BATTLING SUBPAR FINANCES Posh Caves Valley golf course fights to get out of the rough


Just a year after the elite Caves Valley Golf Club opened to acclaim on 900 prime acres near Owings Mills, its directors -- members of Baltimore's corporate leadership -- are refinancing the club's debts, buying time to develop a long-term solution to its financial pressures.

The refinancing became necessary after the revenue assumptions behind the $40 million project, which was conceived as an economic-development "magnet" to attract businesses to Baltimore, were turned upside down by the recession and problems developed in selling luxury home lots priced at an average of $500,000.

Under the terms of the refinancing, the club will turn over 33 unsold lots totaling about 115 acres to a new partnership for development, removing from its books $14 million of its $27 million in debts. Club operations are expected to help repay much of the remaining $13 million. But with $10 million of that due in a lump sum in 1997, another round of refinancing may well be necessary.

The story of Caves Valley's financial stresses largely mirrors the economic shocks that have rocked Baltimore's corporate offices during the past few years.

Caves Valley took shape in the mid-1980s in the minds of a handful of area executives who wanted a world-class golf course here and believed a new club would improve Baltimore's ability to attract businesses to the region.

Surveys had shown that Baltimore was not well-stocked with golf club memberships. There also was concern that many clubs were either at capacity or viewed as practicing racial or religious discrimination, says Christian H. Poindexter, vice chairman of Baltimore Gas and Electric Co. and a member of the club's board. The Caves Valley founders wanted a club known for having a diverse membership, as compared with many other Baltimore clubs, he says, "where depending on your religion or your race, you could or couldn't get in."

Corporate leaders -- headed by Leslie B. Disharoon, former chairman of Monumental Life Insurance Co., and including Reg Murphy, then publisher of The Sun and The Evening Sun -- worked to make Caves Valley a reality. Top executives of such prominent Maryland companies as BG&E;, USF&G; Corp., Whiting-Turner Contracting Co., Mercantile Bankshares Corp. and the Rouse Co. were active in the effort.

Corporate support came principally from BG&E; and USF&G;, which provided large financial guarantees that helped Caves Valley move off the drawing boards. Many other companies, including The Baltimore Sun, provided start-up funds by buying $75,000 corporate memberships in advance.

With revenue from the advance memberships and guarantees of corporate support, Caves Valley went ahead with its ambitious plans in late 1989. Six banks, led by Maryland National Bank, provided a $17 million line of credit to help pay for creating the course.

USF&G; was then led by Jack Moseley and BG&E; by George V. McGowan -- two powerful chairmen active in civic affairs and able to back up their support with corporate money. (It was Mr. McGowan's predecessor, Bernard C. Trueschler, who first committed BG&E;'s support to Caves Valley.) Such support was not uncommon during the 1980s for sports projects nationally and for significant Baltimore civic endeavors.

Those times are gone. Today, USF&G; has replaced much of its top management, including Mr. Moseley, slashed payrolls and aggressively reduced costs to regain profitability. BG&E;, while financially strong, is trying to repair damage from its real estate subsidiary's exposure to a number of other, unrelated deals.

Despite these stresses, both companies increased their support Caves Valley during 1990, and each is now providing more than $10 million in loans and advance payments to the club.

And Maryland National, stung by its own losses on real estate loans, has been eager to refinance the Caves Valley agreement.

Back in 1989, the original assumption was that most of the club's debts would be paid by the sale of 34 exclusive homesites dotting the course's perimeter. The club had hoped it would be left with a manageable $3 million debt after it finished selling the lots in 1998.

But after three years, only one site has been sold. Now, BG&E; and USF&G; are each converting their original $4 million loan guarantees into ownership stakes in the $14 million partnership, called Caves Valley Limited Partnership, that will own the homesites. Caves Valley says it is well along in raising another $6 million to complete this portion of the refinancing.

The two companies also each hold a $5 million loan secured by the club's assets. That $10 million is due in 1997. The remaining debt of $3 million will be a bank loan carried over from the original $17 million line of bank credit.

'It's not a family club'

The Caves Valley golf course, which opened in July last year, has been billed as more than just a country club golf course. From the beginning, it was intended as an economic-development tool.

"Caves Valley is where you want to do your business entertainment," says Mr. Disharoon, president of Caves Valley Club Inc. "It's not a family club."

There are none of the usual country club amenities. No pool or tennis courts. The fairways, destined for about 15,000 rounds this year, are busiest during the week, not on weekends. This is a golfing club, capable of comfortably housing a major tournament.

Designed by acclaimed golf course architect Tom Fazio, Caves Valley opened to raves from professionals and amateurs,

including President Bush and Vice President Dan Quayle, who have played the 7,020-yard course.

As an economic-development tool, the club has shown bright promise. On one evening last fall, according to Mr. Disharoon, he found the chief executive officers of six companies listed on the New York Stock Exchange having drinks at the clubhouse bar. "That's the mission," he says.

Another chief executive officer from a "substantial" Midwestern company visited Baltimore recently for the first time, Mr. Disharoon says, and played golf at Caves Valley in the afternoon, then went to a Orioles game in the evening. "As a result, he said he wanted to come back to Baltimore to look at it as a possible site for the headquarters of his company."

Of the 305 Caves Valley memberships, 151 are corporate memberships, 65 of which are inactive. Club directors hope many of those inactive memberships will be held in reserve for corporate executives new to the area or for the eventual owners of the 33 unsold lots (lots are linked with club memberships). The Sun has two active and one inactive memberships.

The support of BG&E; and USF&G; extended to corporate memberships as well, with each company paying $1.1 million to the club for 15 corporate memberships. BG&E; has five active and 10 inactive memberships; USF&G; has six active and nine inactive slots.

There are 154 individual memberships, carrying initiation fees ranging from $20,000 for people who live more than 75 miles away to $50,000 for members who live within 40 miles of the club.

Real estate pressures

The $17 million bank line of credit to Caves Valley was divided into two parts. The 900 acres bought by the club secured $9 million (an agreement with preservation groups restricts about 700 acres to use as a golf course, agriculture, cultivation of trees or horticulture). The remaining $8 million was guaranteed in $4 million pieces by USF&G; and BG&E;, the latter through its Constellation Holdings Inc. real estate division.

In 1989, the club projected that it would sell five lots in 1990, six in 1991 and six in 1992 -- or a total of 17 by the end of this year, at an average price of $500,000 each.

But the recession intervened. The only lot sale was made to one of the club's founders, Baltimore attorney Andre W. Brewster, who paid $425,000 last year for his 3 1/2 -acre parcel.

From the beginning, it was expected that the club would have to borrow to tide itself over the construction period, Mr. Poindexter says. But it was expected that the amount of new borrowing would be less than $8 million and that it would be repaid within a year from money from lot sales.

When that didn't happen, the club decided in the fall of 1990 against seeking additional bank financing. Instead, it asked BG&E; and USF&G; for more support and received $5 million unsecured loans from each company. The loans gave the club greater flexibility than bank debt, which can be called for repayment at any time, Mr. Poindexter says.

The lots still did not sell, and the banks, led by Maryland National, became increasingly nervous, Mr. Poindexter says. The payments on the undiminished debt were also putting pressure on the club's finances, he says.

"Maryland National, as you know, was invaded by people from the government [banking regulators] trying to help them out," he said. "They got nervous, and we decided that the best thing to do was to finance it in a different fashion, and that is the limited partnership."

Daniel G. Finney, a spokesman for Maryland National, declined to comment on that restructuring.

As part of the new arrangements, the $10 million in unsecured BG&E; and USF&G; loans were secured by the club's property -- minus the homesites -- and the interest rate has been reduced to 7 percent from 10 percent.

The club must pay only interest on the loan until Sept. 30, 1997, when the full $10 million must be repaid. The club has guaranteed BG&E; and USF&G; a 7 percent return on their investment in the limited partnership, according to Mr. Poindexter.

The Caves Valley Limited Partnership consists of two partners: Caves Valley Club Inc., headed by Mr. Disharoon, and CV Investors Inc., whose president is Edwin G. Pickett, an executive vice president at USF&G; and the company's chief financial officer.

CV Investors is made up of BG&E;'s Constellation division and USF&G;, each of which invested $4 million in the limited partnership in March. The partnership is seeking $6 million more from individual investors and companies to pay the balance of the amount for the land.

Mr. Poindexter says 80 percent, or $4.8 million, has been committed by investors and that he expects the deal to be completed by the beginning of August.

Three of the investors are buying individual lots for resale, and a fourth is interested in buying a lot, he says. The other unidentified investors will participate in the limited partnership.

Several members have joined forces to use personal funds to build a house on one of the lots in the hope that it will spur sales. "It's like building a model home," Mr. Poindexter says, adding that the members who are building that house will be repaid once the house is sold.

Even with an improving economy, however, selling the 33 lots will be challenging.

"I think it's going to be a long, slow sellout," says Arthur E. Davis III, president of Chase, Fitzgerald & Co. Inc., a residential real estate broker in northern Baltimore and Baltimore County and former president of the Greater Baltimore Board of Realtors.

Including the cost of building a house on one of the lots, the total cost of a Caves Valley home could easily be $1 million to $2 million, he suggests. For the same price, a buyer could get extremely nice homes in the area that would also include 15 to 30 acres.

After the restructuring is completed at the end of the year, the club should be near the break-even point in paying its expenses and debt service, says Nancy S. Palmer, Caves Valley's business manager. Any shortfalls are now being made up with initiation fees from new memberships, she says. And to maintain a solid financial footing, the club is striving to increase its membership rolls from 305 to 450, the top limit on its membership. "We need more members to be completely at the break-even point," says Ms. Palmer.

Even so, more members won't generate enough new funds to repay BG&E; and USF&G; in 1997, Ms. Palmer says. "Alternative planning will be required to do it," she says, while declining to discuss specific possibilities. "There are a lot of things that can happen between now and then."

Mr. Poindexter says there will be additional refinancing "at some point down the road" when the club's cash flow is more stable. "There are other options, such as assessments and raising fees and so forth," he says.

Although their support of Caves Valley may never return a real profit, BG&E; and USF&G; say they don't regret their involvement.

"We don't view this as a risky investment," said Kerrie Burch-DeLuca, a spokeswoman for USF&G.; Norman P. Blake Jr., who succeeded Jack Moseley as chairman, declined to comment on Caves Valley, according to Ms. Burch-DeLuca.

"It is a long-term investment in the future," Mr. Poindexter says. "It is an attempt to continue economic development here, attract new industry and more jobs, to provide an access to the kind of facilities that these big corporations are looking for."

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