The big deal

December’s twilight was more than just the passing of one year into the next for Desert Mountain.

Dec, 30, 2010 marked the close of a $73.5 million real estate transaction on assets valued at nearly a quarter of a billion dollars.

Established in 1986, Desert Mountain is no small entity. It sits on 8,000 acres and includes 1,628 homes (just greater than 2,400 are planned) six golf courses, six pro shops, club houses and restaurants along with a number of other amenities. This is staffed by 670 employees, of which 329 are golf-related. Of those, 200 are devoted to agronomy under chief agronomist Shawn Emerson.

“We called it a new day for Desert Mountain because it was a tremendous start for 2011,” says COO Bob Jones. “We’d started negotiating the global transfer -- or the purchase of all assets -- around Nov. 3 and concluded with the membership raising over $80 million to purchase and close on the transaction by Dec. 30th. It was a 76-day transaction from raising the funds, to doing the due diligence and to closing the purchase.”

Jones and Emerson, both instrumental figures in Desert Mountain’s transition from development group to member ownership, sat down with GCI to discuss the key steps to closing a $73 million deal, securing the existing workforce and what it’s like to work for 2,268 new owners.

Did either of you have any particular experience doing a financial deal of this magnitude, which is being touted as the industry’s largest?
Shawn: No, I had not.

Bob: Early in my career I’d been through a turnover once before but it was on a smaller scale and nowhere near this magnitude.

This transaction is the largest transaction in the nation, perhaps in the world (for golf). Now, it’s the largest private club in the nation.

So this was new ground for you guys.
Bob: Actually, we’d been getting ready for this transaction for awhile. The membership had tried to purchase Desert Mountain three times earlier since about 2000, but those transactions did not go through. This was the fourth attempt, so we had some experience and knowledge about how this transaction would go.

What we did unique was we took members of our advisory boards and our HOA board and toured 16 properties across the country that had either transferred or were in the early stages of transfer. We met with those boards and management teams during a three-and-a-half week road tour and asked what their best practices were, what their take-aways were and, if they had a chance to do it over, what they’d do different. That info was pulled together into a large-format guide for us that ended up being a pillar in our strategic plan that helped guide us through this process.

With the deal done, was your sale typical of these transactions, or was Desert Mountain unique?
Bob: Desert Mountain was unique because the membership bought all of the remaining real estate except for 37 lots – two of which were homes that the developer held. We bought all water rights, trademarks, logos – everything. The sheer size of 8,000 acres, six clubhouses, six golf courses... made this different and complicated.

What we did learn was how management could assist and play a role in this process. Many times the entire management team gets fired in this process. So based on our relationship with the membership, it became a partnership that ended in a positive nature for the membership, the club and the developer and that didn’t end up in litigation.

Shawn: We looked at the total deal and broke it into three components.

We started with employees. We started a program about a year prior to the transition to train the employees on what to expect when they were turned over to the members. We took a group of upper management, lead by our HR department, to make sure employees knew how to work under the new structure of the membership. We felt that was important because a happy employee will service the membership better.
We talked about how to keep service at a high level so when the club was eventually turned over to the membership they were happy and there wasn’t a risk of everyone losing their jobs.

So there a risk of a mass migration of employees who feared they’d lose their jobs following the transaction?
Shawn: That’s correct. We had to convince the membership that it was good to keep the employees, and we had to convince the employees it was good they stayed. I was in charge of this because my division had the largest number of employees on the property... close to 200. We talked to the employees, made sure they understood what their benefits would be, their 401ks... we helped employees with their lives, introduced them back into their jobs and made sure they were comfortable. This was critical. I was also part – along with Tim Moraghan of Aspire Golf – of the due diligence of the property. We brought in consultant groups who could represent us in a fair way.

Bob: Management teams often make mistakes by aligning themselves with the developer during a transition sale, and that’s why management teams usually don’t make it through the transition.

What we did, under our leadership team, was instead of buckle under the pressure of the unknown, we proactively had each of the eight management groups convince their employees to keep doing what they did best, which was run their operations without failure and not let the transition be disruptive to the business.

We created programming that kept the management team and the employees very focused on our responsibilities. We met with each employee and asked them to pay attention to what they do best because any failure could have messed up the whole deal. If that happened, we’d run the risk of litigation and having a third-party player involved. We didn’t want that to happen.

Shawn, you were involved in a complicated audit of all of the courses, correct?
Shawn: I knew the membership wanted an unbiased opinion. What we started to do a few years ago was have member focus groups and orientation of new boards about what goes on with agronomy. We started with Dr. James B. Beard, because he was the leader in the industry in turf and there was no one who could refute his opinion. So we hired him to start our consultant team. Then we moved to other areas that we were concerned about, including Poa annua on the courses and the transition areas on the golf courses from rye grass to Bermudagrass. So we brought in Dr. Fred Yelverton (extension specialist at North Carolina State University).

Why the concerns?
Shawn: We wanted to make sure when we turned over the assets to the membership they could manage those assets according to what they wanted to do. We wanted to make sure that, after years of overseeding which depleted our base of Bermudagrass, it was a sound agronomic strategy. We wanted to make sure the agronomics were sustainable for the new members.

Bob: We put together a core consulting team, which put us in a position to have facts that were undisputable as to where the basis of this deal was. We always knew we’d grade well, but we needed a third party of highly-distinguished people who could say management has been doing this at the very highest level for years. Shawn’s team took away any misconceptions about what the value of that asset was.

So we ended up with a very fair, factual audit and the people on both sides understood the value and wisdom of that. Actually, this is one of the early lessons we learned from our best-practices tour from courses who’d experienced problems with this issue. Shawn: We took the human emotion out of this transaction and get down to just facts. My job was to not let the minutia of the deal get thrown around at the top levels where the board and the owners were.

You have to remember one key thing: What do you do the day you own the club? A lot of membership groups are so focused on what the deal is today they don’t have an understanding of what’s needed to actually move forward the day they own the club and for the next couple of years. What we tried to do was show them what the deal would look like in the next three to five years.

The agronomic practices didn’t change. The only difference is that the final decision makers get to decide what to do with that information. We were not hiding information, rather we were oversupplying each side with as much data as they could handle so they all knew what was going on. That took away the emotion and got us down to the numbers so both sides could sit down and negotiate a deal. So in the last year before the transition happened, we were on board with the membership about what they wanted to do agronomcially.

The biggest thing was we used to overseed the golf courses. But in talking with the consultants, and in talking to the members, we came up with what we call a “4-2 Plan,” we overseeded four golf courses wall-to-wall with rye grass and left two dormant. Both sides realized if we developed one plan together it wouldn’t have to be part of the negotiation talk.

Looking back, what would you have done differently?
Bob: There were three or four key things we missed. For one, this was an asset purchase, so we had to change business licenses on everything. We under estimated the expense, sheer bureaucracy and legal challenges of creating a new entity and moving a 24-year-old company into this entity. It meant new liquor licenses, new spa and fitness licenses, new food and beverage licenses. We underestimated this. The municipalities had raised their fees and were looking for anything to get a new fee. For example, because we were a brand new entity, and even though the management was the same, suddenly we owed a $400,000 deposit to the power company.

Another thing, in the excitement of owning it yourself, everyone has to learn to be a private club. That means making sure everyone gets along, tie in together with a strategic plan and be on the same page of being a nonprofit, private club. We underestimated how difficult that would be after the transaction was done.

Finally, the management team gets exhausted. In hindsight I would have worked in a little downtime following the transaction and right before we got back into it.

Shawn: The big point Bob is making is the transaction doesn’t end at the closing. That’s a key we missed. In fact, there’s 100 days after the transaction where the club needs to be prepared to run. At that time, your board and management are under the gun because your membership wants to see what you can do. When you take over the club you realize you have to govern the club and you see a lot of the things you wanted to do right away need to be managed because everything takes time.

Bob: During the process we had the slogan “With the end in mind.” In hindsight, that slogan should have been “With the end in mind – and beyond.”

Shawn: You have to take care of yourselves physically and mentally in these deals. You’re putting a lot of stress and pressure on yourselves during the deal, so you’ve got to make sure you’re mentally prepared to handle that.
 

Shawn, when you look back on this experience, what skill set paid off the most for you?
Shawn: What brought me the most credibility was knowing my numbers. That was the key for when they started asking me questions about why we were doing things and why things cost what they did.

I would say agronomy would have been either three or four on my skill-set list. I would say my team-building skills and being able to maintain my staff was secondary behind knowing my financials. Because I was tied up in meetings, I needed a solid team behind me making sure the courses were in the condition they needed to be in.

My biggest thing was, when sitting down with the developer and with the members, I could articulate what the impact was financially and that we did what we said we would do. That was the key to my credibility.

I opened up everything. I had great records and I exposed our strengths, my weaknesses – everything. That brought a trust factor to the table because people could see the good and the bad. I never went into a shell. Instead, I said, “Here are the facts.”

A lot of superintendents don’t articulate why they’re making the decisions that need to be made.

Did you have any sort of finance background?
Shawn: No. What I quickly learned were the simple things – how much nitrogen was I putting down each year, what was the costs, how many labor hours did I use, how many gallons of water. I kept good records and the records spoke for themselves. I meet with our club’s controller to put spreadsheets together that the financial guys were used to looking at. So I took what I knew and put that data into an accounting-type spreadsheet. It wasn’t that I had to learn anything, it was a matter of communicating what I knew. That was really important.

Now that you’ve gone through this process, what advice would you give to another superintendent who might be going through this same process?
Shawn: If you’re a good writer, write. If you’re a good talker, talk. A good superintendent is visible. You need to get out there and meet people. One of the things I did was I made sure each week I talked to eight golfers on the golf course and got their opinions. And before I went through this process, I didn’t realize I needed to do more of this.

A golf course superintendent shouldn’t be hidden away. He needs to interact with people on his turf, which is the golf course. You can not win in a board meeting or in the men’s grill, but you can win on the golf course because that’s your comfort zone.

When you look at the industry, is this the direction that a lot of clubs and courses will be going in the next five to 10 years?
Shawn: Right now, golf course management is a business and it’s not your same old country club.

If you’re part of a real estate or larger development, you need to find out what the true cost is to run that course, and how much the developer may be subsidizing it. In golf we’re going through a phase, and the economy is forcing us, for the most part, to determine the true expenses of a golf course. I do not believe “brown is the new green” – as the USGA is putting out there. I do believe the expectations and the reality of the finances need to get closer together.

Superintendents need to balance what the agronomy portion of their job is and what the business portion of their job is. The trend coming out of schools are young superintendents who are more business-oriented and who have agronomy backgrounds. In fact, I’d advise someone looking to get into this industry to pursue a four-year business degree with a two-year agronomy degree if you plan to move up in the industry.

Let’s face it. I have an agronomy degree but I also run a $15 million budget, 200 employees and I’m in charge of around $75 million in assets. That’s a business. I’d say only 20 percent of my day deals with agronomy and the other 80 percent deals with business.

Because of this, the profile of the assistant superintendent will increase because they’re going to be relied upon to run more of the day-to-day operation of the golf course than they were before while the superintendent evolves more into a business role. It’s what I’m seeing already.

You’re seeing so many superintendents reach a point in their careers where they’re choosing between staying in the industry or moving on to opportunities in allied industries – chemical sales or landscaping. Will this business-oriented background be the new demand for those who want a long-term career?
Shawn: That’s a good question, so let me answer it this way. There are four people who have been instrumental in my career. Cal Roth from the TPC group, who I learned how to run the business. I learned from Virgil Robinson how to be a manager. I learned from George Thompson the science and agronomics and I learned from my father, Bill Emerson, how to deal with people.

I tell my guys all the time, and I actually grade them on this, there are four components to being a good golf course superintendent: You have to run the business; you have to run the agronomy; you have to manage and you have to deal with people both above you and below you. To be successful you don’t need to excel in all of those areas, but you need to be good in all of those areas. You have to make sure you position your job where the most demand is.

For example, here at Desert Mountain, I started as a great agronomy guy but my job evolved into being involved more with the business. To do so, I trained myself to be more proficient in those other areas. What superintendents need to do is look at their particular jobs and ask, “What am I good at what are my weaknesses?” It’s a lesson I learned going through this transition process because, in the end, success is tied into being good at all of these areas, and not just one.
 

Mike Zawacki is editor of GCI.