If you’ve been dreaming of a life centered around playing golf or sitting poolside with a Mai Tai, luckily for you, turning that dream into a reality might not be so far out of reach. Purchasing a golf course or resort property is feasible with the right financing. Your main financing options include: conventional financing, Small Business Administration (SBA) loans, life insurance companies, CMBS loans, and private equity financing.
But which is right for you? While each financing option has their benefits and drawbacks, the best choice will ultimately depend on your particular situation, needs, and goals. For instance, are you buying an existing golf course or resort or are you building from the ground up? What capital improvements and maintenance are required? How much working capital will you need? Will you need to purchase new equipment? The list goes on and on.
To help you better understand your financing options for golf courses and resorts, here is a breakdown of what each loan offers.
With conventional financing, banks will typically offer you a recourse loan to help get you started on your golf course or resort project. Conventional financing offers more flexibility in both pricing and your loan structure along with a more personal relationship with your lender. This personal relationship allows your lender to better customize your loan to meet your specific business goals and provide ongoing loan management support as your needs evolve.
On the other hand, you may run into issues with borrowing limits. Most conventional lenders have a set maximum on their lending power (this is especially true with smaller community banks). Plus, be aware that you’ll have increased personal liability with a recourse loan. For example, should the property be sold below the price needed to repay the loan,you’ll be on the hook to cover the difference.
Small Business Administration (SBA) Loans
You can choose between an SBA 7a or SBA 504 loan. While the SBA 7a loan is more popular, both loans are relatively more versatile compared to other loan options. If you need more than to simply buy up property to start up your golf course or resort project, SBA loans allow you to purchase equipment and bankroll working capital. SBA loans also tend to have lower interest rates which is helpful when trying to get your business off the ground.
However, SBA loans typically have more stringent requirements, and there’s a limit to how much you can borrow ($5 million). You’ll need a high credit score, cannot have access to other funding sources, and the business must be operating within the U.S. So if you have dreams of opening that beachside resort in the Caribbean, and you plan to use an SBA loan to finance it, you’re out of luck.
Life Insurance Companies
You’ll find that life insurance companies commonly offer non-recourse loans, meaning that you won’t be liable in the event you default on your loan. So, while you can breathe a sigh of relief if things don’t go according to plan, in exchange for eliminating personal liability, life insurance financing tacks on more loan restrictions, fees, and prepayment penalties for their protection.
You’ll also have less flexibility on the types of properties you can purchase. Life insurance companies avoid ground-up construction,distressed properties, or renovation projects. But, if your golf course or resort is high quality, and in a major metropolitan area, you’ll have better results with your life insurance loan.
Similar to life insurance companies, CMBS or Commercial Mortgage-Backed Securities loans, also commonly offer non-recourse loans where you can avoid personal liability in the case of a loan default. However, unlike life insurance companies, CMBS loans are even more restrictive. Your loan will be standardized, leaving little room to tailor the loan to your particular needs. Additionally, there will be far less personal involvement in the oversight of your loan as the ongoing management will be handled by a third-party.
Private Equity Financing
One of the most popular financing options for businesses, private equity financing allows you far more flexibility than traditional loans. With few stipulations, private equity lenders are free to lend on whatever they see as a viable business opportunity and set their own loan parameters. Essentially, they have a lot of buying power and are willing to take on more risk than other lending sources.
The main drawback however, is that private equity lenders generally expect a significant cut of your business profits. Also, to ensure your resort or golf course is running smoothly and will see profits, your private equity lender may micromanage your operations and dictate how your business should run.
So What’s the Best Loan Option?
Well, it depends. Conventional financing may be your best option if you’re looking to invest in distressed properties or new construction. If you’re looking to buy an existing property or need to purchase equipment to jump start your project, an SBA loan might be a good choice. However, if eliminating personal liability is your main priority, working with a life insurance company or a CMBS lender might be your best bet. And finally, for the most flexibility and access to liquidity, you’ll want to seek out a private equity lender to get your golf course or resort off the ground.