A club owner who wants to sell the club often overlooks the best purchaser candidate: the property owners in the community or the club members. Finding a third party for-profit purchaser for a private club or a club in a residential community is often a challenge, for various reasons, including limited or negative net cash flow, concern regarding lawsuits from property owners if public access is significantly expanded, or difficulty in purchasers obtaining bank financing for the acquisition, especially in the current economic environment. Property owners and/or club members may be highly motivated to acquire their club in the current economic environment out of concern that the club may cease operations or be operated in a manner that may adversely impact the community’s lifestyle and property values.
Options for structuring a sale to property owners and members include:
- Sale to the (i) property owners association, (ii) an entity formed by club members, or (iii) a community development district;
- An equity conversion, whereby the club owner offers equity memberships and transfers the club assets to the equity club upon reaching a certain level of equity membership sales; or
- Merger of the club into a property owners association.
Factors determining the most favorable property owner/member purchaser (i.e. association, club members, community development district) and the best structure include: (i) laws governing powers of homeowners association and community development districts, (ii) governing documents for homeowners association and community development districts, (iii) ability to obtain the requisite property owner or member approvals, (iv) the degree to which property owners and members expect privacy and exclusivity, (v) income tax considerations, (vi) real property tax and other state and local government tax considerations, (vii) homeowners association and community development district powers to enforce dues payment obligation, and (viii) desire of current club owner to have a role in club governance after sale, possibly to protect unsold residential real estate or a resort operation.
These and other considerations are important to determine the appropriate exit strategy for a club owner.