The Property Tax and Golf Clubs in California

Summary and Introduction – Club CX (CX is as pseudonym) )is one example of how property taxes are assessed in California.  In 2021, CX was purchased by the Homeowner’s Association (HOA).   The HOA believed the transfer of ownership to the HOA would guarantee a property tax exemption.  The County Assessor ruled the Club would not be tax exempt.   This paper examines the question of whether a tax exemption should or should not have been granted. (A further history of the property tax at CX is presented in the Appendix.)

 

The Assessor argued that the value of CX ownership was not embedded in the sales price of homes in the development and therefore not in the assessed values of those homes.  Therefore, CX was taxable to the HOA. That argument was found to have merit.

 

The question of whether homes bought after the sale would have CX ownership embedded in the sales price is also examined. If so, the homebuyer could be subject to double taxation.  It was concluded that if the market operated freely, there would be no double taxation. 

 

Is the Value of Club Ownership Embedded in the Assessed Value of Current Homes? – If the CX development was a planned unit development that included the golf club, CX would be tax exempt.  In that case, homebuyers would include the value of CX embedded in their purchase price.  An example should make this clear.  Assume there are two developments each with N homes valued at H and a golf course valued at V.  In Development1, the developer retains the ownership of the golf course.  The property taxes paid in Development1 are shown in Eq. 1

 

1)      Property Taxes in Development1 = (N∙H + V)∙T

 

 Where,

                             T= Tax rate

 

In Development2, the developer cedes initial ownership of the golf courses to the HOA.  This increases the value of each home by V/N. The property taxes in Development 2 is shown in Eq. 2.

 

2)      Property Taxes in Development2 = N∙(H +V/N) ∙T = (N∙H +V)∙T

                                                                                                                                    

Both developments generate the same amount of property tax.   The HOA at CX is patterned after Development1.   If an exemption was granted CX, HOA property taxes would fall by V∙T to the benefit of homeowners.  It would also open a Pandora’s box as other private golf clubs might try the same ploy to reduce taxes by selling to an HOA and leasing the facilities in return.  It is clear why the Assessor has not granted the exemption.

 

An examination of how homes are priced at CX also shows an exemption is not warranted.  Home prices at CX depend on three variables.  First is the construction value, CV, of a home.  CV would be based on such things as square footage and the quality of finishes.  Second, would be the value externalities, EV, supplied by surrounding properties.  Examples of externalities would be easy access to golf and tennis facilities, open space provided by a golf course, and proximity to shopping and restaurants.  Third, would the business value, BV, of an ownership interest in CX.  In equation form the sales price would be:

 

              SP = CV + EV + BV/N

 

Where,

 

                             SP = Selling price of a home

                             CV = Construction value

                             EV = Externality Value

                             BV = Value of an ownership interest in CX business (golf, tennis, food, and beverage)

                             N = Number of homes in the development.

 

Previous to the sale of CX, there was no ownership interest, so BV was equal to zero.  The value of living on a golf course was substantial and was embedded in the sales price.  It was this externality that allowed the developer to make a profit over and above the cost of building the golf course and related facilities.  

 

The homeowner would pay property taxes on SP which did not include any embedded value for CX property (i.e., BV/N).  The Assessor was correct in denying the exemption for CX.

 

Is there Double Taxation on Homes purchased after the sale to the HOA?  The concept behind exempting community property owned by an HOA is to eliminate double taxation.  Double taxation is taxing the value of community property embedded in home prices and taxing the community property itself.  A simple model will show that is not the case at CX. 

 

The selling price of homes after the sale, SPA, would be:

                            

 

3)           SPA = CV + EV + BV/N + VHOA

 

 

Where,

 

                             SPA = Selling price of a home after the sale to the HOA

                             VHOA = Benefits or Costs of HOA ownership of CX

 

 

The value of the CX business, BV, is estimated as the current assessed value of CX.  The value of HOA ownership is probably negligible for the following reasons: 

 

1.       Previous to the sale of CX, HOA dues covered racquet sports and clubhouse services (i.e. a social membership) provided by the developer.  Golf membership was optional.  After the sale, HOA dues covered the cost of the same services provided by the developer.   Golf membership was still optional. If the service level is the same, it is doubtful HOA ownership created any value added.

2.      Proponents of the purchase implied the previous owner, siphoned off profits and neglected to maintain the club to the standard that was promised. Ownership would give the HOA rights to any profits that could be spent on capital improvements.  If there was a profit to be made, it is not reflected in the budget.  Since 2022, HOA dues have risen 27 percent in two years.  Golf club dues have increased by 15 percent in that same time frame.  And there have been no major improvements to the golf course or club facilities.

3.      HOA ownership could actually dissuade prospective members from joining.   Golf members are a minority at CX.  A golfer who is a prospective buyer must consider if he wants major decisions affecting the golf club to be made by non-golfers who could control the Board.   He must also consider whether he wants to pay compulsory dues to support the tennis facility which he would not use.   A non-golfer might be troubled by being financially responsible if the golf club cannot break even.[1] Before the sale, the previous owner did not have the power to assess homeowners.  After the sale, the HOA has broad assessment authority.  It is unlikely that the non-golfer would see value in HOA ownership as opposed to private ownership.

 

 

Assuming VHOA is equal to zero, the new homeowner would pay a property tax equal:

 

                             PTA = (CV + EV + BV/N) ∙ T

 

Where,

 

                             PTA = Property tax Paid on home purchased after the sale

                             T = Property tax rate

 

The new homeowner would also be paying his portion of the tax on BV which would be paid through HOA dues.  Therefore, his total tax burden would be:

 

                             Tax Burden = (CV + EV +BV/N) ∙ T + BV/N∙ T

 

It appears the new homeowner is subject to double taxation.   This assumes, however, that the buyer is irrational.  The rational buyer would realize his benefit (BV/N) is being paid for by the HOA and he need not include it in his offering price. The price of housing after the sale should be the same as before the sale.  Therefore, there is no double taxation.

 

The implication of this analysis is that amenities such as golf courses should be taxed at the HOA level. Taxing amenities at the HOA level has a significant benefit as it creates a level playing field for HOA and privately owned clubs.  Currently, HOAs can build lavish clubhouses and face no property tax consequences.  The value of a new HOA clubhouse is not immediately embedded in the assessed value of homes because of Proposition 13, and that means existing homeowners do not have an increased tax burden.  Privately owned clubs would have a clubhouse taxed upon completion. Different tax treatments for the same type of asset should not be part of an equitable tax code.

 

 

 

 

Appendix

 Property Taxation at CX

 

Non-profit golf courses are not assessed on the highest and best use of the land, but only on the use of the land as a golf course (See article XIII, Section 10 of the California State Constitution).  The previous owner of CX was a private developer.   That developer never filed with the California Secretary of State as a nonprofit corporation and therefore the golf course could have been assessed at its highest and best use.   It appears that the Assessor treated CX as if it was a non-profit.  Once it was assessed, the assessed value was protected under Proposition 13.  CX’s new owner, the HOA, is a, is a nonprofit corporation.  In order to qualify as a nonprofit golf course, however, the property must have been used exclusively for that purpose for at least 24 successive months prior to the lien date.”  When the property was purchased by the HOA, the Assessor could have reassessed the property under Article XIII or Proposition 13.  Either option would have been financially harmful to CX.

 

The Assessor made two decisions regarding the assessment of CX.  First, the property was not reassessed and the assessed value of CX remained at approximately $15 million. This appears to be a bargain for the HOA since the replacement cost of club facilities far exceed $15 million.  Second, the Assessor rejected the HOA’s argument for an exemption, ruling there was no evidence that the value of the Club was embedded in home prices.  In essence, the HOA bought a business and with it the obligation to pay property taxes.

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[1] Two examples are Morningside CC where the HOA now subsidizes the golf club, and the Springs CC where the HOA members were assessed to enable the purchase of the golf club.  See Barks, Joe, “Tensions Rise Over Suit Against the Club at Morningside’s HOA,” Club and Resort Business, December 28, 2015, and Bohannon, Larry, “This could be it: The Springs Club is trying something new: get golfers and HOAs working together,” Desert Sun, May 26, 2029.

Structuring a Closest to the Pin Competition

 

A recent two-day tournament awarded closest to the pin prizes on nine holes.  The competitors were allowed to use any of three tees (black, white, or green).  The total and average yardage from each set of tees is shown in Table 1.

Table 1

Total and Average Hole Yardages

Tee	Total Yardage	Average Yardage
Black	1,465	163
White	1,287	143
Green	1,147	127

 

One theory says letting players choose their tees is equitable.  That is, the good player from the black tees should be about as accurate as a poorer player from the green tees.  Let’s see how that worked out in practice.  If the theory is correct, the percentage of closest to the pin prizes won from each set of tees should approximate the percentage of competitors playing from those tees. Table 2 shows the actual results.

Table 2

Percentage of Competitors and Wins by Tee

Tees	Percentage of Competitors	Percentage of Prizes Won
Black	34	22
White	55	67
Green	11	11

 

The results are not far from perfect equity.  If a black tee player beat out a white tee player on one hole, the Percentage of Prizes Won would be black 33%, white 56%, and green 11%, or almost a perfect match to the Percentage of Competitors.

Results will vary depending on the difference in distance between tees and the quality of players choosing each set of tees.  An alternative would be to set aside holes where only players from one set of tees can compete.  This would not be recommended.  A hole with a closest to the pin prize releases endorphins that brings pleasure and excitement to a player.   The more holes with prizes, the greater the enjoyment even though it may reduce the player’s chances of winning.  This recommendation assumes the prizes are sufficiently low that the club champion does not let avarice overrule pride and play from the green tees.  

How Not to Conduct a Competition -II

The USGA goes to great length to explain “How to Conduct a Competition.”[1]  Unfortunately, the USGA does not warn of handicapping mistakes that lead to unfair competition.  Many of these mistakes involve competitors playing from different tees.  What tournament committees (TC) often neglect is that Course Handicaps from different tees should only be applied to net tournaments involving stroke or match play. Course Handicaps are not a cure-all that can be applied to every form of golf competition.[2]  This post examines a tournament where the limitation of the handicap system was not recognized and resulted in inequitable competition.

•  Giving Gross Prizes When Competitors Can Choose Which Tees to Play – In this tournament teams were allowed to choose which set of tees they would play.  Flights were then constructed based on the combined Handicap Indexes of each two-man team.   Flights could have teams playing from the back tees and the forward tees.  Each flight would have gross and net prizes.  In the gross competition, teams playing from the shorter tees would have an obvious advantage. The TC should have recognized that this format was unfair, but it did not.   The mistake probably stemmed from the TC tradition of always paying equal gross and net.  Unfortunately, putting “equal” in the title does not make it so.[3]  The remedy to ensure equity is to have all competitors in a flight play from the same set of tees and eliminate “equal gross and net payoffs.                                                                                                                                             
• The Mistaken Belief that Course Handicaps from Different Tees Make a Scramble Competition Equitable – The use of Course Handicaps from different tees in a scramble competition is not equitable as can be seen by example.  Assume we have two teams made up of a 12-handicap and a 15-handicap player.   Further assume one team chooses to play from the longer white tees while the other team chooses to play from the shorter forward tees.  Lastly, assume the move to the forward tees reduces the handicap of each player by four strokes.  The USGA suggests a team handicap should be 35% of the low player’s handicap and 15% of the high player’s handicap. The scramble handicaps for each team are shown in the table below:[4]

Team	Low Handicap	High Handicap	18-Hole Handicap	9-hole Handicap
White Tees	.35 x 12 = 4	.15 x 15 = 2	6	3
Forward	.35 x 8 = 3	.15 x 11 = 2	5	3

As the example shows, using Course Handicaps from different tees does not ensure fair competition.  If the competition was held over 18 holes, the white-tee team would only have a one-stroke advantage to compensate for over 600 yards in distance.  In the 9-hole competition both teams would have the same handicap.  In essence, teams opting for the forward tees instead of the white tees (or opting for the white tees instead of the back tees) incurred either no reduction or at most a one-stroke reduction in their scramble handicap for making that choice.   This demonstrates the uneven playing field inherent in the tournament format.   Again, this problem can be corrected by having all competitors in a flight play from the same tees.

•  Horse Race Format – It is difficult to handicap a horse race event that would level the playing field.  The TC avoided the struggle of having to find equalizing handicaps and simply had all players compete at scratch.  Not surprisingly, win, place, and show went to players from the first flight.  While the format was unfair, another problem was players were not told of the format before being asked if they wanted to play in the horse race.  To eliminate this problem, the TC should specify how all aspects of a tournament are to be run well before the start of competition.   
•  Participation Determinants – The tournament was not well attended with only 70 entrants but with a capacity for 96 players.  Moreover, given the total membership, at least 300 potential players chose not to enter.  There are many reasons for this.  It is doubtful players recognized the inequity of playing from different tees and decided not to play. The flight structure was not available until the eve of the competition and therefore could not have affected the participation level.  More likely, players chose not to enter because they believed tournaments have a history of getting handicaps wrong, player handicaps are not adequately policed, and/or they have tired of seeing the same players winning low gross.  Another reason could be economics.  It cost a player $175 to enter.  If the player was fortunate to win his flight and get one closest to the pin he would receive $140 in pro shop credit.  So, even the winner does not get his money back and must be satisfied with only paying $35 for tournament food.  For half the field who failed to place, they are paying for meals with a retail value of $100 at most.  It is possible many members may view tournaments as profit centers for the pro shop and the food and beverage department and choose not to participate.  How the TC resolves the participation problem is yet to be determined.  One thing is clear, the TC should not impose tournament formats that favor one group over another.  Such mistakes as were made in this tournament only gives players one more reason not to participate.  It also indicates  artificial intelligence (AI) may be less of a worry than a lack of intelligence (LI).

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[1] United States golf Association, How to Conduct a Competition, Far Hills NJ, 2012.

[2] For more examples of mistakes in competitions from different tees see “How Not to Conduct a Competition,” ongolfhandicaps.com, June 14, 2014.

[3] For an examination of the equity of “equal net and gross” see “Is Your Tournament Equitable,” www.ongolfhandicaps.com, October 22, 2012.

[4] The USGA does not specify how rounding to the nearest integer should occur.  In the tournament in question, each player was given an integer scramble handicap and the two were added together to get the 18-hole handicap.  The 9-hole handicap was 50% of the 18-hole handicap rounded to the nearest integer.

The PGA Tour Forgets What It's About

The PGA Tour’s move to more no-cut tournaments neglects one of the most important reasons viewers watch golf tournaments. There has to be a compelling story to draw viewer interest. If not, you just have another LIV event with its dismal Nielsen ratings. The recent Honda Classic is a good example.  The tournament came down to a contest between Chris Kirk and Eric Cole. Kirk is making a comeback after fighting alcoholism.  Cole, who has own health problems, had a world golf ranking so low you wondered how he got into the tournament—until you saw his swing. Both players accredited themselves well in an exciting playoff.  They displayed class in winning and losing and showcased what the PGA Tour should be about.  To paraphrase the NFL, "On any given Sunday" anyone can win and not just the top 70.

Rory McElroy, who has turned into a flack for the Commissioner’s office, has said, “You ask Mastercard or whoever it is to pay $20 million for a golf event, they want to see the stars on the weekend.” The counter argument is, “If you can’t be in the top 65 and ties after Friday, are you really a star?  And do you want to see Rory with an early Sunday tee time fighting to come in 49^th?  And if Rory is correct, what about the sponsors of non-designated events?  They are guaranteed to have few or no "stars."   Treating a tournament as a second-class citizen may have been the reason Honda dropped is sponsorship of the Honda Classic after 42 years. Will the Tour be better off if sponsors in a similar position head for the exits?

Then there are some statistical problems that need to be answered.  First, World Golf Rankings (WGR) are a lagging indicator of performance.  Jon Rahm, for example, can play like a dog for a year and probably not fall out of the top 70.  The new format sounds more like a closed union shop than a meritocracy.  Second, is the WGR really that accurate?  Are the top 70 really the top 70?   Probably not.  But if you have the top 156 playing, you will most certainly have the real top 70 players teeing it up.

Aping LIV by going to more no-cut tournaments is both hypocritical and bad for business. The PGA Tour owes it success in part to nurturing young players to replace aging stars. If young players see limited opportunity, they will direct their talents elsewhere.  That will not be good for the health of the game or for the Tour.    

Handicapping a Skins Game for Par Threes

 

A group of players participate in a gross skins game and net skins game. There is a wide range of handicaps with players receiving 0, 1, or 2 strokes on a par three.  In the net skins game, nothing irritates the low handicap player as much a seeing his natural birdie tied by a bogey made by a player receiving two-strokes.   To right this injustice, the low handicapper suggests that players only receive one-half of their handicaps strokes on par three. That is, a player receiving two-strokes would only get one-stroke.  The player receiving one-stroke would only get one-half a stroke.

What are the implications of going to the “0ne-half Rule”?  A rigorous analysis would require scouring tons of data and using a simulation model to estimate which golfers win and which golfers lose under the different handicap rules.  Even then, the result would be imperfect since results of skins games depend upon the mix of players[i], a hole’s difficulty, its stroke allocation, and the abilities of players (e.g., long hitter, short hitter).  The importance of this problem does not call for that much work.

In this post, a more slothful approach is taken.  It is assumed three players play a par three with the scoring probabilities of each player shown in Table 1.  There are 36 possible outcomes each with its own probability of occurring.  For example, the probability of all three players making par is (.6 x .2 x .1) .012. 

Table 1

Scoring Probabilities

Gross Score	Player 1 (0 strokes)	Player 2 (1 Stroke)	Player 3 (2 Strokes)
Birdie	0.1	0.05	0.0
Par	0.6	0.2	0.1
Bogey	0.3	0.6	0.5
Double Bogey	0.0	0.15	0.4
Average Score	3.2	3.85	4.3

For each outcome, one of three players earns a skin or there is no skin.  A player’s probability of winning a skin is the sum of the probabilities of occurrence where he wins a skin.  Table 2 presents these probabilities for three handicap rules (no handicap, full handicap, one-half handicap).

Table 2

Net Skin Probabilities 

Handicap Rule	Player 1	Player 2	Player 3	No Skin
No Handicap	.505	.055	.020	.420
Full Handicap	.030	.117	.435	.418
½ Handicap	.196	.353	.198	.253

If the competition was only net skins, the ½ Handicap Rule would appear to be best.  The No Handicap Rule gives the low handicap player a big advantage and the Full Handicap Rule gives the high handicap player a big advantage. But the competition under consideration has both a net skin pool and a gross skin pool. Table 3 presents the probability of each player winning at least one skin.  

Table 3

Probability a Player Wins At least One Skin 

Handicap Rule	Player 1	Player 2	Player 3
Full Handicap	.52	.23	.45
½ Handicap	.60	.39	.21

These numbers do not represent the actual probabilities in a skins competition.  With many more players than the three used in the example, the actual probabilities will be much lower.  The probabilities in Table 3, however, do indicate the relative advantage of each type of player.  The Full Handicap Rule appears to best in terms of equity and simplicity of administration (1/2 strokes can be confusing).  Moreover, this analysis was done for par three holes which the high handicapper typically finds the easiest (i.e., scores the least over par).  Therefore, applying the Full Handicap Rule over all holes would tend to equalize the chances of all types of players earning at least one skin.

In the long run, this type of skins game is an annuity for the low handicap player and he should not begrudge the high handicap player who chips in for a three and wins a skin. 

 

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[i] www.ongolfhandicaps, “Why You Win (or lose) in Skins,” June 25, 2012.