REAL ESTATE: Property value may lie in residences.
Published in the LA Business Journal Monday, October 31, 2016
Donald Trump’s only development in Los Angeles, the Rancho Palos Verdes golf course he purchased in 2002 and poured more than $250 million into fixing up, struggled to live up to revenue expectations amid the 2008 recession and tumult in the golf industry.
So, the GOP presidential candidate did what many other businesses did during that time to stay afloat: He asked for a tax break.
Records obtained from the Los Angeles County Assessment Appeals Board show Trump National Golf Club successfully petitioned to lower its assessment in 2008, 2009, and 2010, knocking it down to $10.7 million from $21.8 million.
Since then, with the economy mostly back on track, the property’s assessed value rebounded this year to $14.1 million, still well below its earlier assessment. Despite the fanfare that accompanied its opening, the course seems to have never truly lived up to financial expectations and one day could be plowed under for a more lucrative residential development.
Trump National opened in January 2006 to a flurry of press describing it as the most expensive golf course ever built and link enthusiasts praising the manicured lawns, ocean views, and a clubhouse decked out with chandeliers.
Behind the scenes, Trump deemed the course a success, too. In a December 2007 deposition connected to a legal dispute over his net worth, the billionaire real estate developer projected the course would attract enough golfers for 40,000 rounds a year, at weekend rates of $375 a round and weekday rates of $275 a round. At that volume, Trump said the course could generate earnings before debt service between $6 million and $8 million.
“Right now the course is now just coming into its own. … We’re projected to do very, very well this year,” he said at the time, though the deposition came just months before the economic collapse.
Representatives for both Trump’s campaign and Trump National did not return calls requesting comment.
While Trump’s early vision might have never been fully realized, Trump National hasn’t been alone in its struggles.
Golf courses across the board, even prestigious ones, operate on slim margins, according to industry experts. Although they enjoy reputations as luxury destinations frequented by celebrities, courses are hardly cash cows.
“Golf courses are not nearly as valuable as the public perceives them to be,” said Los Angeles County Assessor Jeffrey Prang.
The biggest golf course sale in the United States this year fetched $32 million, according to brokerage Marcus & Millichap. But the average sale price nationwide, out of nearly 80 sales, was just $3.7 million.
While golf courses are performing better today than during the recession, they have not rebounded to top levels. After a golf boom from the 1990s to mid-2000s, hundreds of courses in the United States closed. After 2006, the number of golfers is estimated to have dropped to fewer than 25 million from 31 million.
“Golf clubs around the world are struggling with how to deal with the low-demand environment,” said Fred Cordova, an executive vice president at real estate firm Kennedy Wilson. “It’s a high-fixed-cost operation, so if demand drops, your top-line revenue is seriously impaired.”
Some course owners are looking at alternative land uses as a remedy, especially as values rise for empty land that can be developed into homes or multifamily projects.
“Golf course value is absolutely de minimis compared to what the value would be if it was developed into residential properties,” said Steven Ekovich, national managing director at Marcus & Millichap. “Now that the land is so valuable, it probably makes sense in some places to close the course and redevelop it. It’s happening all over the United States.”
Malibu could be next.
The 650-acre Malibu Golf Club sold for $30.5 million to Chinese company Shinhan Golden Faith International Development Ltd. last month after being in the hands of a court-appointed receiver. The company did not disclose its plans for the long-neglected site, but people who worked on the deal said building homes is an option.
Under former owner Dick Fuld, one-time chief executive of Lehman Brothers, and his partners, the Malibu club crumbled during the recession beneath millions of dollars of debt. The ownership, which had purchased the site in 2006 for $32.8 million, filed for bankruptcy in 2009 and again last year.
Shinhan’s purchase of the site is eerily similar to Trump’s 2002 takeover of what was then known as Ocean Trails Golf Club in Rancho Palos Verdes.
The land, once a garbanzo bean field, was envisioned as a golf course by developers Ken and Bob Zuckerman for more than a decade in their goal to establish a lasting monument on the coastal bluffs. However, delays plagued the $100 million project, which included the course and land for 75 homes. Despite setbacks, the Zuckermans were nearly set to open Ocean Trails in June 1999 when a landslide dropped the course’s 18th hole into the Pacific Ocean. While the course opened the following year with 15 holes, the Zuckermans were unable to fully recover. The property was put into receivership as part of 2002 bankruptcy proceedings.
That’s when Trump swooped in to purchase the site for $27 million and set about making extensive repairs, including shoring up the 18th hole, adding a day spa, and expanding the restaurant.
Even those amenities didn’t insulate the venue from the recession.
“The actual revenues fell short of expectations,” appraiser Matt Sell wrote in a report for the Assessment Appeals Board when judging the course’s performance for 2008. “The beginning of the poor economy can be attributed to some of the less-than-expected returns for the course from 2006 to 2009.”
Based on the income and expense figures provided by Trump to the Assessor’s Office, Sell pegged the course’s 2008 net income at $1.4 million. In 2009, it fell to $1.3 million; in 2010, it dropped to $1 million.
The appeals, filed by Pasadena tax attorney Wade Norwood on Trump’s behalf, were among many that flooded the appeals board during the downturn. Norwood didn’t return phone calls seeking comment.
Even during a robust economic climate, property owners often file appeals.
“It’s very common for businesses to do,” said Richard Ayoob, a partner at tax law boutique Ajalat Polley Ayoob & Matarese in Glendale. “I would go so far as to say it would be an imprudent business practice not to examine filing an assessment appeal every year. It would be corporate malfeasance to not file an appeal in some cases.”
Home in one
Of course, the maximum value of Trump National is not connected to the golf business at all, something the Republican presidential hopeful has acknowledged.
“If I ever wanted to close the course and build housing there, it would have a value that would make this look like peanuts,” he said in the 2007 deposition.
Several luxury homes that Trump built on residential land surrounding the course seem to support that theory. He sold six between 2010 and 2014 for prices ranging from $4.3 million to $7.5 million, said Linda D’Ambrosi, a real estate agent who marketed the homes. Trump sold 17 other lots to developers, some of whom are now selling their homes for $4.2 million to $5.5 million.
Trump still owns 13 residential plots through companies VH Property Corp. and VHPS, according to assessor records. Plans are in the works to subdivide a separate area neighboring the golf course into 21 residential lots, a process that could take about a year and a half, according to a Rancho Palos Verdes city official.
But it’s not clear when the new lots will come to market. In the 2007 deposition, Trump said he wanted to own the coveted seaside property for the long haul and watch its values soar.
“I don’t need the money, and I don’t want to sell the property, because in 10 years I’ll say, ‘Why did I do it,’” he said, looking ahead to 2017. “And if I’m still around in 20 years, I’ll say, ‘I can’t believe I did it.’”