Ray Tate doesn’t seem alarmed.
He is cruising the grounds of the Federal Club, an upscale golf course he and two friends built for $9 million on 625 acres in rural Hanover County. The club has lost money since it opened three years ago. Home lot sales and new memberships froze about a year ago, when the economy tanked. The club is losing about $50,000 a month and owes more than $16 million.
But Tate doesn’t bristle when asked about the Chapter 11 bankruptcy proceeding.
“You gotta walk up to the tee box and feel how soft that bent grass is,” he says after parking the golf cart near a par five.
“Golfers say it’s one of the best places they’ve ever played.”
Bentgrass is a favorite of golf nuts, but it doesn’t grow easily in Virginia, and it requires substantial upkeep.
“See how each hole is by itself?” Tate says. “We designed this as a golf course first and then sold a few homes, not the other way around.”
Tate motors past the driving range and points out where the new clubhouse will go. Then he circles back to the main area, where the course headquarters is temporarily set up in an old red barn.
Tate, a former University of Richmond football coach, needs the right play to fix the struggling business. The Bank of Essex is owed about $7.8 million, and suppliers may stop outfitting the club with needed equipment if they do not think they will get paid.
Golf courses don’t often pull out of bankruptcy protection. Five hundred courses (both public and private) have closed across the country in the past three years. And Virginia has too many manicured fairways for the current demand. A course in Williamsburg is to be sold at auction today. A Jack Nicklaus course is stalled in the Magnolia Green subdivision in Chesterfield; the developer foreclosed on that project.
Nor are the Federal Club’s problems rare in Richmond. Other private courses, such as the Richmond Country Club, have cut staff, according to industry insiders. Courses all over the area, including the Independence Club, are behind on bills, according to suppliers. Even at upscale Kinloch, members are trying to get out, according to several sources familiar with the course.
Tate and his partner, Richard Laibstain, are trying to come from behind without their best player: their good friend Tommy Pollard, who dreamed up the idea and owned much of the land. Pollard started the Hollows, a public golf club in Hanover. He passed away in 2006.
One idea that has emerged to save the club is to open it to the public, but that could drive away the very members for whom the course was designed. Nevertheless, Tate said he is going to discuss that possibility with his advisory board next week. Another challenge is finding ways to save precious cash. Trying to cut expenses by lowering maintenance costs could quickly let crab grass start to grow. That would upset the golfers and possibly alienate future members.
So you can see that Tate and Laibstain are in a pinch.
“The course is much more likely to convert to public than to close completely,” said Jim Kass, a researcher at the National Golf Foundation.
From 1999 to 2008, 387 private golf clubs across the country converted themselves to public courses, according to the National Golf Foundation.
“Sometimes courses will convert back to private when they can,” Kass said. “They’ll be open for three or four years and then take it back private.”
Some big numbers
In addition to the $7.8 million it owes the bank, the course owes unsecured creditors more than $7 million. The unsecured creditors include local firms such as B.J. Tolley ($200,000), the architecture firm DePasquale Gentilhomme ($30,000), the chemical company Tom Rash Company ($210,000) and Stanley Construction (about $2 million), which is also an investor in the project. Some of them haven’t been paid for work performed six years ago.
The business also owes $500,000 to the federal government for withholding taxes and $619,000 to the Arnold Palmer Design Company for laying out the course.
Chapter 11 gives the club temporary protection from those creditors. But without more cash coming in, it’s unclear how long the club can even maintain the course. The bankruptcy court trustee will want to see some sign that the company can pay the creditors or at least not get further in the hole.
Maintenance costs for an upscale bent grass course are $1.5 million to $2 million a year, according to the National Golf Foundation.
Laibstain said in a bankruptcy hearing that on average the course is losing $50,000 a month, more during the summer and less in the winter.
With 138 members paying monthly dues of $350, a ballpark figure for monthly revenue would be about $48,300. That doesn’t count merchandise, cart fees and special events, and it doesn’t include the $35,000 initiation fee equity members pay, but it paints a general picture.
Expenses have been shaved as much as possible, Laibstain said in a bankruptcy hearing, including cutting back the number of laborers for the winter from 10 to four. The course will not be doing drainage work this winter.
The Federal Club was a sound business concept when proposed 10 years ago. Golf was gaining in popularity as Tiger Woods burst on the scene. And for the first year business was booming. So many builders wanted to buy lots that the Federal Club had a lottery to see who could build.
The first few lots went at the drop of a hat, Tate said.
“We had four builders at the beginning, and when we opened a section we’d draw lots by lottery and the builders bought them three at a time. That was when I thought I was smart.”
The Federal Club is trying to change its plan. It waived the $35,000 initiation fee for members who want to join for a year to test out the club. The course has also traded with the radio and TV stations for advertising. TV spots started airing on the local NBC affiliate last week, Tate said.
The club recently hosted a Christmas event to draw people in and show them the grounds.
“We want this to be a family place, sort of like Kinloch with that quality of golf but also for families,” Tate said, looking out to the pool.
The Federal Club has also started an advisory board made up of a handful of members.
And they’ve hired a sales person to help line up more corporate events, where an organization rents the course for an outing. That can bring in upward of $70,000 a pop.
But to keep things going, the club needs more money.
Tate and Laibstain, along with their lawyer Doug Scott and even Essex Bank, have been searching for at least a year for a new investor.
In 2008, the Federal Club hired Golf Advisors Inc. to find suitable investors, but that firm has come up dry, Laibstain said in a bankruptcy hearing.
“Some are interested, and some aren’t, but they don’t tell you why,” Tate said.
Representatives from Bank of Essex declined to comment for this story, but their patience with the Federal Club might be due in part to their reluctance to write down the loan as a loss. Banks across the country have taken back courses and sold them at steep losses.
Several bank experts said that Bank of Essex will face pressure from regulators to write down the loan and clear it from the books. That could mean taking back the property. In that case, it would likely be sold for a small percentage of what it cost to build: likely between 30 and 50 percent. Several years ago, a course in New Kent County was sold for about half of what it cost to build.
Scott, the lawyer representing the Federal Club who runs a firm that bears his name, said that the bank is calling the shots.
“They’re in a powerful position to be able to come into court and move to lift the stay and foreclose,” Scott said. “I don’t think it’s in their interest, and they may not think it’s in their interest.”
Scott speculated that the bank probably doesn’t want to go through the “rigmarole of having to foreclose,” but that could change at any minute.
As for the remaining 27 home lots, the club has approached builders willing to buy the entire block and put in infrastructure like roads. But that might not be enough to bring the club to profitability soon enough.
One creditor who spoke on condition of anonymity because he did not want to jeopardize future work in the homebuilding/development industry, said that the Federal Club should have been moving aggressively at least a year or two ago and should without a doubt open to public play tomorrow.
“How can they be in a position to turn down business?” he said.
When Tate is asked about the ordeal, he’s pragmatic: “I don’t regret it at all,” he said. “I had no idea it’d be this hard, but nobody knew the economy was going to go into the tank like it did. If I had known that, I’d have been a genius.”
Aaron Kremer is the BizSense editor. He covers the business of sports for BizSense. Please send news tips to Editor@richmondbizsense.com.