Dec. 11, 2023
304: Board Chats - Complexities of Membership Deposits w/ Van Tengberg
Unearth the intriguing world of private club membership deposits with us, your hosts, and our esteemed guest, Van Tengberg, a tax lawyer, and golf industry guru. This episode discusses the evolution of membership deposits and their transformation from a sneaky developer tax loophole to a lucrative revenue stream for clubs. Journey with us as we navigate the changing tides of golf clubs, shifting away from a sole golf focus to more family-friendly offerings. We unravel the intricacies of refundable and non-refundable memberships and their potential legal implications.
As we continue to peel back the layers, we clue you in on the changing mindset of the modern club member. Today, they are less inclined to pay hefty amounts for memberships that promise a refund 30 years down the line. We expose how the market's shift in disposition has led clubs to reevaluate their refund policies and the legal consequences of such changes. Brace yourself as we tackle worst-case scenarios like clubs filing for bankruptcy to eradicate membership deposit refund liabilities. But, not to worry, there are always other options, and we make sure to explore them all, including restructuring and member negotiation.
In our final act, we handle the sensitive issue of membership resignations. We underline the need for empathetic approaches to ensure fairness for both the club and members. From unique solutions like economic packages and dual track memberships, to the importance of transparent communication, we cover it all. As we wrap up, we introduce Concert Golf Partners, a company that offers unique solutions for struggling clubs. We encourage you to learn more about their approach and how they can help revitalize clubs. So, lend us your ears, and let's dive into the captivating world of private club membership deposits together.
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01:10 - Understanding Private Club Membership Refunds
13:50 - Options for Managing Club Membership Fees
28:43 - Navigating Membership Challenges in Clubs
37:26 - Club Revitalization With Concert Golf
WEBVTT
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Hey everyone, welcome back to Boar Chats here on Private Club Radio, brought to you by our friends.
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Concert Golf Partners is a boutique owner-operator of upscale private golf and country clubs nationwide.
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Since 2011, concert Golf has helped over 30 clubs elevate their member experience while gaining financial freedom.
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So in this episode we are going deep on membership refunds when I get to chat with Van Tenberg, partner over at Foley and Lardner.
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Van is a seasoned tax lawyer and golf industry expert, and this episode is all about diving deep into the world of private club membership deposits, the intricacies in how they have evolved over time.
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Did you know that membership deposits in private clubs started as a tax loop for developers?
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What?
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And now it's a selling point for clubs and a significant revenue source.
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So we go over that and plenty of other things in this episode.
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Some of my takeaways are, you know, just in general, the changing landscape of golf clubs, because it's not just about golf anymore.
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We have a lot of changing demographics, increasing demand for family-friendly experiences and that's all influencing club policies and, as a result, clubs have to adapt their policies and their offerings, even considering the shift towards non-refundable memberships, because it's putting a lot of clubs in trouble.
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We talked about the complexities of refundable and non-refundable membership, and the courts have ruled that clubs can't change these obligations the fine line to tread, and clubs need to handle it with care, and we also go over solutions for this issue as well.
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This is a very complex topic in a very complex field with a lot of moving parts, but we're going to break it down and you're going to learn a lot and have a really fun conversation listening to me and my friend Van.
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So let's get started with this episode of Board Chats here on Private Club Radio, brought to you by our friends, concert golf partners, and this is all about membership refunds.
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I am a recovering tax lawyer by trade.
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I have a master's of law in taxation.
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I'm a real estate lawyer and back in 1985, I started working in the golf industry working on golf clubs and things like that Just developed a love and a passion for that and it ended up becoming a large portion of my practice and what ways do you help clubs?
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What are some of your favorite ways to help clubs?
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There's probably two or three different ways that it comes up.
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One is obviously straight acquisition or disposition of a golf club.
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Very similar to other assets real estate assets except that a golf club is a going business.
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So, in addition to selling the real estate, you're also selling a going business, or you're buying a going business, depending on what you're doing.
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Number two is membership programs.
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We spend quite a bit of time structuring and restructuring membership programs, which is obviously one of the topics we'll talk about today.
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Those are 10 amount to leases and office buildings.
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They are the revenue source for the private club, so they're extremely important and you want to make sure that you are doing what you can to structure it so that it's beneficial to the members.
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That gives you the freedom that you need to operate and make changes as circumstances dictate.
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A third way would be unique situations, which could include financing, refinancing, restructure, redeployment.
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There are so many different things.
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Many clubs are redeploying their assets, converting certain things to residential use, that type of thing.
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It covers the entire gambit of even environmental matters, whatever it may be.
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Those are the three main areas that I focus on.
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And this is why I love, peter.
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I love when things get niched down so much.
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You brought it up.
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Today we're going to talk about refunds and membership, which is obviously it's something, but who would think there is this much to unreal.
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So I'm going to let you take a little bit of the lead, just as a basic starting point what legal ramifications?
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How do we even start this?
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Because this is just fascinating though.
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So maybe, yeah, go ahead, I'll let you start it from here and then we'll have that.
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It's actually rather humorous how it all started.
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Many years ago, many, many, many years ago call it 30 plus years ago the industry figured out that if you know, when you joined a private club you paid kind of an initiation fee or deposit, you paid an amount to join the club and then you paid monthly or annual dues.
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Let's just start with that basic concept.
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Well, somebody figured out and a lot of people believe it goes back to Bob Edmond, senior at Club Corp it figured out that when you pay that money to join the club, should that be taxable or non-taxable?
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So there it is.
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That's the genesis of it.
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So what they figured out was, if you call it a deposit and make it refundable at the end of a certain period of time, you as the developer of this golf club didn't pay income tax on it because it was a deposit, not a fee.
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And so all of a sudden the world changed and the industry took off and everybody figured out that if you write, if you pay a deposit, a membership deposit, which is refundable at the end of a certain period of time, you could collect that money, and it was 10 amount to an interest-free loan that you had the benefit of the money, you didn't pay any interest on it and, most importantly, you didn't pay tax on it because it wasn't income, because it was a deposit.
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United States Supreme Court even looked at the case and said yeah, this is Indianapolis Power and Light case.
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This is 10 amount to what you pay a utility company when you sign up and get utilities and therefore it's a deposit, provided certain conditions are met.
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So that's where this whole thing started and for the next 20, 25 years, every developer who built a private club structured a membership deposit program in order to get the benefit of all the income, pay no tax on it and, as I said, it was basically tantamount to a 30 year interest-free loan.
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That's how this whole thing started.
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Yep, wowza, yeah.
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So if you want me to go, keep going.
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I will Fast forward, yeah, fast forward, fast forward, 25 years later, before the third.
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Most of these things were structured as a 30 year refundable deposit.
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So let's just understand what it means.
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You join a club, you play golf for 30 years.
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You pay your dues, whether they're monthly, annual, whatever it is.
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At the end of 30 years assuming you're still there big assumption you get back what you originally paid.
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You don't get back all those annual dues or monthly dues or your charges for a cheeseburger or guests fees that's gone, but you get back the basic amount you pay.
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That becomes 100% refundable at the end of a certain period of time, very, very attractive.
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So all of a sudden you go out and if you're the private club, you're marketing these memberships and you say you can join.
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You pay let's pick a number $25,000.
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That's just a lot of money 25 years ago.
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You pay that At the end of 30 years you're going to get all that money.
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Ok, well, all of a sudden that becomes very attractive, it becomes a selling point.
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And all of a sudden clubs can charge even a higher amount because they're saying at the end of this period of time you get all that money.
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Clubs love it because guess what?
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Not taxable, no interest free.
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It's better than getting a loan from a bank and theoretically that membership would be worth more money in 25 years.
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That $25,000 membership 25 years later is $100,000 or $150,000.
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So you've made an arbitrage gain on that money that you never paid tax or interest on.
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That was the theory.
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Well, the problem was well what happens if somebody wants to get out of the club before 30 years.
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They want to resign, which, by the way, statistically is a very high amount of people.
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They don't stick around 30 years in a private club.
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You've got to do something.
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So you structure the program.
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What they did was they structured the program.
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So if you resign, you go on a waiting list and generally the waiting list was based upon a resale formula which says we, the club, sell, let's say, four memberships and then we'll take one off the waiting list and resell it and you can have a refund of all or a designated portion of what you paid.
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Usually it was a portion, usually it was, let's say, 80% and the club kept the difference as a triastrophe.
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Once again, home run for the club.
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They sold four memberships, they've refunded one and they did it at a discount.
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It's a win-win-win.
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They'll have some taxable gain at that point because the debt was extinguished but at the same time it was a win-win.
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So in theory, 25 years ago that was the most incredible model.
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Everybody did it and again, a lot of people credit Bob Dedman of Club Corp with coming up with it and implementing it.
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It took the industry by storm.
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So here we are, 25, 30 years later and most buyers, most of the big boy buyers, do not want that to deal with that membership deposit because, guess what?
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Now those are starting to come due and it shows up as a liability on the books of the club that's got to be paid, exactly right.
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So they're looking at the financials and on the balance sheet it shows membership deposit refund liability blank million dollars, absolutely payable at the end of a period of time.
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Absolutely, you've got to pay, it's got to be paid.
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So you buy the club.
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All of a sudden you're buying that.
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So astute, smart buyers are buying, saying I'll buy your club.
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But it's not worth what you think it's worth because you've got this membership deposit refund liability that I as a buyer have to pay.
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You never paid tax on it.
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It's a debt that I'm assuming, and the value of the club, just like a mortgage debt, the value of the club that I'm going to pay you is worth less than what you think it's worth.
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That's how we got to where we are.
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And I'm assuming it's probably becoming a bigger problem than we realized.
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It's become a massive problem.
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In fact, most astute buyers will not buy a club until it is clean.
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They don't want to do these deposits anymore.
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Most buyers are buying clubs and they want to buy clubs based on solid cash flow and they don't want that liability on the books.
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That's the astute buyer.
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Now there are many, many astute buyers that say I'll buy it subject to that Price is massively discounted.
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And then they go in and they figure out how in the world do I work through that amount and try and get that result?
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And that's where an entire industry has been developed on.
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How do you deal with that membership deposit refund liability?
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Do the changing of the current demographics impact that strategy at all?
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For clubs Like, does that become ingrained in any way?
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Yeah, yeah, that is a very, very good question.
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The modern club member does not want to pay this massive amount of money with the hopes of getting it back in 30 years.
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In other words, if they're sitting there looking at, do I pay $150,000 for a private club membership and I'll get it back 30 years from now, or can I pay $25,000?
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It's a one-time fee, it's gone and I'll just play golf, pay my dues and I'm happy.
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They almost always choose the latter, which is the non-refundable fee, not the deposit.
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And so, demographically and culturally, that's what they're doing.
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They don't want to sink all that money into a private club membership.
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In fact, many clubs there are exceptions, of course, the very fine clubs are not interested in these.
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You know, most members are not interested in putting out hundreds of thousand dollars for that private club membership.
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Golf is different now than it was back then.
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They want a club, they want the, you know.
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They want the food and beverage.
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They want the fun, kind of like top golf.
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They want to have fun.
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They don't want to sink, you know, hundreds and hundreds of thousand dollars.
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The old adage, it's not your father's private club it holds true.
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Again, there are exceptions, but the large chunk of people want to play.
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They want it to be family friendly, they want it to be, you know, for the spouses, for the children.
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They want it to be fun and go have fun casual clothes.
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Don't tell me I can't bring my cell phone.
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And don't tell me I've got to put out $250,000 to join your club.
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They don't want to do it, they don't want to deal with it.
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So yes, the long answer the demographics have changed.
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Are there?
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My brain's just going mile a minute.
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Are there like legal, like law is so far from me because I try to stay in my lane so much, but what like?
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I'm assuming that there's legal implications when a club has to like, can a club alter the membership return policy, like so how, like, what's going on there, like what kind of things can clubs do?
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Or what sort of excuse me, what sort of options are there?
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Okay, very good question.
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The answer is no, it's a debt.
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Clubs try it.
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They say look, our membership plan says that we can modify it in any way.
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However, the courts that have weighed in on this say you, club, if you agreed to pay that, that is a debt.
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You do not have the right to unilaterally alter that and change the economics of the deal.
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There are some things around the edge you might be able to fiddle with a little bit and get away with it.
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Maybe instead of four to one, it's five to one or those kinds of things.
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There's different things you can do, but the bottom line is it is a debt, it is an obligation and while you may be able to change a lot of things in your membership plan or your bylaws, such as t-time priority you know, do use things like that that refund obligation is tantamount to a promissory note that you owe and you cannot unilaterally modify it.
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So when you're a buyer and you're coming in to buy this club, you're looking at it going I can't change what the deal was.
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That is the deal.
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I have to live with it.
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So then you have to put your creative hat on and come up with all kinds of different ways how you can manage that liability, how can you condense it, reduce it, repackage it, restructure it so that it's something that you can live with and run and operate this club, and that's where the entire industry of trying to deal with this has come about.
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So can clubs change Like so can if a club is going this direction, can they stop having like membership refund?
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Like how does that work Then?
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What outcome?
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Cause obviously there's gonna be situations where I'm assuming some clubs, they can't fiscally maintain what's going on between inflation, the refund, everything else going on.
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What options do they have?
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Like how do clubs they have to look at it?
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Let's sort of divide this up into two categories.
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Let's do worst case scenario and then options, and the options could be whether it's the existing club or it's the new buyer coming in to buy the club.
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Let's do number one.
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First worst case scenario.
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Could the club file bankruptcy and wipe out the membership deposit, refund liability?
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The answer is yes.
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Think again.
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It is a debt, it is a liability and the club could file a bankruptcy, could go through a chapter seven, which is liquidation, could go through a chapter 11, which is restructure Very, very complex.
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Have clubs done that?
00:17:58.640 --> 00:17:59.898
Yes, they have.
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Are there implications to it?
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Yes, there are.
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But they can do it and they can't wipe it out.
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But let me tell you there is a price that you pay when you do it, but it can be done.
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Have clubs done it?
00:18:12.526 --> 00:18:14.742
Yes, I'm very familiar with one club.
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They wiped out about a hundred million dollars worth of membership deposit refund liability.
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Now, under the tax code, you take that hundred million and you reduce your basis in your club.
00:18:29.143 --> 00:18:31.057
But it's.
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You know that cancellation of debt is not taxable and bankruptcy, but you have to reduce your basis in all your assets.
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So if you paid a hundred million for this property and you now reduce that basis by a hundred million, that means you have zero tax basis and when you sell, everything's gained.
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So there's a price to pay.
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There's ways you can deal with it.
00:18:51.941 --> 00:18:53.922
So that's worst case scenario.
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Call it Armageddon, call it Scorched Earth, whatever you want to call it.
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It has been done.
00:18:59.303 --> 00:19:06.365
Are there other ways, less drastic, to whittle down package restructure?
00:19:06.365 --> 00:19:07.218
Yes, there are.
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There are a variety of clubs that go through a number of different things trying to figure out how to minimize this membership depository liability.
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Here's a couple examples they go approach the members and say this is due, this obligation's due in blank number of years, instead of us paying that in X number of years.
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We'll pay you something right now and it goes away.
00:19:34.683 --> 00:19:42.002
Or we will give you credits on food, beverage dues, other things, to make that go away.
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Voluntary, absolutely no liability or obligation.
00:19:47.287 --> 00:19:51.084
They can just say yes or no, and some clubs do that.
00:19:51.084 --> 00:20:08.174
Other clubs go through a restructuring of their program because, remember, all they used to offer were these refundable memberships that have the membership deposit from liability and they realize we can't offer those anymore.
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So we're going to start offering non-refundable memberships.
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And then the members say well, wait a minute, if you're not offering those refundable memberships, that four-to-one thing that you have is how you're going to have to count the non-refundables towards the four-to-one and we get a refund, and that becomes a very much of a problematic thing.
00:20:30.910 --> 00:20:35.882
So clubs have to figure out how to distinguish between the refundable and the non-refundable.
00:20:35.882 --> 00:20:38.479
Big deal, big, big, big deal.
00:20:39.912 --> 00:20:44.883
Other things are when buyers step in, they offer different kinds of packages.
00:20:44.883 --> 00:20:53.910
For example, they may come in and offer a voluntary refund policy saying we'll run dual tracks.
00:20:53.910 --> 00:21:04.743
You can go ahead and get your refund the way you're supposed to get it, but we'll also do something because we're going to sell these non-refundables and we'll run both tracks concurrently.
00:21:04.743 --> 00:21:07.849
And whichever way you get your refund first, that's great.
00:21:07.849 --> 00:21:09.916
If you don't want to do it, you don't have to.
00:21:09.916 --> 00:21:17.541
Other buyers come in and say to the seller we'll buy your club, but we don't want that liability.
00:21:17.541 --> 00:21:20.713
You keep it, believe it or not, that's happened.
00:21:21.214 --> 00:21:30.862
And some sellers go forward and sell and they keep the liability because, remember, they got the money, they never paid tax on it.
00:21:30.862 --> 00:21:35.901
So they're looking up saying you know, I've gotten the time, value, money, benefit, I'll pay it.
00:21:35.901 --> 00:21:47.782
And they end up paying it when the 30 years is up or if there's been a reissuance and resale and there's all kinds of mathematical formulas for dealing with that.
00:21:47.782 --> 00:21:52.480
Other buyers studied the documents very carefully and try to figure out.
00:21:52.480 --> 00:21:59.923
Is there a formula in there that says these people have to be members for all 30 years to get the refund?
00:22:01.049 --> 00:22:11.421
Now there's smart, really really smart clubs back in the day structured it that way and said, yeah, we'll give your money back in 30 years, but you've got to be here all 30 years.
00:22:11.421 --> 00:22:19.122
You don't get to resign, get your reissuance and then sit around and wait till the end of 30 years.
00:22:19.122 --> 00:22:23.457
So there's just a lot of different.
00:22:23.457 --> 00:22:29.252
Those are all examples of things you do to try to whittle that down and get that reduced down.
00:22:29.252 --> 00:22:39.020
There are tax, business, economic consequences to everything, but those are the quiver of arrows that you have to try and work through those issues.
00:22:39.970 --> 00:22:47.522
Are there any issues or challenges or anything when you bring in nonrefundable memberships?
00:22:49.570 --> 00:22:55.303
Yeah, mainly the one I mentioned earlier, which is, hey, the four to one is the big one.
00:22:55.303 --> 00:22:59.910
And people say, wait a minute, you sold four nonrefundables.
00:22:59.910 --> 00:23:02.315
You're not even offering and selling refundables.
00:23:02.315 --> 00:23:05.702
How's my four to one ever going to get satisfied?
00:23:05.702 --> 00:23:11.661
That's the big one, that is the biggest one.
00:23:11.661 --> 00:23:12.903
You've got to figure that out.
00:23:12.903 --> 00:23:29.890
And there are cases federal cases that say if you offer a refundable and a nonrefundable membership and they're exactly the same, other than the refundable nature of it, that's the same membership and you have to count that towards your four to one.
00:23:29.890 --> 00:23:34.821
So think about the guy who bought the club at the membership at 100,000.
00:23:34.821 --> 00:23:43.890
He's entitled to 100,000 and now you're selling nonrefundable memberships for 20,000 on a four to one basis.
00:23:43.890 --> 00:23:46.890
You sell four of them, you have 80,000, but you owe 100,000.
00:23:46.890 --> 00:23:48.934
You've got negative arbitrage.
00:23:48.934 --> 00:23:51.401
So you've really got to be careful on that.
00:23:52.511 --> 00:23:53.896
That just clicked, then there we go.
00:23:53.896 --> 00:23:57.608
A little bit slower there, but I was finally coming around.
00:23:57.608 --> 00:23:57.910
There we go.
00:24:00.515 --> 00:24:02.017
No, no, that's the issue.
00:24:02.017 --> 00:24:11.890
You don't want negative arbitrage, because your NOI gets hammered when that happens, not to mention the implications of it.
00:24:13.031 --> 00:24:17.501
Are there any other scenarios that can happen from any and all of this happening?
00:24:19.132 --> 00:24:24.643
Yeah, there is a lot of things that go on, sort of collateral damage, if you will.
00:24:24.643 --> 00:24:28.476
The entire membership can revolt.
00:24:28.476 --> 00:24:41.869
There are class action lawsuits that have come up where all the members have gotten together and filed a class action saying all the things you've done are this, you owe us this, you've destroyed this.
00:24:41.869 --> 00:24:45.279
It's a mess, it's absolutely a mess.
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