SAWYER RESORT & GOLF is pleased to announce that it was the LISTING BROKER last month on the SALE of a MAJOR GOLF PROPERTY under a LEASE TO PURCHASE structure. This deal is worth reviewing, given the current challenging golf course BUY - SELL market, and for its combination of:
• Background
• Property
• Buyer
• Deal Structure
• Lessons Learned/Risks

BACKGROUND: This property was foreclosed on and subsequently owned by one of the largest US specialized golf course lenders. As the new owner, the lender was responsible for all expenses, cash short-falls, capital improvements and payment of third-party management fees to an experienced, very capable golf management company for operating the property. The Owner/Seller listed the property for a sale at a historically reasonable price, but aggressive in terms of current performance, which had been hurt by the 2008 - 2010 recession. The Seller would have strongly preferred an outright sale to a lease.

PROPERTY: Shaker Run Golf Club (www.shakerrungolfclub.com) is the leading upscale semi-private golf property in the tri-state market of Cincinnati and Dayton in southwestern Ohio. It is ranked the #2 public course in the state by "Golf Digest", which also gives Shaker a rating of 4.5 Stars (out of 5) -- "Outstanding". Shaker Run is 27 holes of varied golf, 18 designed by Arthur Hills (opened 1979) and 9 by Michael Hurdzan (1999), both Ohio-based architects. Shaker is also well-known and recognized for its outings, functions (especially weddings) banquets and food service.

BUYER: The Buyer/Lessee of Shaker Run is an experienced and reputable local golf operating group that has experience both in the construction of Shaker Run and in its initial operation after opening. This group also has outside financial backing.
DEAL STRUCTURE:
• Triple net lease with Lessee/Buyer responsible for all expenses, taxes, equipment leases; also responsible for completion of pre-determined capital expenses.
• 3-year lease to expire by the end of 2013, which gives the Buyer/Lessee up to 3 full golf seasons to operate the property before purchase.
• The Buyer/Lessee is OBLIGATED to purchase the property (NOT an option) no later than the end of the lease term in 2013.
• Lessee makes a cash deposit of approximately 7 to 10% of the Purchase Price that it forefits and loses if it does not buy the property (and also loses if it otherwise defaults on its lease obligations).
• The Buyer/Lessee pays a market cash lease payment monthly in advance to the Owner/Seller during the lease term based on a market rate.

LESSONS LEARNED/RISKS: This transaction has an excellent chance for success because:
• The terms are fair to all parties.
• The Lessee/Buyer has relevant expertise both with Shaker Run and the market in which it competes. It also has additional capital behind it.
• Shaker Run is a top property in its market and thereby likely will be at the forefront of the golf revival.
• The Buyer/Lessee is motivated to perform, losing its deposit, capital and time invested if it does not close and buy.

RISKS:
• The Buyer/Lessee cannot sufficiently turn-around the property during the lease term to pay the purchase price.
• Mortgage debt for acquisition may not be available by the end of the lease term (unlikely),
• For the Owner/Seller, it may have to take the property back if the Lessee/Buyer cannot perform on its purchase obligation.

THE MASTERS: Hey, how great is The Masters?! Truly, a tradition like no other! For all the anticipation of the Masters, there is similar disappointment when it is over.
For an "elegant, engaging beautiful presentation" (per the NY Times) allow me to highly recommend "America's Gift to Golf; Herbert Warren Wind on The Masters" (The American Golfer), the newest book by noted golf editor and historian Martin Davis. This masterpiece is a compilation of the writings of the U.S.'s greatest golf writer, Herbert Warren Wind, on the Masters, available at Amazon.com.

The lead front-page cover article of Barron's Business and Financial Weekly for Monday, July 28,2003 was "Golf Glut; Why Golf's Prospects are Dimming". The article was a decisive wake-up call that (in its words) "The forecasted golf boom has fizzled unambiguously in the past few years and threatened to become a king-sized bust!" The article laid-out all the depressing statistics that we have come to know too well in the US:

*drop in rounds played
*drop in the number of golfers
*increasing foreclosures of golf courses in financial distress
*failures of the golf course REITs
*courses for sale at prices sharply under construction costs
*reduced corporate budgets for golf outings, meetings and club memberships.

This article was a very visible declaration that, at the time, the golf real estate business had bad fundamentals and that one should buy, loan or invest in golf with caution. What Barron's did NOT get right was the dramatic economic recessionary downturn starting in 2007 - 2008 that of course made the bad golf fundamentals materially worse. Looked at another way, mid-2003 was an excellent time to be a seller of golf!

A TIME TO BUY?
If 2003 was a good time to sell golf by reading correctly the tea-leaves, is now, 7 and a half years later, a Good Time to Buy Golf? There still is widely prevalent negative commentary on buying and selling in golf. Sale prices have dropped measurably based on the triple-whammy of (a) lower market multiples for establishing the sale valuation; (b) lower operating performance to apply the market multiples; and (c) virtually no traditional mortgage acquisition financing. Why should anyone buy a golf course with the market the way it is?
My response is that both the economy and golf courses have hit bottom and that economic indicators and the dynamics of golf have turned the corner and, albeit marginally, are starting to improve:

IMPROVING ECONOMIC INDICATORS
*Unemployment Trending Down
*Consumer Confidence is Up
*Small Business Optimism is Up
*Housing Starts are Up
*Housing delinquencies and household consumer leverage are both Down
*Bank Liquidity and willingness to lend is improving
*Interest in 2nd homes is coming back.

The improvements in these indicators are not large and likely just a start, but they have turned the corner. If true and continuing, consumers (golfers) will be more favorably disposed to spend money on discretionary expenses such as travel, recreation and, of course, golf.

IMPROVING GOLF DYNAMICS
Like the economy, various factors in the world of golf also have turned the corner and are slowly improving:
*Supply of golf courses is decreasing, and no new courss are being built
*Industry-wide efforts -- to retain existing golfers and attract new golfers -- are paying dividends and will continue to do so
*Pricing of golf is becoming more aligned with consumer expectations and capabilities
*Golf is more user-friendly (addressing, for example, need to play fewer holes in less time) and more female-friendly
*Golf is advancing in the technology world with understanding and utilization of social networking and mobile apps
*Baby-boomers are retiring and are and will be playing more golf if "value" is perceived.
*Viewership of Golf on TV is up appreciably.

On another front, there will be golf course lenders coming on stream as other commercial real estate asset classes become more liquid and competitive. Lenders will be attracted to the golf "space" for the lack of competition and meaningful spreads on golf loans. While generally not available now, such lending will be advantageous for buyers that look to refinance and recapitalize their investments in golf two or three years down the road.

"TIMING IS EVERYTHING"
Timing a market is easier said than done, whether stocks or golf courses. However, it is not imperative to buy at the exact bottom of a cyclical market. Rather it suffices to buy during troughs and sell during peaks. By buying at or near the bottom of a cycle, a cyclical real estate business like golf will benefit from:

*The push from the economy to magnify rounds, cash flow and profits;
*Valuation multiplies for cyclicals tend to rise at the same time as cash flow because buyers will pay a higher multiple when there is a cyclical upswing;
*Lending terms are better during an upswing, allowing a buyer/owner to recapitalize, taking more money and profits out with better cash flow and better lending terms;
*While perhaps harder to do when operations are improving, pruning costs can lead to higher cash flow and in turn valuations.

Sam Zell, the legendary commercial real estate investor, made his fortune buying properties in down markets that no one else wanted and selling when the market was hot with more buyers than sellers. In other words, BUY WHOLESALE and SELL RETAIL. One can really best accomplish this by being a contrarian savvy investor: buying before it is obvious.
The final reality is that as the golf market turns the corner and sales volumes begin to increase,

*BUYERS will see sales activity and jump in so as not to miss their chance to buy at or near the market low; and
*SELLERS will see sales activity and realize that with an active market, it is not wise to hold out for the very highest top dollar.

In December I had the good fortune to attend the Third Annual Barclays Capital Real Estate Conference, which was entitled Real Estate - The Year Ahead. Never once at the conference was the word "golf" mentioned as a real estate asset. Rather, the conference was dedicated to the 4 major groups of commercial real estate:

1. Office
2. Multifamily
3. Retail
4. Industrial

Despite golf's absence, there were many points made and issues discussed from the other commercial real estate asset classes that were very relevant to the business of golf course ownership and operation.

A New "Era of Less" in 2011

The best presentation was on research compiled by the Urban Land Institute and PriceWaterhouseCoopers on Emerging Trends in 2011 entitled an "Era of Less". For commercial real estate in this Era of Less expect and plan for:

* A Shrunken Industry
* Lower Return Expectations
* Lower Leverage/Reduced Credit Availability
* Fewer Development Prospects
* Crimped Cash Flow and Profits
* Less Reliance on Cars

There were two primary "More" observations:

* Commercial Lenders and Borrowers accelerate recognition of substantial losses
* Limping Assets face problematic workout and uncertain refinancing prospects.

The Good News

Fairly unnerving short-term pessimism.... BUT here is the Good News:

* We are at the bottom of the cycle. Performance and values should slowly start to edge up as economic demand (read "jobs") edges up.
* Ample Availability of Equity Capital, especially for specified properties versus unspecified pools
* More Buy - Sell transactions will be completed in 2011
* Trophy properties (versus "trash") will lead the way
* Interest rates stay low in 2011
* Gradually extreme negativity in the commercial real estate market will abate, leading debt markets to thaw in 2011 and lenders to step-up lending volume (but not leverage).

Other Observations from the Conference

* The best markets for commercial real estate growth are the "24-hour" "global gateway" coastal cities New York, Boston, Washington, DC, San Francisco and Seattle (not Los Angeles).
* The sector everyone loves the most is rental apartments (declining % of home ownership), versus for sale or bought product. This is analogous to public golf courses versus private clubs.
* Baby-Boomer Retirees won't have the lifestyle they expected
* Lock in financing if you can and the longer the better.
* On Hospitality, hotels will bounce back faster than other sectors, but with more volatility
* Office and retail are hurt by the internet (less space needed). Golf is helped.
* No new supply helps all existing types of commercial real estate
* There always are pockets of growth in slow growth markets
* Savvy investors buy before it is obvious.

Most of this is quite relevant to the golf business even if it all was generated by "non-golf" research.