If You’ve Got The Scratch, You Can Profit From Golf

So you’re playing golf on a gorgeous weekend, the course is crowded as it always is these days, and the nonstop ka-ching of the cash register starts you to thinking:

The owners must be making a small fortune here. I wonder if I could get a piece of the action? You can.

Many investment opportunities have sprung up in the past few years - with more on the way - to take advantage of golf’s resurgent popularity and industry predictions that Baby Boomers will precipitate a 15-year bull run.

Then there’s consolidation. The owners of the nation’s 15,400 golf courses - subdivision developers, municipalities, country club resorts and individuals - are a fragmented lot who are being pursued by major investors.

Golfing has gotten “sexy, (and) there is a lot of money chasing golf courses,” said Neil Miller, associate general counsel of National Golf Properties Inc., but there’s no guarantee that projects won’t slice into a sand trap.

“It’s kind of like restaurants. Eating’s fun. Golfing’s fun,” Miller said. “But it’s a lot harder to make money than to play golf.”

Nevertheless, with the National Golf Foundation predicting that the number of duffers will jump from 25 million now to 31 million in 2010, individuals have several ways to invest in golf courses and golf-oriented residential developments.

These ways range from real estate stocks and home-building mutual funds to limited partnerships and outright speculation in golf course residential lots.

“For the smaller investor, the best way - rather than put a group of friends together and build a golf course - is to purchase shares” in a real estate investment trust (REIT), said Jay Leupp, a stock analyst with Robertson Stephens & Co. in San Francisco.

REITs are publicly traded real estate stocks. Only one REIT National Golf Properties Inc., a $473 million Santa Monica firm - specializes in buying and owning golf courses, said Leupp, who tracks the stock.

The 3-year-old real estate firm owns 111 golf courses, including a package of 20 courses purchased in July for $58 million, in 27 states.

Residential developers generally build golf courses as a lure to attract homes buyers. Their profits are in the homes, and the courses typically operate at a loss.

“One, they’re so land intensive and, two, most developers are not good golf course developers. They’re good at building and selling homes and condominiums,” Leupp said.

He said golf course operators buy links from developers at discount prices that range anywhere from 50 to 80 percent of replacement costs.

There are a couple of due-diligence flags for investors looking at National Golf Properties. Under a lease arrangement, American Golf Corp. operates all but four of National Golf’s courses. Chairman David Price, who owns approximately 45 percent of National Golf, also is the largest stock holder in American Golf.

Leupp said that the lease deals are handled at arm’s length and that Wall Street appears to have “gotten comfortable” with the relationship between the two firms.

National Golf may soon have competition.

“There are more (golf) REITs coming,” said Michael Evans, national director for the accounting firm of E&Y Kenneth Leventhal. “A couple are in formation on the East Coast.”

Although Evans would not identify the potential REITs, he said they already “are acquiring golf course properties of residential developers” in anticipation of going public.

A different investment play might be to consider stocks of publicly traded homebuilding firms that specialize in retirement communities, nearly all of which feature golf. The major developers include Lennar Homes of Miami, U.S. Homes of Houston and Phoenix-based Del Webb, whose 10 Sun City communities make it the nation’s largest active adult home builder.

“So you look at the assets of a Del Webb, and there are a lot of golf courses in there,” said Evans. Its flagship, Sun City Arizona in Phoenix, for example, has 10 courses with 18 holes each.

Limited partnerships offer a more direct approach - with a number already in existence and others being formed to buy golf courses owned by municipalities, Evans said.

One such firm recently has been going to smaller U.S. cities, where green fees run $15 to $20, to determine if they want to sell. Syndicators like this use small investors’ money to fund their purchases.

“So you have to keep your eyes and ears out for that,” said Evans, adding that financial planners are the most likely source for checking whether syndicators are seeking limited partners.

Less direct golf investments include real estate mutual funds or the growing vacation time-share industry.

A major warning here, however. Timeshares are not investments - they generally don’t provide equity ownership - and should not be purchased as such. But investors can buy stock in firms that specialize in timeshares, especially those with resort golfing amenities, such as Marriott and RSI.

For the stout of heart, buying a homebuilding lot on or near the golf course has the potential to return a nice profit if you’re among the first buyers, for properties tend to appreciate as a subdivision nears completion.

“Being the pioneer on a golf course community, buying a lot and turning it, is not a bad strategy,” Evans said. “By the time the rest (of the subdivision) gets built out, you may be able to flip it.”

But, he said, “you don’t want to be the last guy in.”