This article will not be for every reader, but it does address one of the critical issues facing community oriented and even freestanding clubs today; how to deal with equity refund. I call it the developer legacy not because I want to pick a fight with developers, but because it’s an accurate description of how many clubs today are faced with a dilemma.
Let’s start at the beginning. Why did equity become such an issue? Many reasons, but most prevalent was the developer’s need to sell dirt using the country club amenity as an accelerator to the lot absorption process. By offering equity the developer removed the obstacle of membership cost, with incoming buyers envisioning a considerable portion of the membership investment as equity or even as an appreciable asset. In fairness, this was also a way in which the developer could fund the club assets without substantially increasing the cost of the dirt.
Over time, in many cases as the club was turned over or purchased by the membership an interesting phenomenon occurred. If the members purchased the club, their own equity, which likely paid for the asset development initially was not credited. In addition, they also absorbed that same initial equity refund process as a long-term liability in the process. Again, in fairness, as a sales tool for real estate, it was a brilliant plan. But what happens twenty years down the road?
As different law firms began writing the membership documentation for emerging developer clubs, a great deal of latitude naturally was granted to the developer to ensure stability of the operational entity. However, the differences in the way documentation was written had differing consequences for the members down the road. An example is the club that guaranteed eighty percent refundability of the initial entry fee upon resignation. Sounds great to the buyer, but what happened when market conditions changed in 2008 and initiation fees began to drop around the country. Fundamentally, this clause handcuffed many clubs from reacting to the market conditions as lowering entry fees, in many cases, would have meant going negative on money collected versus refunds to exiting members.
Conversely, some membership documents reflected that the equity refund would be predicated upon the “then existing” fee being charged by the club. That simple differentiation has spelled the difference between successfully navigating a changing market versus being handcuffed.
Another significant clause in equity relationships is the ratio of new treasury members joining until a resigning member will be refunded. In most cases that I have seen the ratio was four to one with the exiting member required to pay dues until they are replaced. In the boom times of the 90’s this seemed very reasonable, and again in support of the developer, no one could have seen how overbuilding and the crash of 2008 would affect membership growth and retention.
While these challenges have not affected all clubs, the overbuilding and market fall in 2008 did affect all clubs. With it came expense belt tightening and in many cases, reducing current entry fees, further exacerbating the plight of the equity refund club that promised a percentage of the initial entry fee paid. In a market where competition was brisk, clubs with handcuffs had a significantly greater challenge to survive.
Bridge Versus Long Range Strategy
For some clubs, there was the question of will the market come roaring back, will real estate prices be restored, and will second home buying resume a higher-level pace. Some of these optimistic souls chose a bridge strategy until better times rolled back. Some of the initiatives included lowering entry fees to the refundable amounts owed those exiting resulting in zero capital formation. Others allowed members to “lease” their membership until their name was first on the sell list. However, even as these tactics were employed the list of those wishing to exit and still paying dues until their membership sold, was increasing.
In other cases to offset the increasing size of the sale list clubs lowered the ratio of treasury membership sales to exiting membership sales, others with flexibility in the amount of refunds, cut pricing, but in most cases, even price cutting was not overly effective in reducing the “sell list”. There is a long list of very prominent clubs that tried these strategies and tactics to little avail.
Market-Based Equity Refund Solutions
While there have been many incredibly creative tactics employed to resolve the sale list and equity refund issue, here are some of my favorites that lean more toward a long-range strategy.
- If By-Laws are prohibitive to your club remaining market competitive, go for the vote to make the change. There is not likely a single member in any club in the country that has not heard the horror stories of clubs in trouble because of equity refund restrictions. This is a tough process of education and polling, but it is the safest in the long-term. Be sure and give flexibility in the process so that you don’t need to go back for a vote again.
- Once you’ve cleared the way to do so, create a dollar amount that the club needs to have as a transfer fee, then let members set a price on what they want for their membership, with the least priced membership selling first, chronologically to the highest amount. Allow members to change this amount monthly.
- If not already allowed, let the member transfer the membership with the sale of the home.
- As members age, to decrease attrition and reduce liability, begin to offer some amount of discount to monthly dues, by reducing their equity accordingly.
In all cases, the strategic response for equity related clubs should be to determine the liability of equity, begin to reduce the amount of equity refund offered and secure capitalization through a fair and equitable relationship of providing a relevant and vibrant club setting for a reasonable fee. Believe me, it works.