Par for the course: Considerations for a golf course insolvency

Golf courses may seem like the ultimate luxury destination of sport, recreation, and business — but in reality, they’re one of the businesses most susceptible to insolvency.

Since before the COVID-19 pandemic, many golf courses have been trending toward insolvency, putting their lenders in the position of getting the ball back on the fairway.

If you have golf course clients struggling financially, be prepared to navigate their unique insolvency needs.

Financing a golf course client

Taking on a golf course looks like any other client on the surface. You will likely provide traditional financing, long-term financing to buy assets, and a lot of financial support for facility improvements. With your support, the golf course will have an operating line, and financing for equipment purchases and maintenance as they take on long-term and operating debt to run their golf course.

During the late 1990s and early 2000s, this kind of financing was happening all over the country as golf courses saw a boom in patronage. But by the late 2010s, these same golf courses were rapidly folding as the customer base fell off, and lenders were left navigating their client’s insolvency.

COVID-19 lockdowns were an exception

In the late 2010s golf courses were already going insolvent, mostly because their customer base was shrinking. Their traditional largest audience, middle-aged men were aging out of the sport, and golf wasn’t replenishing its interest enough with younger audiences to maintain the number of courses on the market. Of course, during the COVID-19 lockdowns, indoor activities were restricted along with large gatherings. People could only gather in small groups, outside, staying six feet apart — and golf happened to meet all of those criteria.

During the lockdowns, COVID-19 actually propped up the industry, giving your golf course clients a few positive seasons. But by the time all of the restrictions were lifted, all of the same problems remained, and golf courses fell back into the insolvency trend.

Why are golf courses going insolvent?

Operating a golf course is a unique industry. While they manage the same standard challenges and practices of traditional businesses like cash flow or reduced activity, they also shoulder distinct challenges.

Maintenance — Maintenance may not seem like a unique challenge but for golf courses, it’s next level. Maintaining their equipment is just the beginning. But maintaining at least 18 manicured holes including fairways, greens, sand traps, and beautifully menacing water hazards is an endlessly expensive endeavour.

Adjacent Businesses — Golf courses will often explore other options like housing developments to diversify their own business. When these projects undergo their own unique challenges — in the case of housing developments, the unpredictability of the real estate market — and don’t pan out for the golf course, it can impact their overall financial viability.

Regionality — Depending on where your client’s golf course is located, they may be dealing with a tougher dose of mother nature. In particular, Canada’s prairie provinces deal with unpredictable weather and all-too-predictable winters that shut down the golf courses for half the year. Recent changes to weather patterns and climate conditions including forest fire activity have also had a negative effect.

Seasonality —  For those golf courses that do close for winter, seasonality may be the biggest challenge of all. These clients have to generate enough income through the spring, summer, and fall, to make up for the winter months when they’re not operating at all. While provinces like BC may dodge this challenge, the prairie provinces are more susceptible to this obstacle.

Considerations for lenders

If your client’s golf course is showing signs of distress, you’ll have a number of steps and options to consider.

Assessment of current management

Your overall experience will be greatly determined by how cooperative management is. You will have to decide if you have faith in the current management to right the ship and get their golf course operation out of financial peril, or if you need to intervene.

If you do need to intervene, then your main goal will likely be working with management to effect changes and, if required, a sale of the business. At this point, the level of cooperation management offers will make a big difference in the rest of the process. You may even consider an option where you choose to bring in new management you believe is more likely to turn the business around. Either way, the cooperation of current management will make the process much smoother.

If you do come up against an uncooperative management group, you as the lender may need to enforce your security, demanding on your loans and securing the assets you hold as security.

In some instances, your client may have given personal guarantees, which grants you even more leverage in enforcing your security. 

Selling the golf course — it’s all about timing

This is where the location of the golf course makes a big difference in how you approach a realization strategy. If you’re dealing with golf courses that need to shut down for the winter season, then timing is everything.

Your transition from your client’s insolvency to a sale will have more success if the enforcement is at the end of the season. That way, you can properly control the closing of the golf course and use the winter season to effect a sale, ideally fast enough to be up and running again to open in the spring season with a new owner. In our experience, a sales process from start to finish would require the entire winter season.

If you’re put in a position where you have to enforce your security in the middle of the season, decisions will have to be made about whether or not to continue operations and for how long, and when the optimal time to initiate a sales process would be. These decisions may be based on the cooperation of management and the state of the facilities and equipment.

In the worst-case scenario that your client completely abandons the operation at the beginning of the season, you can appoint control of operations to your insolvency and corporate recovery team to keep the business going as receiver manager until the end of the season in the interest of timing your sale with the winter. This is a more expensive scenario that puts the lender in the position of covering the costs of operation — but it’s good to know your options.

The importance of relationships

In addition to management, there are other relationships to consider throughout the process. The golf course owner may actually be an equity group represented by members (such as a private course) whose other interests are important to you as the lender. Even the membership of the golf course may include important connections and prospective clients. Your insolvency and recovery team will keep these considerations on your radar so you can determine what steps to take in dealing with the golf course’s equity holders.

Knowing what clubs are in your bag: Be ready for the golf course insolvency trend

In the best-case scenario, you get some cooperation from your client to remedy the financial challenges or agreement to market the golf course for sale on terms agreeable to all parties. Working collaboratively to properly shut down operations for the off-season can optimize the business’s potential for the realizable value if a sales process is completed as potential purchasers will want to verify this process has been completed as part of their due diligence. If enforcement steps need to be taken at a time that isn’t optimal, as a lender you still have options to maintain operations through a Receiver-Manager and initiate a sales process at a proper time

Regardless, it’s important to be aware of the unique challenges faced by your golf course clients and the resulting financial trends. Be aware of the signs, cultivate cooperative relationships with management, and be prepared for the process of insolvency and ultimately optimize the best value through a sales process if required.