When capital improvements are needed

When capital improvements are needed

Larry Hirsh describes the correlation between the condition of an irrigation system and a golf course’s value.

January 29, 2018

Among the challenges we encounter with golf property valuation is the determination of when various capital projects are necessary and impart a significant impact on value.

During the past few months, we’ve been asked to provide appraisal services on several properties with dated irrigation systems and other components like cart paths, bunker drainage and even greens. The question always comes up about whether these systems require replacement or simply repairs, and when a buyer would presume that replacement were necessary, whether some repairs are necessary or whether the new buyer assumes he or she will be able to “get by” with the equipment as-is. When the client is seeking a low value, like in a tax assessment appeal or they’re buying, they often tell us the system needs to be replaced. When they want a higher value, like when they’re selling or refinancing, they tell us the system is “functional” and has lots of years left.

After encountering this so often of late and knowing that many clubs have found it difficult in the sagging golf economy to make improvements, I decided to explore this question which appraisers don’t always handle as effectively as we’d like. Let’s talk about irrigation systems.

Often, when we visit a property, we ask about the condition and functionality of the irrigation system.  Since the irrigation system of any golf course serves as its heart and circulatory system, I decided to learn more about them. Thanks to my friend Larry Rodgers of Larry Rodgers Irrigation Design, I took a quick crash course in irrigation systems. What did I learn?

Rodgers estimates the cost of a typical, high-quality system between $2 million and $3 million. Some can go higher and he cited one system on a challenging site with very precise coverage at $6 million. Like anything, corners can be cut and some courses install new systems for as little as around $1 million.

Any golf course irrigation system is made up of three distinct elements.  These are:

The infrastructure is like the circulatory systems and consists of the water source, pipes, wiring and other non-moving parts of the system. These typically have a life of 25 to 50 years and represent about half the cost of installing a new irrigation system on a golf course.

The mechanical elements are those items with moving parts, such as pumps, irrigation heads, valves, rotors and filters. These typically have a life of 15 to 25 years and represent about 25 percent of the cost of a complete irrigation system.

The electronic elements consist of the computers, software, central and field control systems. These have the shortest life in the system at seven to 12 years, for among other reasons the advancement in computer technology. The electronics typically account for the remaining 25 percent of the cost of the system.  

According to Rodgers, typically half of the cost of each element is labor and is often reduced by those courses with the manpower and know-how to do the work in-house, as much as two-thirds.

So, how do we determine what is actually necessary and how a buyer would evaluate the property, considering its irrigation system?
--It’s important to break down the system into the three major components as listed above. With different life cycles, one part of the system may be perfectly adequate while another may require replacement or significant repair. In some cases, it may just be minor repairs that are needed.
--Examine the age of each component and not just the entire system. In most cases, various components will have different ages.
--Consider whether projects/repairs can and would be done “in-house” representing “sweat equity” that would reduce the financial impact to the club.
--Observe the condition of the golf course. Is it too wet? Is it too wet in some places and too dry in others? Are there “donuts?”
--Examine the course’s maintenance program and how much water its uses.
--Consider how the irrigation system is evaluated.
--Consider what, if any, savings will occur as a result of a new and modern irrigation system.

While it is highly unlikely that a new irrigation system can ever pay for itself, just like your heart, the golf course can’t live without it. Thus, calculating a financial return on investment is difficult at best.  Accordingly, most courses do the minimum necessary. In many cases, it’s an issue of expectation as to when the system will need to be replaced in the near future. In a “buyer’s market” like we have today, an outdated and aging irrigation system can spell a significant decline in purchase price. 

It’s also important to understand the expectations of the patrons of a specific course. If they (like many private clubs) expect tournament conditions on a regular basis (and are willing to pay for it), replacements may occur more frequently. Conversely, if the daily-fee or municipal course in a more price-competitive market where players aren’t as demanding decides simply not to invest, or to make minimal repairs, the clientele is more likely to be accepting of that.  It’s the appraiser’s job to consider all these factors, think about when potential costs would be incurred and integrate those conclusions into the cash flow analysis.

While the irrigation system is the most complex of these challenges, this can also occur with golf cart paths, where tree roots, potholes and worse occur, and bunkers, which experience washout and drainage problems making them dysfunctional. Greens, especially in the southern regions of the United States, also wear out and require regrassing and sometimes rebuilding when they become dysfunctional causing drainage issues, turf diseases and resulting in poor surfaces that golfers complain about.

These issues are often taken for granted by golfers until they show up in poor playing surfaces. Then, a club can lose its members or golfers and after that it may be too late. To determine the impact of these conditions on value is to understand how the potential purchaser of the course will evaluate them. If something has to be replaced immediately, it’s likely a dollar for dollar deduction. If it can be deferred, the cost can be discounted and a sinking fund established to cover the cost when due. The superintendent always wants a new irrigation system. The owner wants to defer. When is it truly needed? How does it impact value?  In a “buyer’s market,” the buyer determines that.

Larry Hirsh, CRE, MAI, SGA, is the president of Golf Property Analysts in Conshohocken, Pa.