Golf Course Financing - In or Out?

They are known as the Textron’s of the Golf World; Lenders who have chosen to stay put in the golf course refinancing and golf course construction markets despite the exit of well-known lenders such as Bank of America, Wachovia Securities, JP Morgan and other prominent national lenders. Add the troubles of inexperienced multiple course owners and you have an industry that is being shunned by the financial communities.

Jerry Cummings Jr., President of Commercial Bancorp LLC, an Ohio based national commercial real estate financing consulting firm, believes that “The mass exodus of lenders from the golf course financing market could actually have a positive impact on the whole industry.”

“When the major players in a given capital markets area exit that area; the general consequences are a broad tightening of credit extensions for all participants. You see the maximum LTV’s drop and interest rates rise. The minimum NOI is increased respectively. The longer the major players stay out of the market the stricter the small number of participating lenders can be, in effect creating a goldmine of sorts for themselves. Because of the limited number of available lenders, both private and public, the operators of even prominent courses are seeing there cost of funds skyrocket”

The high LTV’s of yesteryear are just that, yesteryear. Today’s golf course refinancing underwriting guidelines are limiting refinancing and purchase loans from fifty to sixty-five percent depending on the structure and quality of the paper. The interest rates are running about 275 basis points above market rates on similar non-golf commercial properties. Additionally, the underwriters are sometimes requiring interest reserves and/or operating reserves to insure that if the operator gets into trouble they have access to liquidity to help, especially in the lean times. Most lenders also are requiring that a course that has been in trouble before have a qualified management team for the duration of the loan term. “Given all of the extra layers of risk management one can see how a problem market can be molded into a profitable market with much lower exposure to losses.” Mr. Cummings continued.

What this all adds up to is the eventual second coming of lenders back into the recreational financing markets. How can you say that a golf course project with a fifty percent loan to value, an interest rate well above the current market, with a highly skilled management team in place, reserves, on a short term is not desirable. “I have requests all day long that mimic this scenario,” Cummings states. “The lenders will flow back to the market but to what extent and under what terms are yet to be determined.”

Commercial Bancorp is a national leader in golf course and golf course/residential development financing consulting through their Website www.commercialbancorp.com

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Written by Jerry Cummings Jr.