Commercial Loans and Fun Blog

Commercial Loans, Golf Courses, and Cap Rates

Posted by George Blackburne on Mon, Aug 2, 2021

Screen Shot 2021-08-01 at 6.18.20 PMThis is a fascinating story of how using a cap rate allowed us to value and sell a foreclosed golf course, and it helped my private investors avoid a loss and actually make a profit.

There are three methods of valuing income property - the cost approach, the sales comparison approach, and the income capitalization approach.  When the appraiser has arrived at a value using each approach, he then has to reconcile these three valuations to arrive at his final conclusion.


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It is important to note that the appraiser must not just average the three results.  Instead, the appraiser should choose the most reliable approach to value and then temper that conclusion with the results of the two other approaches.

Now when valuing a fairly standard property type, like an apartment building, appraisers tend to rely the most heavily on the sales comparison approach.  For how much have other apartment buildings in the area sold?

Since there are bazillions of apartment buildings, the valuation process is generally straight forward.  How much did nearby apartment buildings sell for per door?  (Fancy CREF way of saying "per unit.")  What was their gross rent multiplier?


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The cost approach is the valuation method least often used, mainly because it is too much work for appraiser.  Too often the appraiser just weenies out of using the cost approach, citing the bull stuff excuse that it is too difficult to "estimate depreciation."  

But now the tale gets juicy... and dark.

About four years ago, Blackburne & Sons made a $2.75 million loan on a gorgeous golf course in an affluent suburb of Chicago, a golf course course with a replacement cost of $13.2 million (according to the county).  Unfortunately the borrowers defaulted, and we foreclosed.


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At first, the real estate brokers were telling us that our golf course was almost worthless.  Several thousand golf courses had already come back in foreclosure nationwide over the past decade, as Tiger Woods self-destructed and the sport waned in popularity. 

"This golf course sold for just $2 million," the real estate brokers would tell us  "This other one sold for only $1.5 million - about the value of Midwest farmland."

But wait a moment, we reasoned.  Those golf courses were all losing money.  They had lost money for a decade.  Our golf course was actually profitable.  (Our borrower had simply been over-leveraged.)

Those foreclosed golf courses were also located in inconvenient, middle-income areas.  The folks living in the surrounding neighborhoods of those foreclosed golf courses were mostly blue-collar folks who didn't make nearly enough money to join a golf club.


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Far more importantly, however, the "sales comps" were all sales where the seller had a gun to his head.  Think back to the movie, The Godfather.  That movie producer did NOT want to to cast Jonny Fontaine (Frank Sinatra) in his movie... until he woke up to find the head of his beloved horse under the sheets of his bed.

Folks, you cannot use as a sales comparable a sale where the seller was just 48 hours from foreclosure.  Part of the definition of fair market value is the proviso that ... "neither the buyer nor the seller was under undue pressure." 

Okay, so we can't use foreclosure sales, REO sales, and sales on the cusp of foreclosure as sales comparable's.  These sellers were all under undue pressure.


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But what do we do when very few profitable golf courses have sold in the preceding three years?  There were simply no un-pressured sales to use as comp's.

This is when I personally stepped in and started marketing the golf course based on the income approach.  "Buy this Course and Earn a Whopping 9.75% Cap Rate!"  You will recall that a cap rate is just the return on his money that a buyer would earn if he paid all cash for an income property (allowing for about 3% of Effective Gross Income to replace the roof and the HVAC units as they got tired).

Holy moly!  The course sold for $3.2 million within just 10 days of marketing. Prior to that, our idiot real estate broker was telling us that we had to sell this trophy golf course for just $1.6 million.  The real estate broker was a moron to rely entirely on the sales comparison approach to value.


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I personally hope the deal falls through because the net profit to our golf club just keeps skyrocketing.  If we had waited just six more months, I am convinced that we could have sold the course for $4.8 million.

The lesson to be learned today is that the sales comparison approach is NOT the only way to value real estate.  People buy income properties for the income they generate.

By the way, I begged the buyer to allow me to buy part of the course based on that paltry $3.2 million purchase price.  I suspect that he laughed at me.  Clever boy.


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Topics: Cap Rates, golf courses, commercial loans

Commercial Loans on Golf Courses

Posted by George Blackburne on Tue, Jun 11, 2019

Golf courseAt the end of this training article, I will tell you where to find lenders making commercial loans on golf courses; but first we all need a reality check.

Golf courses across the nation are seriously overbuilt, and most of them are losing money.  About nineteen years ago, when Tiger Woods was at his zenith, golf soared in popularity.  Golf course developers went crazy building new courses.


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But when his beautiful ex-wife knocked out most of his front tooth out with that hurled cell phone (after bashing in his car with a golf club), and after Tiger's play started to crumble, the popularity of golf started to wane.  It has never recovered.

Young people simply don't have the time to take up golf.  Eighteen holes take too long to play.  There are even some calls to reduce the number of holes from 18 to 12 in order to reduce the time it takes to play a round.

I was shocked today to learn that the number of regular golfers fell from 30 million to just 20.9 million between 2002 and 2016.


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Holy moley.  Not surprisingly, revenue to the public and semi-private courses has plummeted proportionately.  Private courses are having tremendous problems retaining enough members to keep their courses open.  

A private, member-only golf course in my former home town of Plymouth, Indiana failed.  A dozen former members were able to buy the foreclosed golf course back from the bank for just $525,000.  The bank's first mortgage had been $1.7 million, and the cost to replace the course had to exceed $4 million.  Hundreds of acres and a gorgeous club house - all for just $525,000.  Amazing.  The bank certainly didn't want it.

As a result of the whopping 30% decline in play, golf courses are failing in droves across the country.  The industry has lost about 1,000 courses in the past seven years, and the pace of golf course failure is starting to increase as the owners finally run out of reserves and get tired of feeding the alligator.  An alligator is a negative cash flow on real estate.


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Bottom line:  Golf courses everywhere are losing tons of money, and commercial lenders know it.  There is very little appetite to make commercial loans on golf courses today.

Nevertheless, if you simply must have a new commercial loan on a golf course, you might try an SBA lender.   Golf courses are eligible for SBA loans.

The problem, however, is that the SBA does not guarantee the entire balance on any SBA loan; so the bank making the new SBA loan will have a significant amount of its own dough at risk.  You are going to have a lot of trouble finding any banks or SBA lenders willing to make commercial loans on golf courses.


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What about credit unions?  Credit unions are unusually flush with money, and they will make any commercial real estate loan these days that makes sense.  If your borrower is buying a struggling golf course at a huge discount - like the one in Plymouth (see above) - and your buyer is clean, strong, and experienced, you might have a chance.

On the other hand, if your golf course owner is bleeding cash like a stuck pig (like most golf course owners today), good luck.  A bailout loan is unlikely to happen.

What about a hard money lender?  Maybe.  But a hard money lender will only make a commercial loan of a golf course these days once.  After taking their inevitable huge loss, the hard money lender is unlikely to make the same mistake a second time.


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That's the bad news.  The good news?   There are billions and billions of new hard money lenders, each (unknowingly) anxious to make a mistake by making a new commercial loan on a beautiful golf course.  You will find hundreds of credit unions and hard money lenders on and

So are all golf course owners doomed?  Maybe not.  As more golf courses close, play at the remaining golf courses increases.  My favorite golf club in Plymouth, Indiana has picked up a significant number of new members this year because three surrounding courses have failed.

It's a game of survival.  If a golf club can financially hold on, while all of the competing golf courses surrounding it close down, the club may be able to pick up enough golfers to finally make a profit.  Remember, even though the number of golfers nationwide has plummeted by a whopping 30%, there are still 20.9 million golfers in the U.S.  As the song by Wilson Phillips goes, they just have to "Hold On" for one more day.


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Topics: golf courses