REITs and golf: A happy marriage tors to acquire or provide financing • have a minimum of 100 • derive no more than 30 per- for all forms of real estate." It acts shareholders; By LAURENCE HIRSH cent of gross income from the vestment Trust (REIT). In or- kind of like a mutual fund for real • have no more than 50 per- sale of real property held for less The latest factor contributing der to most accurately measure estate. In order to qualify as a REIT cent of the shares held by five or than four years, securities held to the boom in the golf course the REITs impact on the golf under the Internal Revenue Code a fewer individuals during the last for less than one year or certain industry is the Real Estate In- course industry, a little back- corporation or trust must: half of each taxable year; prohibited transactions; ground information is in order. • be a corporation, business • invest at least 75 percent of the • pay dividends of at least 95 Laurence Hirsh is president of A REIT is defined by The Na- trust or similar association; total assets in real estate assets; percent of REIT taxable income. Golf Property Analysts, a Pennsyl- tional Association of Real Estate • be managed by a board of • derive at least 75 percent of REITs were created to provide vania-based golf appraisal firm. Investment Trusts (NAREIT) as "a directors or trustees; gross income from rents from investors with the opportunity to The following article appeared in corporation or business trust that • have shares that are fully real property, or interest on mort- participate in the benefits of own- a recent GPA newsletter. combines the capital of many inves- transferable; gages on real property; ership of larger-scale commercial real estate or mortgage lending, and receive an enhanced return, because the income is not taxed at the REIT entity level. This means that a diverse range of investors can realize investment opportunities otherwise available only to those with larger resources. This oppor- tunity first became available when President Eisenhower signed the real estate investment trust tax pro- visions into law in 1960. The basic provisions of this law remain un- changed, although there have been a number of improvements to the law over the past 30 years. The REIT industry has ben- efited from tax reform initiatives enacted in the 1980s. These initia- tives eliminated the incentive of tax-sheltered real estate vehicles and promoted a return to the fun- damentals of capital formation and investment in real estate for in- come and appreciation. A tax change in 1986 allowed REITs to manage their properties directly, and a 1993 change removes a significant barrier to pension plan investment in REITs. There are more than 300 REITs operating in the United States today. Their assets total in excess of $61 billion. More than 80 percent of these trade on the national stock exchanges: • New York Stock Exchange - 147 REITs • American Stock Exchange - 42 REITs • NASDAQ National Market System -12 REITs In addition, there are dozens of REITs that are not traded on a stock exchange. The first golf property REIT (Na- tional Golf Properties) was formed in 1993 by acquiring much of the assets of American Golf Corpora- tion. Since that time five other ma- jor REITs have entered the golf course business or been formed to do the same. These include: • Golf Trust of America (ex- clusively golf); • Patriot American Hospital- ity (hospitality); • Starwood Lodging (hospi- It pays to be the early bird with the even better prizes this year and the tality); Mini-Drum Advantage Program. As in ability to collect points for up to two • Meditrust Corporation (ac- the past, it's your opportunity to earn seasons. Watch for your merchandise quired Cobblestone Golf Group); free merchandise just for buying your catalog and program details in the mail • Presidio Golf Trust (by MERIT® Insecticide and BAYLETON® or call 1-888-456-MINI. Arnold Palmer Golf Manage- Fungicide supply a bit earlier. Aside www.protect-your-turf.com Bayen ment Company). from the great turf, you can expect Performance of the Golf REITs can be measured, but with cau- tion because their history is so Stop by Booth #561 at the GCSAA Trade Show, Orlando, February 12-14, 1999 99S25A0123-1 © 1999 Bayer Corporation Printed in U.S.A. short. National Golf Properties (TEE) has risen steadily from Continued on next page IUPM MAfeMENT Hirsh/REITs tioned and are in markets with that when combined with favor- In conclusion, what REITs mean tate investment world now and Continued from previous page strong future prospects. able interest rates, numerous to the golf course industry is that higher quality management and around $20 per share in Decem- Why are REITs paying so lenders (compared to 10 years there has never been a better time the growth of the game have made ber, 1994 to a high of $35 in June, much for golf courses? This is a ago) and the continued growth to sell a golf course. As an ap- Wall Street and the rest of the 1997 and has since settled back question I often hear. of golf logically and naturally praiser, I have seen transactions I investment community look at golf into the $30-$32 range since Feb- First and foremost, REITs (and produces upward pressure on never thought possible. As a bro- much differently (and more posi- ruary, 1998. Golf Trust (GTA) is other golf course buyers) are golf course values. Additionally, ker, I have had a buyer offer to pay tively) than 10 years ago. the only other exclusively golf 'paying so much' for courses some REITs are cash buyers, my commission rather than wait Of course, with all this opti- REIT with any history and it's because there are more buyers meaning there is no debt service for the seller to list property just mism comes a word of caution. only about 15 months old being with substantial funds in the in the equation and thus the abil- so the buyer could get first crack Where does this stop? We all initially offered at around $21 marketplace than ever before. ity to pay more and make the at the property. Golf courses are know that real estate (like all per share and rising to approxi- This creates keen competition cash flow grow over time. in the mainstream of the real-es- Continued on page 81 mately $32 per share as of May 2, 1998. As of January 12, 1999 National Golf Properties is trad- ing just under $28/share and Golf Trust is trading at 26 3/8. Presidio Golf Trust never got off the ground, becoming a casu- alty of the volatile stock market in mid-1998 and Meditrust an- nounced plans to sell Cobble- stone in late 1998. Reportedly, there are as many as six finalists 18 LEADING fORMULATORS in the bidding to acquire Cobble- stone in a process which should be completed in the near future. GTA and NGP have performed admirably but to date only control AGREE ON ONE THING. a total of 150 courses along with another 100 or less owned by the other REITs. One would assume that with 16,000-plus courses in the United States alone that this is only the tip of the iceberg. As previously mentioned, REITs are required to return 95 percent of their revenues to stock- holders. This comes form the operating leases and rents estab- lished partially based on acquisi- tion prices. In a competitive mar- ket, this means higher prices and thus, increasing rents to support the acquisition prices. An inter- esting byproduct of this require- ment is that in many instances, existing ownership sells to the REIT and then has the opportunity to lease back' the operation. Ac- cordingly, existing owner/manag- ers have the unique opportunity of 'cashing out' and exercise their knowledge of the property, the market and clientele to continue the business growth and continue their opportunity to make a living. In some cases, this creates a 'partnership' with the lessor (REIT) which may ask the les- see (seller) to accept stock in the REIT as part of the sale pro- ceeds. This can be good or bad, depending on the stock market. While it may seem that all courses are attractive to REITs, that is not always the case. Most REITs are not interested in pro- posed construction or in recently opened properties with little or no operating history. REITs are Meth-Ex 40. The nitrogen source of choice for 12 to 16 weeks of sustained plant growth, typically interested in properties with positive historical cash flow the industry's best fertilizers. ,, , Guaranteed. For a proven that can be more accurately pro- Specially formulated to QJYIE I "H'EX LhJBB nitrogen source, look for jected into the future. This, along release nitrogen by hydrolysis 18 any of the names pictured with the importance of the po- and microbial activity, Meth-Ex 40-0-0 delivers above. Or call your nearest Meth-Ex 40 dealer. tential lessee's ability to meet rental payments would seem to indicate that REITs are typically only interested in properties 'MMMRNIMHMMMMMM which are generating positive cash flows, have been well posi- CIRCLE #146/GCSAA BOOTH #3749 GOLF COURSE NEWS Forecaddies has not gone up significantly." Bartley said Seaview adopted Seaview toyed with the idea of "I've had a few people say they Continued from page 77 Beyond the speed of play is- a mandatory forecaddie program installing laser yardage finders didn't want a forecaddie because D'Alene.