posted by Desties on Oct 27
Today’s radical “success plan” strategy implemented by High Country Club should bury to rest one of the destination club industry’s biggest assessment tools: the net asset test. The balance sheet test, which clubs use to measure their fiscal fortitude, simply divides a club’s net asset value by the amount of member refundable deposits.
To be a member of the Destination Club Association, a club must maintain an asset test rating of 66%. In other words, it must have enough assets to cover 67% of the refundable deposit. At the start of 2008, High Country Club was proud to have an asset test score in excess of 100%.
Today?
“Due to the current economic conditions, we believe that once the mortgage holders are paid there will not be any equity left for us to refund to our members,” writes HCC CEO Christian Kirschner, if the club should have to liquidate if less than 75% of the members agree to the new structure.
How can a company go from more than 100% to less than zero?
There are two major reasons. The first, obviously, is the real estate market. Since clubs like HCC finance most of their purchases, once the assessed value of the property dipped below the down payment and accrued principal payments, the asset turned into a property with negative equity.
The less obvious flaw in the asset test is that it allows a club to book a value at 100% of its purchased value for the first two years. In other words, even though a property in the Outer Banks could have been purchased for $1.2 million a year ago and is worth closer to $0.8 million today, asset test rules allow it to be recorded at $1.2 million until next year.
HCC took a realistic assessment of its asset values in coming to grips with today’s decision. Other clubs should follow suit.