Golf Community Development

Structuring a golf community development to fulfill the objectives of the developer and his financial partners and lenders, as well as those of potential homebuyers and country club members, requires thoughtful front-end organization and thorough legal expertise. Careful forward planning can save a lot of time of money during the critical period after the big construction money is being spent, but before substantial revenues begin to come in. The following thumbnail sketch will help the golf community developer "keep the cart on the path" as he winds his way toward a successful project.

Locking up the Land

Even though the initial impetus for acquiring a site may be its unique beauty and suitability as a golf course and country club, the project will be, in large part, a residential real estate development. Accordingly, after the engineers and land planners have confirmed the feasibility of a site, the first order of business is to acquire rights to purchase the property. Since the venture usually is speculative at this point, an option agreement is generally appropriate. The required initial option consideration often is not substantial. Nevertheless, the developer should fully investigate the title and environmental condition of the property and complete all other principal due diligence at this point. This not only serves the conventional wisdom that a large portion of the profit is made in "the buy," but also makes the subsequent raising of capital from investors easier and less risky. Since processing of development plans and land use entitlements, as well as arranging for construction financing and any desired public financing, can take some time--almost always longer than one thinks, it is advisable to negotiate for an extended option or escrow period up front, even at some marginal cost.

Raising Seed Capital Through A Private Placement

After locating the property, the developer typically will seek to raise seed capital through a private placement securities offering. Depending upon the specific project, the offering may range in size from less than $1 million to much more. The principal uses of these proceeds may include option or purchase payments on the property, golf course and clubhouse design fees, architectural and engineering expenses, land use planning expenses, legal and accounting expenses and general and administrative expenses. The private placement may be designed as a common stock or limited partnership unit offering.

There are three principal issues that golf course developers need to consider when seeking venture capital from a private placement securities offering:

Securities Law Compliance

Raising capital through a private placement requires compliance with both federal and state securities laws. Typically, golf course developers will work with legal counsel to prepare a Confidential Private Placement Memorandum satisfying the disclosure requirements of Regulation D under the federal securities law. The structure the offering also needs to comply with the "Blue Sky" laws of the states in which the privitation placement will be conducted. The Memorandum typically will include a description of the project, a market study, financial projections and a description of management's experience and background.

Rights Associated With Units

In an attempt to facilitate the marketing of the private placement offering, golf course developers frequently include certain special rights such as a future, dues-free membership in the club, future discounts on food and merchandise at the club facilities, future discounts or priorities on the homes or custom lots (which, at least in California, must be structured so as not to constitute an offer to sell homes or homesites to be located on the property in the future) or future rights to free lodging at a golf villa to be developed as part of the project. Increasingly, the California Department of Corporations will scrutinize the appropriateness of these special rights upon considering the later appreciation for a permit to sell club memberships.

Equity Versus Non-Equity Memberships

If the private placement offering includes the right to a membership, the developer must determine whether the club memberships will be offered as equity or non-equity. Marketing efforts are improved by offering equity memberships and the amount of revenues will be increased by selling equity memberships. The developer, however, should be aware that the resale of the club is made much more difficult if the club is "owned" by its members.

Structuring A Joint Venture With A Financial Partner

After commencing the private placement offering, the developer typically will seek a joint venture partner who will provide access to the capital required to complete the development either through providing substantial equity commitment or guaranties to support third-party financing or by funding the development costs directly. A joint venture is a single-purpose entity that can be a general partnership, limited partnership or limited liability company. The developer usually is the managing partner in control of day-to-day operations, with the financial partner participating in major decisions.

After locating the right joint venture partner, the developer's attention will turn to negotiating the structure of the partnership. Issues to address in a joint venture agreement include definition of the business plan, refinement of project pro formas, capital contribution obligations, distribution of cash flow, tax allocations, management rights, management, development and overhead fees, provision for special rights previously reserved for seed capital investors and the developer, dispute resolution mechanisms, default remedies and transfer restrictions.

The Construction Phase

After the development venture is in place, hopefully the focus can turn toward closing the real estate purchase and the acquisition and development financing for the project. If all material matters regarding the property have been addressed up front and the developer has negotiated for a flexible closing date, the acquisition can be closed very near to the time that construction is ready to commence. During this period, the developer is negotiating the principal contracts for development and construction, including mass grading (including contouring of the golf course to within a few inches of final grade), golf course construction (largely installation of tee boxes, greens and bunkers, together with some fine finish grading), clubhouse construction, easement relocations and acquisitions, architectural, geotechnical and engineering services (to the extent not done in the earlier planning phases), employment agreements with key management, security arrangements with providers of subdivision bonds and letters of credit, insurance subdivision improvement, reimbursement, annexation and other agreements with public entities, and a variety of other matters that crop up. Depending upon the circumstances, it may be quite beneficial to consider funding of public improvements (especially major roads or other backbone improvements) by assessment districts, community facilities districts or other available means of public financing.

Selling Club Memberships

One of the ways the developer seeks to reduce financing costs is to sell memberships in the country club to be located on the property, and collect proceeds therefrom, prior to completion of the club facilities. Securities laws regulate the offering of country club memberships and impact various planning decisions, including whether equity or non-equity memberships will be offered, the transferability of memberships, disclosure to potential members, and financing the construction of the golf course and club facilities.

In most cases, the offering of the memberships in California (whether equity or non-equity) will require a permit from the California Department of Corporations. Federal registration of club memberships with the Securities and Exchange Commission is required unless the membership offering complies with several conditions. Given the time and expense associated with SEC registration, successful golf course developers are careful to structure the membership offering to avoid these requirements.

The Department of Corporations Permit application will require the preparation of an extensive Offering Circular and other documents. Prior to applying for the permit, the developer must make some fundamental decisions, including:

• The nature and classes of membership.
• If the memberships are equity interests, the factors that will trigger turnover of the club to the members.
• The specific club facilities to be constructed.
• The proposed membership fees and dues structure.
• Payment terms for club memberships.
• Suitability requirements.
• Any repurchase rights.

The California Department of Corporations has become increasingly proactive in reviewing the proposed terms of the club membership offering. The Department will not issue a permit authorizing the sale of memberships unless it finds that the membership offering is "fair, just and equitable" to the prospective members. Experienced legal counsel in the area of membership permitting is an important element.

Sale of Homes and Home Sites

If the sale of building lots, houses or condominium units boiled down to completing construction and negotiating a contract with each buyer, the life of the golf community developer would be much simpler than it is. In any California project, the developer will be required to obtain a Final Subdivision Public Report (a "White Report") from the California Department of Real Estate before making any offers to sell homes or homesites. Similar federal registration requirements also apply. The White Report is essentially a disclosure document given to purchasers as required by law for consumer protection reasons. The process of obtaining the White Report and commencing sales of residences usually requires the formation of a homeowners association and development of conditions, covenants and restrictions (CC&R's), architectural guidelines, association operational budgets, standard purchase and sale forms, etc.

A golf community development presents special concerns due to the proximity of the golf course to the surrounding residences and other facilities. Some of the most obvious are the issues of errant golf balls, use of cart paths and other portions of the golf course by non-golfers, preservation of golf course views versus growth of trees and other vegetation on the golf course, noise from intensive course maintenance and grooming regimen, heavy use of pesticides and fertilizers and use and runoff of reclaimed water. Many of these issues are addressed in the CC&Rs or in special easement documents requiring close interface between project engineers and legal counsel. Since the developer invariably wants to commence the sale of homes or homesites as soon as construction is completed, the developer needs to address these matters early and thoughtfully in order to have the White Report in hand when completion occurs.

Avoiding the Pitfalls

Golf course community development can have special rewards beyond the profits to be made. Yet, there are plenty of "bunkers," "hazards," "rough" and "OB" along the way. Skilled legal counsel is part of a well-assembled project team, working with the developer and other consultants to see that the myriad of different elements each are addressed at the right time and with the proper consideration and understanding of how they interrelate. The successful developer avoids the most common (and most costly) pitfalls by:

• Staffing up internally to avoid overuse of consultants, including legal counsel.
• Addressing issues and problems as soon as they arise, before they impact or delay other matters and while they are usually easier and less expensive to fix.
• Starting early on everything--time is money, and the cost from delays gets more and more expensive as the project proceeds.

Hewitt & O’Neil specializes in corporate securities and business law, real estate, natural resources and land use law and public finance, with a special depth of experience in the development of amenity-oriented communities involving country clubs and golf courses. The firm's attorneys have assisted golf course developers in all aspects of their projects, including land acquisition, endangered species, land use entitlements, environmental issues, seed capital offerings, public and private development financing, joint ventures, commercial development, residential construction and sales (including forming homeowners' associations, formulating architectural guidelines and CC&Rs and obtaining public reports from the California Department of Real Estate), employment and brokerage matters, membership sales, equity membership conversions, and a variety of other matters.