Evaluation

& Recommendations For Santa Barbara Polo & Racquet Club Background The Santa Barbara Polo & Racquet Club was formed in 1911 in Carpinteria, CA, and took many forms of private ownership over its years. Beginning in 1974, a condominium complex, pools, tennis clubhouse and stabling were added. The Club property itself (polo grounds and tennis facilities) was purchased by a group of about 10 polo players who put it into a 501 (c)-2 trusteeship (Santa Barbara Polo & Racquet Club). These same polo members comprise the board of directors of this organization. The Club itself is organized as a 501 (c)-7 private Club (The Santa Barbara Polo & Racquet Club Management Company), and is owned by its members. The majority of the board of directors of the private Club is also the same ten polo members. This organization leases the property from the trusteeship for approximately $225,000 annually. Neither organization has a written conflict-of-interest policy. There have also been charitable non-profits associated with the Polo Club (Polo Training Center of SB & SB International Polo Training Center) with their board of directors composed of wives of the 10 polo members and the owner/wife of the accounting firm handling the financials for all of these organizations. Approximately 20 years ago, a Polo Club tennis member, Stephen Crossland, who owned a collegiate brand-marketing firm, offered to market the Santa Barbara Polo Club trademark as an additional source of income for the Club. The brand-name was a hit overseas, and generated an additional $250,000 in income for the Club annually. In 2007, this regular income from trademark branding was transferred from the non-profit private Club to the trustees in a agreement by both boards. Today Today, the Santa Barbara Polo & Racquet Club has approximately 200 tennis members and 70 Polo members. However, there are only approximately 10 ongoing polo members. The rest of these polo members are transient members who join for the few months of polo season only. The Club (SB Polo & Racquet Club Management Company) does not own its property, but does own its facilities and equipment, with a value of approximately $1.16 million as of 2013.

While most of the membership is in tennis, most of the gross income is in polo and polo-related corporate sponsoring. However, this income from corporate sponsorship of polo is not the same thing as the income from trademark branding. For 2011, the Club recorded $3.3 million in gross revenue, with only $702,000 of that income from tennis. However, of the $3.1 million in expenses, tennis operations expenses were only $134,000. This means that the tennis club had an operating profit of $550,000, while the overall operation of tennis and polo only had a $160,000 profit. Clearly, there are substantial administrative expenses shared by both polo and tennis. But, while polo comprises only has a small portion of the total membership, its expenses are largely subsidized by the tennis club. The Clubs bookkeeper is paid a salary of $93,000 per year, plus retirement and benefits. In 2012, the Club tennis facilities underwent a renovation, largely paid for by an assessment to the Club members. Just before construction began, the contractor for the project was changed from a Club tennis member to one of the board of directors of the trusteeship. The Club member resigned from the Club. Analysis The private Club is an unusual organization. The tennis and polo members are quite separate almost like two different Clubs. They have little common interaction. However, while there are 200 tennis members, it is the 10 permanent polo players who control the boards of both organizations. The tennis members seem to have little understanding or interest in the governance of their organizationl. The most serious problem is obvious. Since the two boards are controlled by the same individuals, there is an incestuous relationship with clear conflicts of interest. The trustees of the polo property did not actually pay any money to purchase the property. In actuality, they LOANED the money to the trusteeship. Each of the ten trustees made a $150,000 loan to the trust to come up with the $1.5 million to purchase that property. These trustees are paid out interest of approximately $280,000 per year (or $28,000 each annually) on their loan. So, while these trustees have not take any compensation for their involvement in the organizations, they are actually paid in the form of 19% interest off of their buy-in loan. They actually recouped their original investment in just over 5 years but are still owed the original $150,000 from the trusteeship. In essence, the majority of the $225,000 fee the Club membership pays to the trusteeship for use of the land is paid directly to the trustees in the form of interest. More important is the transfer of the trademarking royalties: In 2007, the income from trademarking the Club name was moved from the private Club to the trusteeship, with the stipulation that the royalty income to be either used to improve the Club property or to be returned to the membership1.

While not readily known here, the Santa Barbara Polo & Racquet Club trademark is one of the most popular and successful brand-names in Asia. This brand-name specializes in high-end leather goods, and their product line and sales have increased exponentially in recent years, with over 50 high-end products being sold in Asia. This brand-name explosion was no doubt helped by the very high-profile Clubs 2011 anniversary celebration attended by British Royalty. In 2010 a physical flagship store was opened in Malaysia. A second was opened in December 2012, and in just February of 2013, another flagship store was opened2. Since tax filings for the trusteeship since 2008 are not publicly available, there is no available record as to how much royalty income has since been generated from this trademarking, or how it has been paid out. However, the public record of the private Club shows that no income from this trademarking has yet been returned to the Club. As a matter of fact, the members were assessed for the majority of the cost of the facility upgrades. In any organization, having a board member act as the contractor on a major remodeling of the organization facilities would be a noted conflict of interest. Recommendations The income of the bookkeeper is double that of other similar Club bookkeepers in the area. This, in itself, is a common red-flag that would indicate that a member- involved audit of the Clubs finances, especially in the relationship of the two entities, is in order. Both the Santa Barbara Polo & Racquet Club Management Company (private Club) and the Santa Barbara Polo & Racquet Club (trusteeship) should be required to develop a written conflict of interest policy that requires disclosure to the full membership of any potential conflicts of interest of board members. To further avoid potential conflicts, the by-laws of the Club should be amended so that Club members who are trustees of the land cannot serve as board members of the Club and that the makeup of tennis and polo members be either equal or in relation to the number of permanent members each membership has. The Club membership is encouraged to be more vigilant and involved in their governance. While there is a general attitude among the tennis members that they exist at the whim or will of the trustees, it is unfounded. The trustees clearly are interested in preserving their polo. But, as board members, they are required to act to preserve the mission of the Club, and the tennis members have equal, if not more say, in the destiny of the Club.


1 From Statement 1 of the 2007 IRS Form 990 for the Santa Barbara Polo Club (trusteeship):

Santa Barbara Polo Club entered into an agreement with a company to exploit the name and logo of the Club. The Club will receive royalties. The income will be used to make improvements and maintenance of the property and pay interest and principal on funds borrowed to make improvements to the property. Any excess funds will be given to the Santa Barbara Polo & Racquet Management Company. 2 http://www.newsarawaktribune.com/news/865/Santa-Barbara-Polo--Racquet-Club- opens-second-flagship-boutique-outlet/ DISCLAIMER This report is based upon information available to the author at the time. Although the author has made every effort to ensure that the information in this book was correct , the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.