Golf Resort Loans

Posted August 16, 2013

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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  • Regarding Friday’s editorial and Bill Black’s opinion piece in Saturday’s paper, one can make the argument that the case for a $8.25million provincial loan to assist the owners of the Cabot Links golf resort in the development of the second phase is indeed weak and not completely justified. The “need” for the golf loan is without merit. Mike Keiser is a wealthy greeting card magnate who co-founded Recycled Paper Greetings Inc. in 1971 , developed it into the third largest greeting card company in the U.S. and , when sold in 2005, was reportedly valued at $250million. He is an avid golfer and is known in the U.S. as the “Lord” of the links reflecting his passion for this type of course. With or without provincial assistance, the Cabot Cliffs’ second phase was going to be built as Mr. Keiser has the financial resources to make it happen. Nova Scotians can thank Mr.Keiser for the substantial investment to date in the development of Cabot Links and the resulting economic benefits to the town of Inverness and surrounding area but it is highly doubtful that he “needed” funds from Nova Scotians to carry on with his plans. There is, however, a strong “need” to financially assist local small businesses to expand in order to reap the rewards of the economic resurgence of the town and area. The terms of the loan can be characterized as generous: the rate of 3.6% is below current commercial 15 year mortgage/loan rates. Given that Gov’t. of Canada 15 year bonds are yielding 2.88% and provincial 15 year bonds are yielding 3.92% , lenders would be charging a rate of from 4.88% to 5.88% for a 15 year loan on a golf course. Banks/insurance cos. are not inclined to finance golf courses/resorts because of their specialized operation (revenue flows not a sure thing ) ,their lack of liquidity and competitive pressures. The P.E.I. gov’t. has been trying to unload four very high-end golf courses for three years now. The loan should not have been interest free for three years ( the borrower has the financial means to make full principal and interest payments from day one ) and a repayment period of ten years makes more sense for a golf course loan. Notwithstanding the amount of equity put in to date, these are very generous loan terms which few, if any, Nova Scotian businesses can hope to be rewarded with. Economic development loans from the provincial gov’t. are needed in Nova Scotia but not in this instance. Bill Black makes some good suggestions as to how gov’t. assistance should be granted and whatever party is in power should set about implementing a system of clear ,concise and practical guidelines and criteria by which loan requests can be appropriately evaluated and justified.

    Bob Wornell | August 18, 2013

  • Well a golf course may seem an attractive business to some but really it is four to five month business in regards to revenues as opposed to Maritime Steel which is being denied similar funding for a 90 million dollar three year contract. Maritime Steel does not however make for a Photo OP for the premier or a press release. Employed with Maritime Steel on that contract would be about 100 people five days of the week, 52 weeks of the year and all above the minimum wage. Trucking for that contract would involve over 350 tractor trailers annually transporting 12000 tons of Scrap Steel in and 6500 tons of finished product to White Plains New York. This is a considerable revenue source via a 55 ton cargo truck filling up on Diesel every two days for the journey out of New Glasgow. Then there is the subcontractors for this company that include two machine shops making replacement parts for machines in the plant and a company that finishes parts that are too great an amount for the Unionized workers at the plant.

    paul taylor | August 17, 2013

  • If tourism-boosting is the focus this may be a good way for government to do it’s part. Like you have observed, there is private skin in the arrangement. The measure of success over the next 15 years will be tourist number improvement; so measure them!
    While ‘we’ are at it there needs to be several other nodes in the province. If ‘we’ will make those investments, they will come.
    Generally speaking, tourists don’t look after themselves – they are looked after by a willing (seasonal) service industry… .

    Gordon a.... | August 17, 2013

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