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How to decide if property is an asset or liability

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Ten years ago my colleague, Michael, spoke about having to advise an owner on the best development plan for an international -standard, 27 hole competition golf course. The owner was wanting to position his resort as the ‘St Andrews of the Southern Hemisphere’.

My colleague’s advice? ‘Sell it ASAP. The value of the golf course will kill the club. Then the members will lynch you.’

This sounds drastic for such a polite sport. There are over 1,500 golf clubs in Australia (representing only four per cent of the global number) and those that own their own course are struggling. The clubs that don’t own the course (because it is Crown Land, owned by a council or company) seem to struggling less.

Let’s look at the numbers of a club which owns its own course to work out what’s happening.


We are talking about an asset, so there are two components to consider:

1. Capital value. We all have things we own, but the actual value of an asset – what someone else will pay you – might be less than what we think it is worth. It is the same idea as the value of your car once you drive out of the salesroom - the car is worth much less five minutes later. Chapter 5 of Financial Performance Unveiled shows how a 130 year old company failed because this point wasn’t understood by its executive. Oops.

If a golf club owns the course, the book value may increase over time, especially if it is in a capital city. The club board might feel ‘richer’ if the liabilities remain constant but there’s a hidden whammy: the depreciation charge might increase and this could lower net profit. So the Balance Sheet may seem stronger but the profit turn out lower. Members won’t be happy.

2. Ability to generate revenue. While we think of assets as being something we ‘own’, the accurate definition is ’an economic resource to generate revenue in the future’. An asset should be hard at work. How does a golf course generate revenue?

Let’s look at our club financials and performance metrics.


A golf course needs to be managed well to generate revenue - think of all the hours it just sits there. This club attracted 106 new members in 2013 but up to 20 per cent of current members switched to social golf. Having nearly a quarter of your members ‘Non Playing’ creates a knock-on effect to other sources of revenue: competition, coaching and club house(1). The 2012 ‘summer of rain’ impacted results but the downward trend continues.

Let’s look at expenses. The club has cut where it can by reducing the FTE course staff by 3 and administration staff shifts, but gas, electricity and fertilisers increased by $22,000 in 2013.

Is the asset not worth owning if it only increases in capital value but does not generate sufficient revenue?

Michael argued that, to run a golf club profitably, average and social players should only be allowed to play 9 holes and access to 18 holes be restricted to competition- level players because they play fast and do less damage to the course and, since golfers are really only interested in getting to the 19th hole, the remaining land should be developed or sold. That tough management conflicts with the social aspect of a membership organisation.


Two issues to consider:

The opportunity cost of owing assets 

The traditional approach to analysing financial statements put much emphasis on owning assets, the idea being that you have something to sell if you need cash. Some of that value is increasingly dependent on ‘intangible’ assets, such as brand perception and status (see Royal Melbourne website), to generate revenue. The cost of maintaining an asset, such as a golf course, at a market competitive level may require a review of the business model.

Financial discipline is important for all organisations

Decision makers – especially in member, social and community type organisations – can be driven by a vague notion of ‘duty’ to their members, owners or stakeholders at the expense of the organisation. Once you become involved in a community event which doesn’t produce either the surplus required, or any identifiable benefit, you’ll be told ‘You can’t put a price on goodwill.’ You can!

Two questions to ask:

1. Is the cost of maintaining one of my products worth it strategically? If not, how can the business model be changed so that we get the benefit (and hopefully profit) with lower costs?

2. Is a joint venture or contract/lease/licence a better model that ownership of assets?

What happened?

Did the owner do what Michael recommended - sell? Unfortunately for his Balance Sheet, he opted for a Plan B which still, 10 years later, hasn’t worked. But since he could afford to own a resort in the first place…

(1) Note the percentage decline reflects the drop in the revenue income not the category’s percentage of the total.  

This blog is for education purposes only. 

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