The landscape of the club industry continues to change. The economy, changing demographics, and other factors have taken their toll in recent years. Today’s successful club offers more than just a club; it offers a lifestyle. Clubs have evolved from the traditional model in an effort to attract the new generation of members. Along with more family oriented environments and relaxed dress codes, one of the ways clubs have tried to deliver that desired lifestyle and attract those members is to add or expand on their wellness/fitness facilities.

Let’s be clear. These projects are not small in nature. It usually takes a club a few times to get it right. The club cannot simply add a few new treadmills or transition space into a small workout facility. We are talking about large additions to club facilities or major renovations to existing facilities, frequently costing millions of dollars. This includes state-of-the-art fitness equipment, personal trainers, and wellness and nutrition classes that rival the best gyms.

Projects like these require a significant amount of planning. The club needs to decide on its vision of the facility and what it is trying to accomplish. It needs to determine what costs are required to execute the project and how to sell it to the membership. Part of this process is deciding how it should be funded. With stagnate memberships in many clubs and revenue per member below the peak of about 10 years ago, the answer is not simple.

Few, except the largest and most successful, clubs have the cash on hand or in capital reserves to fund a project of the size we are seeing. Thus, most clubs use a combination of debt, initiation fees, assessments and income generated from operations. In fact, more than 90% of clubs use at least some debt in funding capital improvements.

Initiation fees

Some clubs will pledge initiation fees to fund capital improvements. In fact, an estimated 65% of clubs have a policy that isolates initiation fees for capital improvements. However, not all clubs with that policy actually follow it. Even when a club pledges a portion of its initiation fees to fund a major project like a new fitness facility, seldom is it the sole method of paying the outstanding debt. In addition, other capital improvements may be required during the same period.

Surplus from operations
When generated, a club can designate a portion of its operating surplus to fund the fitness facility. While the past six years has shown a consistent surplus, amounts available for debt service are generally not the sole source of funds for a large project, even when combined with any surplus initiation fees that may be available.

Capital dues/assessments
One frequently used way to fund a club’s fitness facility is through capital dues or assessments. There are a variety of creative ways these dues or assessments can be structured.

  • They can be as simple as an additional monthly amount that is designated to pay for capital projects, both current and future with no end date.
  • There can be a calculated special assessment, based upon the total cost of the project and the membership. For instance, a 600-member club is building a three-million-dollar fitness facility; the total cost of the project is $5,000 per member ($3,000,000 / 600 members). From there, the creativity can take over.
    • The club can give the member the option to pay the amount up front.  The up-front assessment can be refundable, partially refundable, or nonrefundable.  
    • The club can also calculate a monthly assessment to fund the loan based upon the loan amount, interest rate and amortization period of the loan. Usually a monthly assessment of this nature is nonrefundable, however.  
    • The club may also include certain incentives to members for bringing in new members.  The incentive may take the form of elimination of the monthly assessment for a number of months, or a credit of a portion of the assessment.  The incentive may be a certain dollar amount, say $500, applied to the member’s account to be used for anything but dues or the assessment.
    • The club may even make it possible for a member to be exempt from the assessment if they bring in a certain number of members within a specified period.  

The point here is the structure of the assessment is not limited to any certain way…as long as the math works.

To conclude, adding a fitness facility or a major expansion to an existing facility is something every club should consider.  For many of your members, working out is a daily part of their life; chances are they may have a gym membership in addition to their club membership.  Having a worthwhile facility can entice your members to spend more time at the club and attract that new generation of members.

As published in Boardroom Magazine, May/June Edition by Kevin F. Reilly, JD, CPA, CGMA and R. Todd Swisher, CPA, CGMA, Partners and Hospitality Team Leaders