Club Membership Structures: Tougher to Get Right Than a 30-Foot Putt
September 24, 2008
Michelle F. Tanzer- Ft Lauderdale
Developers of mixed-use and resort projects have long recognized that golf facilities and other recreational amenities increase the value of the property offered for sale within their projects. Placement of a condo hotel unit, villa, lot or home facing the evergreen fairway, along with branding, almost certainly affords a significant increase in the sale price. However, with so many alternatives in the possible structuring of the golf or amenity program, most find choosing the right alternative a difficult shot to make.
Selecting the Appropriate Amenity Package
Most club membership programs begin with an analysis of the amenities to build. For the past few decades, a championship golf course designed by and bearing the name of a golf celebrity was the obvious choice. Now, the choice of amenities is not so clear. Interest in golf continues to be a strong factor, but buyers are now looking for many other amenities along with golf. Amenities such as spas; fitness centers; walking, hiking and biking trails; boating and marina facilities; polo; and children and teen centers all continue to gain in importance to buyers. Developers must make critical decisions on how to allocate their development funds to the appropriate mix of amenities. The location of the project, the target market, the immediate availability of golf, local competitors and many other factors must be considered prior to deciding on the amenities to be included in the membership program for resort guests.
Two Main Types of Membership Programs
Once the appropriate amenity package is selected, the type of membership program must be considered. The two primary types of membership offering structures are “equity” and “non-equity” membership programs, with multiple subcategories available under each. Equity membership programs are those in which the club facilities are owned by a nonprofit corporation and each member of the club has an ownership or “equity” interest in the club. Equity members have the right to vote on club matters following turnover of developer control, manage and operate the club facilities (directly by a board of directors or through a management company), and are jointly responsible for the financial obligations of the club operations. In contrast, non-equity membership programs are those in which the club facilities are owned by the developer or other non-member-owned entity and each member of the club has only a right to use the club facilities. A non-equity member of a club has no voting rights and little or no control over the management or operation of the club facilities. In non-equity membership programs, the company that owns the club facilities funds all operating deficits and retains all operating profits; the members are responsible only for the payment of the applicable membership fees, deposits and other charges. Many factors play a role in deciding whether to implement an equity or non-equity membership program, such as age of anticipated members, price range of residential product, whether it is a second home or primary home community, or a stand-alone club.
Variations Within Membership Program Structures
Within each of these two primary types of membership programs, there are numerous variations to choose from. Membership programs in the equity or non-equity variety may be designed as unitary, tiered or add-on programs.
Unitary programs are programs that offer only one category of membership, and all members have equal access to all of the facilities. A prime example of a unitary program would be membership in a private golf club, with no other significant facilities, and only a limited number of memberships offered in only one category.
A tiered program would be a program with two or more categories of membership where each category of membership provides members with different access to the facilities. For example, in a club with extensive facilities such as golf, tennis, dining, marina, spa and boating facilities, a tiered program may be used to provide certain members with access to or higher priorities to use some or all of the facilities.
Add-on programs are those that offer two or more categories of membership similar to the tiered program. However, acquisition of one category of membership is a prerequisite to other categories and access to or higher priorities to use the club facilities may be added on to the base membership.
Additional membership structures include association clubs and convertible membership programs.
Association clubs are those in which the association for the residential community owns the recreational amenities, and property owners gain the right to use the facilities by virtue of their membership in the association. While much less popular than either the typical equity or non-equity structures, there are instances when association clubs are the perfect choice.
Convertible membership programs combine many of the benefits of non-equity and equity clubs by beginning the membership program as non-equity club and converting to an equity club following a triggering event such as sale of a stated number of memberships, a future date determined by the developer or a vote of the members.
Avoiding the Sand Traps and Roughs
Staying out of the sand traps and roughs in membership design is not always as easy as it may seem. There are significant issues related to tax and securities laws that are imperative to consider when designing membership programs, and, if structured properly, there are significant benefits that may be realized. Alternatively, if not structured properly, serious consequences may occur. It is generally understood that membership deposit programs offer substantial tax benefits, as the membership deposits may be classified as loans from the members and not as income to the developer. However, in order to achieve these benefits, many requirements must be met. For example, there must be a definite and unconditional repayment obligation within prescribed time frames. Failure to meet the requirements necessary to constitute a loan from the member could result in vast income and therefore income tax obligations to the developer.
Membership offerings that place members’ money at risk prior to the completion of the club facilities may constitute a security requiring registration as a security either on a federal or on a state level. In many instances, a securities registration can be avoided by placing membership funds in a properly maintained escrow account until all of the club facilities are completed. While there are alternatives to escrow, they are limited and may only be available under certain circumstances. For example, a letter of credit, construction or performance bond, or corporate guaranty may suffice. It is vital that other characteristics of a security not be established in the membership program. Memberships should not be permitted to be resold or otherwise transferred to any person or entity other than back to the issuing club. Membership price should be established by the club, and memberships must not be freely marketed for sale outside of the club membership program. Further, the membership program should be designed so that use of the membership facilities is the primary motive for acquisition of the membership. Other motives, such as the possibility of profit on a membership offering, should not be promoted.
Founder membership programs, which are frequently desired for their potentially huge opportunity for capitalization of club facilities, are particularly subject to securities issues. Founder membership programs sometimes offer extraordinary membership privileges in addition to significant opportunity for return on their money. This is a classic danger zone. Prior to offering a founder membership, particular attention should be paid to avoiding pitfalls of securities laws, and founder membership programs should always be reviewed by qualified securities counsel.
With changing trends in membership utilization, increased maintenance expenses and aging membership populations, many membership programs have suffered financially. As a result, many new clubs and some existing clubs are considering mandatory membership. While not the answer in every situation, mandating membership, at least at a lower tier of membership, for all property owners in the project is an important factor to consider in structuring a membership program. Mandatory membership can protect a club from membership fluctuation, whether from attrition or otherwise, and can prevent those seeking to enjoy the benefits of living in a golf club community without contributing to the cost of maintaining the amenities. However, not all jurisdictions will permit mandatory membership programs and a careful review of local law is essential prior to implementing this type of offering.
The Nineteenth Hole
An appropriate membership program structure in resort projects can net significant benefits to the developer in terms of return on investment, rate of sales, and overall success and sustainability of a club and the resort in which it is located. Providing access to the club facilities by resort guests is critical to the success of the resort operation. There is no one membership program structure that is preferable in all cases over all of the others. Thus, each particular project should be evaluated based on its own facts and circumstances, and the best possible membership program should be designed and implemented based on the unique qualities of each.
For more information, contact:
Michelle Tanzer
954.468.7914
michelle.tanzer@hklaw.com
toll free: 1.888.688.8500