Would you buy a used golf cart…from yourself? That’s really what one argument espoused by proponents of leasing golf course equipment, instead of buying it, boils down to. You know how rough your own players and staff can be on carts over the months and years it takes to buy them through installment payments. So why, one leasing company executive asks, would the management of any club willingly choose to take on either of these two burdens after completing a payment plan for a fleet of carts: 1) having to maintain and keep in service the carts that the club would now own, or 2) having to find a market for disposing of the ones that aren’t worth trying to keep.
“I think it’s safe to say that club and resort managers have more pressing issues to deal with than what to do with 150 pretty well-used golf carts,” the executive says. “There’s also the question of whether keeping around carts in that condition, and with that kind of mileage and age, is really in the best interests of a club and resort property and its members and guests. Even if they can be kept looking good, there will be operational issues and concerns that just won’t exist when a fleet is rolled over and replaced with all-new carts at the end of a lease period.
“Certainly, for properties that really feel it’s important to have something tangible to show at the end of a two- or three-year period for all the payments they’ve made, that can be accomplished just as easily through a leasing structure that has a buyout option as it can be through an installment plan,” this executive continues. “But I’ve been in a fair amount of three-year-old golf carts myself after they’ve been in pretty much constant daily use at clubs, often operated by players who don’t know, or don’t care, how to drive them properly or how to keep them from really getting beat up by lots of bad stops and starts, or by going too fast over bumps and hills.
“Believe me,” this executive chuckles, “after a golf cart’s been through that kind of abuse, there’s usually really not much ‘tangible’ that’s left to hang on to.”
Taking a Broader Look
Most club managers, leasing firm executives report, have long recognized that golf carts fall into the category of course and club equipment that they really don’t even need, or want, to take ownership of.
“The old rule of thumb is that if it’s something that will appreciate in value, you’ll want to buy it, but if it depreciates, you’ll want to rent or lease,” another executive says. “And certainly, it’s not hard to convince golf club managers who’ve had any experience with cart fleets that they can depreciate in value pretty quickly.”
But while golf carts, as well as utility vehicles and basic course maintenance equipment such as mowers and groomers, have long formed a solid base for the club leasing market, financing companies now report that interest is growing in also looking more seriously at lease packages for an expanding list of other types of equipment and infrastructure needs at clubs and resorts. The experts attribute this trend to a number of factors:
• The renovation boom has put renewed focus on finding economical ways to acquire new equipment that’s going into expanded kitchens and clubhouses and new fitness centers, spas and other features that are gaining favor at clubs and resorts, at the same time that new golf course development, and activity at existing courses, has stagnated.
• A wave of introduction of equipment featuring more advanced technology has sparked interest in upgrading existing equipment to improve operating efficiencies and reduce costs.
• Club and resort managers are getting better educated about the full scope of financing options available to them, and more sophisticated in taking a team approach to look at how to strike a better balance in distributing available capital to meet the overall needs of the property across all operating areas.
• More than anything else, the need to finance major expansions and renovations, combined with an upward trend in interest rates, has put a renewed emphasis on what’s always been leasing’s biggest attraction: improving cash flow, and conserving operating funds.
Flow Me the Money
Cash flow has become more critical at a time when clubs are having to spend millions to upgrade their clubhouses and facilities. With existing members being asked to bear much of the burden of financing these capital projects through additional assessments or dues increases—often at the same time that clubs are waiving initiation fees and/or offering discounted rates to try to reverse sliding membership trends and attract new applicants—club managers and department heads are under more scrutiny than ever to tighten up everywhere they can, so members aren’t getting hit with other fees and increases everywhere they turn.
“More than ever, [club managers] need to be keenly aware of the risks, and costs, tied to losing members who can no longer afford, or are just plain angry, about assessments,” says another club industry financing expert. “Finding as many ways as possible within club operations to reduce cash outflows and expenses is the best way to keep members happy—in fact to keep them, period.”
Know the Deal—And the “Dealer”
As interest in doing more leasing for more types of club needs has grown, however, so has the number of companies that are more than eager to promise an endless stream of great leasing packages.
“There’s always someone out there to do the deal,” says one leasing executive. “If you can receive e-mail and have a fax machine, and let it be known you’re looking to lease equipment, you’ll find out pretty quickly just how easily the ‘barriers to entry’ in the business can be passed.”
So more than ever, making sure that leases are being arranged with reputable and reliable firms has become a key consideration for club managers. Experts tick off the usual list of criteria that should be assured before any agreements are signed:
• the overall financial backing and security of the leasing company;
• working with a direct lender, vs. using brokers who may sell off the paper and disappear when lease-servicing issues arise;
• using sources that are experienced in, and understand the specific needs of, the golfing and club industries.
“The unique nature of the golf and club industry’s needs make the selection of a potential lending institution extremely important,” says one leasing executive. “Knowledge of the products and trends in the industry is the key to gaining credit approval and obtaining the proper transaction structure. A lending institution that’s knowledgeable about these issues will make the difference between a successful and easy transaction process, vs. one that’s more difficult and cumbersome.”
Deals With Distinctions
The good news is, the companies that are the most experienced in meeting and servicing the club industry’s leasing-related needs are not resting on their laurels and assuming that business will continue to flow to them. Instead, they’re working hard to develop and market new programs that can give them a real edge in the face of new competition, and added confusion, in the marketplace.
Some club-experienced leasing firms who are also in the business of financing land and facility acquisitions are now bundling their services and packages, and even offering “one-stop shopping” arrangements where free years of equipment lease
s can be earned as part of mortgage deals. Others that are solely focused on equipment leasing are streamlining their application processes and making it easier than ever to explore and calculate the possiblities of leasing through Web-based applications and services.
It all adds up to an especially good time to be a “buyer” —even if you really end up being a lessee. And the experienced companies are welcoming the opportunity to compete, because they see it as also being an opportunity to dispel a lot of the persistent myths about leasing.
“Many people are still wrapped up in the old perceptions that there are a lot of hidden costs and traps in leasing arrangements,” says one executive. “They have no problem going to Hertz to rent a car, but somehow they get hung up on leasing being a lot more complicated, when it really isn’t—it’s just renting over a longer period of time.
“We’re always glad to get the opportunity to try to explain that, and right now does seem to be a time when more people in the club business are recognizing the cash-flow benefits of leasing, and asking us to tell them what it’s all about.” C&RB
Summing It Up
• Rising interest rates and the club renovation boom have combined to highlight the cash-flow benefits of leasing more than ever.
• Interest is increasing among clubs in leasing other needed equipment beyond golf carts and course maintenance vehicles.
• One rule of thumb holds: if something appreciates in value while in your possession, you should buy it; if it depreciates, you should rent or lease it.
• Don’t equate buying through credit lines or bank loans with buying with cash; they’re not nearly the same, especially if you’re comparing the two options to leasing.
No Limits On What to Lease
Most clubs and resorts think primarily of golf carts, utility vehicles, and course maintenance equipment as the most likely candidates for leasing, but the full list of possibilities would also include these items:
• Irrigation systems
• Global positioning systems (GPS)
• Clubhouse furniture, fixtures and equipment (FF&E)
• Food and beverage equipment (ovens, icemakers, dishwashers, etc.)
• Point-of-sale equipment
• Computers, copiers and office equipment
• Telephone systems
• Pool and spa equipment
• Fitness center equipment
The Leases You Can Do
Leases can be structured, and referred to, in many ways and at many levels of detail. Here are both some general and specific terms often used to describe typical leasing arrangements applied in club and resort settings:
• Capital Lease or Promissory Note—These allow for a sale, financed by the leasing company, to the end user through a dealer. The sales tax is financed into the purchase price. The end user owns the equipment and controls the property tax, and is allowed the tax advantages of depreciation and interest.
• Conditional Sales Contract/ “$1 out”—These set consistent payment amounts throughout the term of the transaction and at the end of the term, the lessee owns the equipment for $1.
• Deferred Payment Leases—These give the borrower time to work out cash-flow issues by deferring the first monthly payment by 30, 60, or 90 days or longer.
• Fair Market Value Lease—A form of operating lease (below) that gives the lessee the option to purchase the equipment for what is established, at the end of the term of the lease, as its fair market value (FMV). The lessee can also choose to return the equipment or re-lease it for an extended period. This lease structure has popular tax benefits for the borrower.
• Finance Leases—These are typically characterized by a fixed end-of-term payment ($1, 10% of original cost, etc.). Title to what’s being leased typically passes to the lessee (borrower) at the end of the lease term. These arrangements provide many of the typical advantages associated with leasing, except tax benefits. The lessee has the option at the end of the terms to purchase the equipment, or trade it in.
• Operating Leases—In these arrangements, the lender sets an appropriate residual value based on the lease term and annual usage parameters. The lessee simply operates the equipment for the term of the lease and then returns it to the lessor. At the end of the lease term, equipment may be purchased from the lessor.
• Seasonal Leases—Popular in Northern clubs for winter play and in the Sunbelt for the months of summer slowdowns. They provide for larger lease payments during the months when play, and resulting revenues, are higher. During the months when play is slower (or nonexistent), lease payments can be accordingly lower as well, or even waived. These seasonal leases can be structured as either Finance or Operating Leases.
• Step Leases—These allow lease payments to either increase (“step up”) or decrease (“step down”) over the term of the lease, in line with cash-flow expectations.
• Tax-Exempt Municipal Leases—For clubs and courses owned by municipalities, these allow ownership of equipment similar to conditional sales contracts. They contain a required non-appropriation lease and are available to all municipal entities not associated with the federal government.
• Tax Lease Contracts—Provide 100% financing with no down payments or advance rentals. Offer end-of-term flexibility so lessors can renew, return equipment or purchase at fair market value. Sales and property taxes are added to monthly payments if applicable. These arrangements may qualify for off-balance sheet financing.
Sources: National City Golf Finance and Textron Financial
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