Why Membership Dues, Initiation Fees, & Capital Fees are KEY to any Long-Term Capital Plan
Editor's Note: Today's blog post is brought to you by RCS Strategic Alliance Partners and founders of Club Board Professionals, David Duval and Joseph Abely.
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"Long Term Capital Planning: The Roadmap to Financial Sustainability".
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We are strong proponents that private clubs should have a 5-10 year long-term capital plan.
A long-term capital plan should reflect all future anticipated capital expenditures – whether they be preservation, modernization, and/or reinvention - and how these efforts will be funded over time. Ideally, these investments are systematically funded through a combination of operating surpluses, initiation fees, capital fees and assessments, and sometimes with the prudent use of debt.
In addition to normal replacement and modernization of assets, those capital projects prioritized in a strategic plan to help reinvent a private club, improve membership satisfaction, and attract new members should be an integral part of a private club’s long-term capital plan.
Many clubs are choosing to invest in the addition of sleek fitness centers and group exercise classes to better capture the younger members.
Membership dues are the engine that funds the operations of a private club.
As a percentage of a private club’s operating revenues (which includes dues, food & beverage, sports and other amenity charges), membership dues represent approximately 50% of the total for the median of clubs surveyed by Club Benchmarking, Inc. (this percentage may be less for a private club without golf). The incremental value of an additional dollar of membership dues is more impactful than an incremental dollar of F&B revenue because, unlike F&B where there are food, beverage, labor and other costs that need to be covered, membership dues have no underlying costs.
A private club’s operating revenues must cover operating expenses. If there is a surplus of operating revenues to operating expenses, we recommend that such an amount be transferred to a club’s capital account. For clubs that generate a deficit, short of assessing the membership, a deficit is by default funded through a reduction in funds available for capital expenditures.
As the capital expenditure needs of a private club are substantial, use of capital funds to subsidize operating losses often leads to deferred maintenance. The unintended consequence of deferred maintenance is the possibility of the deterioration of the club’s facilities and other member facing amenities, leading to member dissatisfaction and both the loss of current members and difficulty in recruiting new members.
There is a temptation on the part of private club Boards not to raise membership dues. The reasons are varied, including:
A perception - valid or not - that the level of service and/or amenities do not justify an increase, especially where members vote on membership dues increases;
A temptation to reduce dues believing, usually incorrectly, it will attract new members or retain existing ones indefinitely;
Attempts to compete on price, rather than a strong value proposition, with other private clubs in the marketplace.
Unfortunately, the operating costs of private clubs generally increase in a 3%-5% range each year and short of reducing operating expenses (which again can adversely impact member facing amenities leading to dissatisfaction), dues need to be adjusted to achieve breakeven (before depreciation) or better levels.
Initiation Fees and Capital Fees
Initiation fees, along with capital fees, special assessments and/or debt, are the fuel for facility updates, improvements, and expansions.
The ability to adequately fund capital expenditures is hampered when sufficient initiation fee revenue is not generated. Many private clubs facing declining membership opt to decrease or eliminate initiation fees in an attempt to draw more members. Most of those clubs subsequently find it difficult to then increase the initiation fees to previous levels and, short of substantial increases in membership dues or special assessments, are forced to defer capital updates, improvements, and expansion. For many, that begins a downward spiral of membership dissatisfaction, facilities decline, and too much reliance on golf to attract new members. (Check out a recent RCS article, "Golf is Not Enough: Amenities That Move Prospects".)
Many well run private clubs charge members a capital fee in addition to their membership dues. The capital fee is segregated into a club’s capital account and is designated specifically to fund the club’s capital expenditures. Capital fee revenues that in the aggregate equal a club’s depreciation expense can help ensure that a club has a sufficient funding to replace worn assets on a timely basis and keep the facilities fresh. Many clubs also charge enough to allow the build-up of reserves to cover future modernization projects including improvements to the dining facilities, golf course, pool and tennis. These fees can run $1200-$2,400 per annum per full member and can be payable monthly, quarterly, or annually.
Well planned, the flow of initiation and capital fees will help insure that a private club funds the majority of its capital needs. When a private club has significant replacement projects (such as an irrigation system) or aspirational projects such as a new or significant upgrade to its clubhouse or a new pool with increased amenities and capacity, special assessments and/or prudent use of debt can be considered.
If you're eager to learn more or want to understand more deeply the (big) concepts we've spoken about only briefly here, make sure you register to join us for our RCSU webinar on Wednesday May 17th at 12:00 PM. We'll see you there!
Dave Duval and Joe Abely are Founders and Principals of Club Board Professionals, LLC, a strategic financial consulting and training firm. We serve private clubs as well as homeowner associations with a significant investment in sports amenities. Dave and Joe draw upon substantial career and relevant country club and HOA board experience. Their website is www.cbpros.com. Dave can be reached at firstname.lastname@example.org and Joe at email@example.com.