Golf Resort Loans

It is hard to make money running a golf course. Parks Canada owns and operates Highland Links, one of the best golf courses in Canada. In spite of having no debt to service, it loses money.

Many other courses in the Maritimes have similar challenges. Osprey Ridge, near Bridgewater, has a robust membership but still had to be taken over by the municipality last year.

So how can it make sense for Nova Scotia to lend $8.25 million to the owners of Cabot Links? In fact, this may be better than most of the loans that government has made:

  1. The owners have a lot of skin in the game. Their investment in the existing hotel and golf course is substantial.
  2. The business is off to a terrific start. Glowing reviews both in golf industry magazines and in papers such as the Globe and Mail and the New York Times have created a positive buzz. First year traffic was strong.
  3. The owners have a very credible track record. The principal investor is Mike Keiser, the developer of Bandon Dunes, an extremely successful golf destination. It is located in a remote corner of Oregon and has grown to include five highly rated links style courses. In fact, remoteness seems to add to the cachet, although one wonders whether that is sustainable.
  4. The Cabot Links layout is distinctive and takes advantage of a terrific setting, one of Nova Scotia’s inherent assets. It is generally viewed as the only true links style course in Canada, and one of the very few in North America. It is easier and cheaper than going to Scotland or Ireland for a similar golf experience.
  5. By expanding the golf offering and hotel, they make the location more of a destination. Partnering with Highland Links and possibly others is helpful to Cape Breton as a whole.
  6. The loan is interest bearing and repayable over 15 years, unlike some of the forgivable loans of the recent past; for example, to Irving Shipyards. Given the positive attributes, one wonders why this kind of loan could not be done through a bank or other private sector lender.

If government wanted to subsidize interest costs that would be a separate decision and would not alter the lender’s role in managing risk.

This would have four advantages. First it would make the cost of the government’s participation explicit — simply the annual cost of the interest rate subsidy. This would be measured from what the market said about an appropriate rate, not from the government’s borrowing costs.

Secondly, if a loan got in difficulty, it would be dealt with in a way to protect the lender, not the borrower. Governments are especially weak in their stewardship of delinquent loans. They are too willing to let management carry on long after it is evident that they are not succeeding. Meanwhile there is erosion in the value of both tangible assets (buildings and equipment) and intangible assets (reputation and goodwill). It is far better for employees if the lender acts early and brings in new management.

Thirdly, government’s exposure would be limited to the annual amount of the interest rate subsidy. Multi-million dollar write-offs at taxpayer expense, perhaps after a future election, will be avoided.

Fourthly, the cost can be compared for value with the payroll rebate program. Notwithstanding some recent criticisms, that program has the considerable merit of only paying when and if the jobs actually occur. The fact that only half of the potential rebates were earned is disappointing, but it underlines the fact that the program pays for results, not hopes.

Unfortunately, accessing private sector lending can be difficult. Other highly credit-worthy borrowers in rural Nova Scotia report difficulty in getting loans. A significant problem is that the infrastructure for a particular business may have little value for other operations, and finding other qualified owners and managers may be very difficult for the lender.

Nevertheless, policy on economic development loans can be improved:

  1. When possible, chiefly in and around Halifax, government should encourage and facilitate private sector borrowing, and provide interest rate subsidies if warranted. In these areas, government should be reluctant to do loans that the private sector would not touch.
  2. Other loans, typically in more rural areas, may be provided by government, but need to be tested against the key criteria achieved by Cabot Links: substantial capital investment by the principals, proven business model and management, and benefitting from distinctive Nova Scotian advantages. Rates and subsidies should put rural opportunities on a level footing with urban.
  3. Work with private sector lenders to maximize their participation.
  4. Less capital intensive businesses are better supported with payroll rebates.

Government should be glad to have more opportunities like Cabot Links, and disciplined enough to turn down those that are rather less attractive.

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