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1997-04-15 Feasibility Study ~ '\ ~ . . Feasibility Study For Nine Hole Golf Course Albertville, Minnesota JEZJE'CTU'IrJIWIm ~1UMMAIR~ Prepared: April 15, 1997 Contillental Golf Corporation 3400 West 66th Street Suite 150 Edina, Minnesota 55435 (612) 929-3255 Fax: (612) 9294748 INTRODUCTION In March of 1997, the Pilot Land Development Company commissioned a feasibility study for a nine hole golf course to serve as a recreational amenity for a 200 to 250 unit housing development in Albertville, Minnesota. The following is a summary of that nine hole golf course study. In the northwestern quadrant of the MinneapolislSt. Paul metropolitan area, the primary market ar~ is defined by the cities of Albertville, St. Michael, Hanover, and Rogers. A secondary marke! area is comprised of the surrounding communities with the city of Monticello to the northwest, Elk River to the northeast, and cities comprising the metropolitan edge to the southwest. Among these cities include, Dayton, Corcoran, Champlin, and Maple Grove. The map below illustrates the nine hole golf course market area with the primary market circle shaded in gray. I I I SHERBURNE COUNTY . t North Monticello ~~~~ ANOKA COUNTY I 94 I I 694 WRIGHT COUNTY I 494 HENNEPIN COUNTY The site is readily accessible from Interstate Highway 94 from both the northwest and southeast, and from a variety of county roads from the east and west. Reasonable driving time and access is particularly important from the populated northwestern suburban areas of Hennepin County. The MinneapolislSt. Paul metropolitan area is one of the strongest golf markets in the country. Golf participation in the state of Minnesota is high, ranking first in the U.S. in terms of percentage of population playing golf. As of 1996, Over 22% of Minnesota's population plays golf. Additionally, participation by women golfers is significantly higher than the national trend. Minnesota is also in the top twenty states in rounds played per capita with a range of 3.3 to 3.7 annual rounds played per person. In general terms these facts coupled with expanding population growth in the northwestern quadrant of the MinneapolislSt. Paul metropolitan area are positive factors for golf course development. . 1 . SUMMARY OF MARKET POTENTIAL Population is being driven in this general area due to several reasons. Growing economic opportunity and good quality of living are key factors. Due to convenient access from Interstate Highway 94, Wright and Sherburne Counties and the towns of Rogers, Hanover, St. Michaels, and Albertville have become bedroom communities to the larger metropolitan Minneapolis area. This trend is forecast to continue as the metropolitan area increases in size, congestion, and other negative urban factors. The chart below summarizes the population tends of both the primary and secondary market areas through the year 2000. Growth 1990 Rate 5% 6% Growth 1995 Rate 2000 7,146 14% 8,289 85m 5% 89,645 92,523 6% 97,934 PRIMARY Market Population SECONDARY Market Population_ TOTAL Market Population 5,955 81,311 fIT ,266 17% Source: General Population Characteristics, u.s. Bureau 01 Census 1990 The market area is characterized by better than 35% of its population under the age of 18 years. Age data ava;lable for the cities of Albertville and St. Michael indicate an even greater distribution of population in the under 18 age bracket with just over 40% of these city's population under age 18. Golf participation in this age group is the lowest of all groups. In addition, the area is somewhat under supplied with players age 45 and above. These players in the older age brackets are a particularly important source of rounds for a nine hole golf course. A nine hole facility in this location will need to focus on reaching both younger and older players through programmatic means in order to achieve adequate volume in its first several years of operation. In the additional demographic categories of household income, occupation, and educational attainment, favorable factors exist within the market area to suggest a strong supply of golfers and golf rounds. Household incomes in the area are predominantly in the middle income range between $25,000 and $75,000 annually. A good 75% of golf rounds are played by individuals within this income range. Better than 57% of the area's occupations fall in the ProfessionaVManagement or the TechnicaVSales groups. These two groups lead the way in golf participation both nationally and regionally. Educational attainment in the overall market area is also good. Individuals with higher educational attainment tend to be more likely to participate in the game. Overall, the population of the primary market area is not large enough to comfortably support a nine hole golf course in the short term. While healthy growth in the population of both Albertville and St. Michaels has occurred the past five years and 16% growth is forecast to continue through the turn of the century, the resulting increase will only provide an additional 1 ,150 people within these communities in the next five years. The golf course will need to attract players from the larger secondary market of approximately 90,000 people in order to achieve success in both the short and long term. However, the likelihood of a nine hole golf course capturing either the regular or occasional round from a distance greater than 20 minutes is limited. The fugitive round of the experience seeking golfer from a distance greater than 45 minutes will not be a factor. Adequate population is available to provide for only one reliable source of players: the core area player traveling 5 to 20 minutes. The regular/occasional player traveling 20 to 45 minutes will account for a very limited number of players. From a supply perspective, the Midwest region of the country is particularly strong in golf course supply. Golf facility development in Minnesota has consistently grown on an annual basis over the past decade. 21 golf courses came on line in 1995 and 19 golf courses in 1996 for a two year total of 40 new golf courses. This growth of supply can be largely attributed to a general confidence in the growth of the game as a business. . 2 . Statewide in Minnesota, over 87% of all Minnesota golf courses are open to public play. Additionally, Minnesota ranks tenth in the nation in population per public eighteen holes. Availability of land, government involvement in public course development, and stable economies are all factors that have contributed to an excellent supply of accessible public golf facilities. Strong participation and supply factors have served to increase player's desire for a quality eighteen hole golf course experience. Currently development in Minnesota is focused to capitalize on that trend. Eighteen hole course development is occurring on the edge of the metropolitan area due to land availability and favorable demographic patterns. The northwest quadrant of the MinneapolislSt. Paul metropolitan area has an adequate supply of golf courses. Golf Accessibility Rates for the market area range from 34,866 people per public eighteen holes in Hennepin County to 12,272 people per public eighteen holes in Sherburne County. The current national average of population per public eighteen holes is 37,715. 1995 Population per Public Population 18 Holes Primary Market 7,146 7,146 Anoka County 275,314 23,940 Hennepin County 1,063,404 ;,4,866 Sherburne County 55,226 12,272 Wright County 80,702 16,140 Within the primary market area there is one eighteen hole golf course. Fox Hollow is a medium- priced facility located outside of Rogers, Minnesota. It generated a total of 39,500 rounds in 1996 and is achieving a $25 weekday green fee and a $30 weekend green fee. There is one private golf facility in the market area. Rolling Green Country Club, located in Hamel, is an eighteen hole mid-level private club. The following chart summarizes the inventory of golf courses effecting the market area: Prim8ry Secondary Overlap Total 18 Hole Public 1 9 3 13 9 Hole Public 0 1 5 6 Total Public Facilities 1 10 8 19 Three additional eighteen hole facilities and five additional nine hole facilities located within the northwest metropolitan area are included in the inventory as they overlap the secondary market. Overall, the distribution of public facilities is dominated by eighteen hole courses. Eighteen hole courses comprise 68% of the courses in the overall market area. The northwestern quadrant of the Minneapolis/St. Paul metropolitan area is characterized by very strong public golf course access. The golf courses in both Sherburne and Wright counties are dependent on golfers traveling 20 minutes or better from the metropolitan area. Again, it is not likely that a nine hole golf course will draw the destination golfer from a range of greater than twenty minutes in large enough quantities to make for a consistent source of rounds and revenue. Based on the overall analysis of both demand and supply, there is limited opportunity in the market for a quality public nine hole golf course experience. Even as part of a 200 to 250 unit housing development, the golf course would need to be of comparable quality to area eighteen hole golf courses in factors such as length, challenge, conditioning, aesthetics, and overall playability in order to attract significant destination play. . 3 . SUMMARY OF GOLF COURSE DEVELOPMENT The overall mission of any golf course project is to create a golf course that is playable, practical to maintain and manage, and is physically beautiful. Providing enjoyment to the greatest number of players possible regardless of their abilities should be a central goal. Additionally, the project has to be constructed economically in order to survive as a business. First and foremost, it must succeed as a business. Acreage for the golf course will need to be in the range of 75 to 100 acres. Ample acreage must be set aside in order to create holes that are pleasing for the golfer to play. In addition, the golf course route must not impinge of the housing component of the project. Safety and ball flight problems are factors that are not easily cured once the project is completed. Afurther consideration is the potential annoyance that maintenance routines may have on homeowners in close proximity to the golf holes. - The developer must take care in assembling an experienced team in order to insure a quality construction process. Key members of that team will include a golf course architect, construction foreman, and the golf course superintendent. A structured selection process must be followed in order to secure the best individuals for the project. Additional members of the team may include an environmental engineer, hydrogeologist, civil engineer, and wetlands consultant. Typically from planning to completion the development of a golf course is a three year process. A slightly aggressive timeframe of golf course construction is as follows: · 1997 - Organization, Financing, Permitting, Initial Design, Final Design · 1998 - Drawings & Specs, Contractor Bids, Mobilization, Begin Construction · 1999 - Construction, Establishment, Maturation, Business Start-up, Open for Play The chart below illustrates the probable costs of developing a nine hole golf course that is of suitable profile to a quality housing development. The cost projection does not include the cost of land acquisition or the cost of financing. Summary of Project Cost Permitting Organization Costs Architect Golf Course Construction & Establishment Maintenance Facility & Equipment Clubhouse, Landscaping, & Parking Lot Start-up Costs Financing/Development Costs Contingency/Bonding 30,000 5,000 50,000 1,100,000 340,000 220,000 105,000 o 90,000 1,940,000 Total to to to to to to to to to to 40,000 20,000 100,000 1,300,000 400,000 250,000 125,000 100,000 125,000 2,460,000 Key development costs can often be overlooked or under estimated in the initial planning stages. Categories often missed include budget for grow-in labor and supplies, golf course fixturing, maintenance building, maintenance equipment, clubhouse fixturing, landscaping, and start-up costs such as pre- opening marketing and inventories. While golf courses can be built for more or less, the above summary represents a reasonable and inclusive cost estimation in order to produce a quality golf experience that will match with the housing development and draw the volume of players necessary for business success. . 4 . SUMMARY OF OPERATING RESULTS The 9 hole green fee in the year 2000 will be $14. Rates for seniors and junior players will offered at 10% off the regular green fee. Family patron cards will be sold offering reservation benefits and 20% off the regular green fee. In terms of volume, based on conservative projections in population growth and market share, the volume forecast projects total rounds in the first full year of operation at 16,000 rounds. As the facility would mature and establish additional market share, rounds would conservatively increase until a stabilization point of 24,500 rounds is reached in year six. Tee time utilization at that point would be 45% which is in a standard range for comparable nine hole golf courses. Revenue would be generated from two main sources: direct revenue from the golf course (green fees and golf cart fees) and revenue from ancillary services (food & beverage sales, driving range, and golf shop merchandise sales). Projected operating margins range from a negative 63% in the abbreviated first season of operation to a stabilized operating margin of 28% in year six of operation. National Golf Foundation studies show the average operating margin for a nine hole course is 23%. As in the development of the golf course, an experienced operational management team is critical. A qualified golf course superintendent is essential in order to produce a well-maintained golf course. An experienced golf professional is needed in order to organize customer service for the facility's golfers. Proper selection of these two positions will insure a properly developed golf product as well as the proper control of expenses. The chart below summarizes operating results for the first five year period of operations. Debt service and property taxes are not contemplated in this example. 1999* 2000 2001 2002 2003 Rounds 3,675 16,000 18,300 19,850 22,575 Operating Margin (63%) (1%) 9% 15% 23% Net Operating Income (69,000) (8,000) 28,000 55,000 109,000 Debt Service 0 0 0 0 0 Income (Loss) (69,000) (8,000) 28,000 55,000 109,000 Cumulative Income (69,000) (77,000) (49,000) 6,000 115,000 . 1999 projections based on September 1, 1999 opening dale The stabilization timeframe for a new nine hole golf course is five to six years. At stabilization point the facility will be generating a net operating income of $150,000 with a 27% operating margin. The value of the golf course as a business at that point would between $1,200,000 and $1 ,500,000. Financing structures for most new golf course projects are generally heavily financed with equity debt. Traditional lending institutions are usually inexperienced when it comes to financing golf course projects and may tend to shy away from involvement. To be interested they will generally require at least 50% to 60% of the project cost in equity by the owner. Full value of land is not generally credited to the equity amount. Equity on golf course projects is often organized into limited partnerships or limited liability entities. . Due to limited cash flow in its first four to five years of operation, this project will not attract the interest of lending institutions. The project must be financed either by equity funds held by the developer or by cash flows generated by the housing development. . 5 . CONCLUSIONS 1 . Nine hole golf courses draw the majority of their customers from their immediate market area. The population of the local primary market is not large enough to supply an adequate amount of golfers in the short term. Population and numbers of available golfers will grow in the long term, but in order to attract golfers from greater than twenty minutes away in the first crucial years of operation, a nine hole golf course of attractive quality will need to be developed. 2. The operation of the golf course will not generate sufficient cash flow to finance its construction. The developer must be prepared to subsidize development costs and short term losses through alternative means. 3. The developer must remember that the golf business is a serious and specialized business. Accordingly, experienced golf course professionals must be retained to develop the facility and manage its operations. 4. Primarily, the development company must weigh the golf course as an amenity that would propel sales in its more profitable housing business. If a golf course is constructed, an adequate investment must be made in order to properly compliment the quality of the planned housing portion of the development. . 6 .