care to remember to financially sustain the property values in the community for every property owner's benefit. But most of all, for the benefit of those who enjoy a view of the golf course.

No, it's actually the developer's fault, but it wasn't intentional. He just thought he was building something that our society wanted ... and it did at the time: "exclusivity." The more unique the location, the more unique the golf course, the more unique the clubhouse decorum and design--the higher the selling price commanded for home sites.

There was always an "expectation" that the community would be self-sufficient and that there would naturally and inherently be more demand for club membership within the community than availability. After all, club membership was historically thought to be a privilege. Residents used to purchase and maintain their club membership simply for fear of an inability to sell their house without the club membership. Today, residents fear being unable to sell their homes with a club membership after their clubs begin to visibly erode. And hence, the concept of mandatory club membership was born to both stabilize and enhance the country club amenities while at the same time attempting to put all homeowners in the country club community on an equal playing field.

The bottom line: the club and the community are forever linked, and a healthy club is a healthy community with strong property values. Most importantly, it has been demonstrated that a community with a high quality and financially sound country club maintains its property values better than a community without such an amenity. Or, to put it another way, the value of the homes in a community is much more dependent upon the quality of its country club than is the value of a country club membership dependent upon the quality of the homes in that community.

Historically, communities in which their country clubs became financially unsound suffered a negative impact on property values. It is therefore important that the residents of a country club community do everything possible to ensure the financial viability of their country club. Since non-resident members may view the club differently than resident members; naturally, it is important for a club to desire as many resident members as possible in order to control the future of their country club and their community.

Mandatory Membership IS an Amenity!

What we have come to find out today is that private country club communities with mandatory club membership programs are being viewed as being far more financially stable than those without such programs, thus attracting future homebuyers who seek to sustain a high quality social and recreational country club lifestyle. These new buyers are genuinely concerned when buying into a country club community that the country club amenities will be financially supported by all residents within the private community, and not just left for some of them to carry the load for the rest. Many have described this structure very simply as the age-old saying--security in numbers.

Even more astonishing are the sheer numbers of country club communities that have converted to mandatory club membership programs in Florida over the past couple of years resulting in the majority now being structured in this manner. It seems as though every community that "could" convert because of a sufficient level of support from their community have now done so whereas those communities that have waited too long to convert have now missed their opportunity to do so.

These challenging economic times that we have all been faced with over the last couple of years are not expected to change for the better anytime soon and what became clearly evident was that those country club communities with mandatory membership programs already in place before the economic tide changed fared the downturn storm significantly better than those without such programs.

New buyers to these communities can see the difference and buy with their eyes wide open. So to everyone's pleasant surprise, most mandatory membership communities actually have experienced an immediate pick up in activity as new arrivals to the community immerse themselves in club life. These country clubs used to be concerned about merely replacing their outgoing members lost each year with an equal number of new members just to remain even, but now they are seeing their membership levels get quickly back on the road to healthy levels of support.

So how does a country club community convert to mandatory club membership?

A mandatory club membership program has to conform to the governing documents of the related country club community; therefore, legal counsel must be consulted as early as possible in the process. As part of that process, there is a delicate ballet that must ensue predominantly between the resident members and resident nonmembers.

A conversion program must be designed to address, as much as possible, every constituency group within the country club community: the resident members and nonmembers, the golf and non-golf membership categories, and the resident and nonresident club members. The program must be received by all as fair and reasonable and appeal to the vested interests of all the concerned parties. Needless to say, this is not an easy undertaking. Such conversions are often emotional, highly sensitive, and inherently controversial.

What all parties have to understand is that the conversion to a mandatory membership community is not an instant fix, as it doesn't happen overnight but rather through natural attrition as the community is transformed back to high levels of participation through new buyers moving into the community. The most widely accepted approach to a mandatory membership conversion involves the concept of "grandfathering," or exempting, the resident non-club members from having to immediately become club members. The current non-club residents DO NOT have to immediately become club members and they DO NOT have to ever move out of their community. They can live in the country club community as they originally intended to do for the rest of their lives essentially unaffected. However, when they do sell their home, their new buyer must take membership in the club at some level.

Many country club communities that have converted to mandatory club membership require that new residents take at least social membership status; others have created new, low cost, categories of membership; while others require the buyer to take on the same or higher level of membership held by the seller of the property. There are many different approaches that can be taken based upon the dynamics of the community, but again, most every program has some form of a grandfathering element to accommodate the existing members and nonmembers. The focus however must remain clearly on the future and which path makes the most sense to recapture financial stability and affordability.

Some communities offer special programs and incentives to the sellers of properties such as allowing the new buyers to pay their club joining fees in installments, sharing the club joining fees from incoming members (buyers) with the outgoing sellers, reducing or waiving joining fees and/or dues rates for a limited period of time, etc. We are only limited by our imagination when designing a mandatory membership conversion program that appeals to all segments of the community. But we can't "give away the baby with the bath water" so to speak in that the program has to make fiscal sense and have financial integrity.

How Long Does Conversion Take?

The important and very powerful message that resident club members must convey to their nonmember neighbors is that they are taking on great pains by pledging a continuing financial commitment to the country club as part of the conversion process. Existing and future club members must understand and accept the concept of "dues continuation," which simply means you cannot continue to walk away from the country club and still live in the community; otherwise, mandatory club membership would not have any significant positive impact.

But certain clearly-defined, qualifying hardship conditions are often incorporated into mandatory membership programs that automatically allow resignation from the club such as the death of a spouse or either spouse reaching a certain age. Almost all country club communities have a "blue ribbon" hardship committee made up of independent individuals who hear various sensitive requests for resignation or temporary leaves of absence. One thought to remember is that the healtier the country club, the more varieties of qualifying hardship exemptions and flexibility that can be exercised to accommodate everyone's individual circumstances. As a club falls into financial distress, so too does leadership's ability to be open to a wider accommodation of those requesting consideration for hardship exceptions.

Expect to take a year to properly plan for a mandatory club membership conversion including establishing a joint committee of the country club and homeowners association boards, performing extensive due diligence and feasibility studies, preparing numerous legal documents and communications, holding a number of town hall informational meetings, interviewing numerous other country club communities, and ultimately, holding votes of both the country club members and community residents to change governing instruments.

One thing is certain, brace yourself for a very heated and emotional debate on this concept and remember that courage is grace under pressure. To say a conversion is challenging is a gross understatement as there are legal risks that cannot be avoided when weighing the benefits of implementing a mandatory club membership program, and the future is yet to be written to say that everyone was right when choosing this path. Communities that "row together" have a greater chance of reaching their destination than those who continue to fragment and fight each other. Consensus building is paramount to the successful implementation process, so every effort must be taken to educate each property owner on the direct impact the country club has on their community, and of course, their individual property values.

Robert Patasnick, CPA is a partner with the national audit and accounting firm McGladrey and Pullen, LLP. He is national director of club services and represents over 160 private, member-owned country club and large-scale community association clients in Florida. McGladrey & Pullen, LLP ranks as one of nation's leading providers of audit and attest services. With more than 100 offices in the United States, they are committed to helping mid-sized businesses grow and prosper. RSM McGladrey, Inc. and McGladrey & Pullen, LLP have an alternative practice structure. Though separate and independent legal entities, the two firms work together to serve clients' business needs (http://www. mcgladrey.com).