Avoiding Leasing Loopholes

Today more than ever, extra care must be taken to avoid the costly mistakes that can lurk in common lease clauses.

 

Thanks to a bevy of technological advancements, today’s turf equipment can help superintendents provide superior playing surfaces for members and guests—but not without a price. And because of growing budgetary constraints on superintendents, an increasing number of cash-strapped clubs and resorts across the country are leasing turf equipment, instead of purchasing it outright.

SUMMING IT UP • Always have at least two people from the club—including the superintendent—review equipment lease documents prior to signing.• The areas of the lease that pertain to normal wear and tear, excess usage and the actual return of the equipment have the potential to create added costs at the end of the lease term. • Avoid surprise lease-end costs by beginning a discussion with the leasing company no less than ninety days prior to the end of the lease term.

Among the benefits offered by manufacturers and third-party financing vendors, leases allow superintendents to stretch their capital budgets. That can help them maintain optimal course quality and operating efficiencies by making it possible to replace obsolete equipment today, rather than having to wait until the next budgetary cycle.

Leasing also requires less money up front, permits “soft cost” financing, preserves bank credit lines, offers flexible payment options, allows upgrades and add-ons quickly and easily, protects against technological obsolescence, and minimizes balance sheet liabilities.

Leases are not all sunshine and cherry pie, though. Club operators need to exercise caution when entering into new equipment leases, to make sure they fully understand the terms of the agreement.

 

The Who and What of Leasing
In most cases, the organization that you will negotiate the price and terms of a lease with will be a different entity than the one holding the lease though the term. This is a critical concept to understand: Once the lease documents are signed, the distributor you have been negotiating with receives its full pay, and your club is now in a 36- to 60-month contract with a bank that typically views your equipment deal as a line on a balance sheet.

Having a leasing company’s asset inspector come to your property a month or two before leased equipment must be returned can help to avoid major repair-related headaches.

The actual lease documents are long and filled with confusing legalise. But while it may not be riveting content, it is well worth the effort for at least two people from the course leasing the equipment to read through the documents thoroughly, prior to signing.

The golf course superintendent should be one of the people participating in this review, as he or she will have played a significant role in the negotiations and should be able to spot things that are not in order, are not as negotiated, or could cost the club money at the end of the lease.

“I negotiate the equipment package, but our company’s Vice President of Finance negotiates the lease terms and ultimately signs the documents,” reports Berry Collett, CGCS and Director of Golf Maintenance at The Sea Island Company’s five upscale courses on St. Simons Island in Georgia. “I do receive a copy of the lease documents for my records and to review prior to it being signed.”

Areas of the lease documents that clubs must pay special attention to focus on excess usage beyond annual hour limits, the condition of equipment upon its return, and the actual requirements for returning the equipment. These are the areas that often result in unexpected expenses at the end.

Only So Many Hours in a Year
The maximum hours of use per year will be stipulated within the lease documents, as well as a per-hour charge for exceeding this threshold (usually $3.00 to $5.00 per hour). The hour threshold should be established during the price negotiations for the equipment package. Most leases allow for 600 hours of use per year.

Here at Prestwick CC, during our most recent equipment negotiation we asked the distributors for package price quotes based on both 600 hours and 900 hours annually. One of the competing distributors offered to throw in the upgrade to 900 hours at no additional charge. This was the distributor we eventually leased the equipment package through.

However, when the lease documents arrived for our CEO to sign, a copy was sent to me to review and I noticed that the maximum hours of use was listed as 600. After a quick call to the equipment distributor representative, a new set of lease documents was sent out to us specifying 900 hours of maximum use per year.

The charge for excess usage in this particular lease document was $5.00 per hour; so such an innocent mistake, if overlooked, could have resulted in an excess usage charge at the end of the lease term of several thousand dollars.

Steep shipping costs related to the return of equipment from remote locations can quickly negate the financial gains earned through leasing arrangements.

Bring it Back (Almost) Like You Found It
The “condition of equipment upon return” usually stipulates that the equipment will be brought back in working order, with normal wear and tear.

“Naturally, it is in a club’s best interest to keep turf equipment well-maintained, thus avoiding the cost at the end required to get the equipment back into good working condition [before returning it],” says Jeff Black, former Equipment Maintenance and Lease Manager for Scottsdale, Ariz.-based Desert Mountain Golf. “But no matter the condition of the equipment, it is very important to have an onsite meeting with a leasing company asset inspector 30 to 60 days prior to the lease agreement’s expiration. At this meeting, the inspector will document the condition of the equipment and help to determine what repairs—if any—need to be made [before it’s returned].”

Those repairs can range from something as simple as replacing a tire or two to something as extensive as replacing an engine. But more importantly than a to-do list, this meeting gives the club a clearer picture of the equipment’s condition, and the opportunity to make needed repairs at a lower cost

“It is a critical error to return equipment without a written document assessing the condition of the equipment that is signed by both a member of the club’s team and a representative from the leasing company,” adds Black.

Our Place or Yours?
The language of lease documents that pertain to the actual return of the equipment is often vague and has the potential to result in large unexpected costs. In most lease documents, the specifications for this part of the process usually reads something similar to, “customer shall, at customer’s sole cost and expense, return all [not part] to a destination specified by Lessor.”

Depending on what is negotiated up front, this standard contractual language could result in an equipment return that is as pain-free as the distributor picking up all of the equipment at your club at no additional cost. But on the flip side, it could result in a complex and costly scenario where you have to arrange and pay to truck the equipment a thousand miles or more to another region of the country.

Years ago, when Black was the Equipment Manager for a golf course management firm called The Links Golf Group, he learned the hard way about what this clause could cost him.

“Even though I was aware of the standard clause in the documents saying the customer is solely responsible for returning the equipment at lease end, no leasing company had ever required that of us before,” he says. “But this particular leasing company required us to ship the equipment from South Carolina to Orlando, Fla., at a cost in excess of $5,000.

One of the best protections against falling into leasing loopholes is to maintain a long-term relationship with a trusted distributor that extends into multiple lease renewals.

“The real salt in the wound,” he adds, “was that although the equipment was returned in very good working order, a bill from the leasing company followed charging us several more thousand dollars for equipment repairs they said were needed.” It was then that Black learned to get the condition of the equipment documented and signed well in advance.

Collett also ran into some costly problems when he first took over at Sea Island nine years ago. “The lease package I adopted was financed through a bank that does not normally do equipment leases,” he says. “When the bank sent an asset inspector to evaluate the equipment, I was informed that we would have to make some repairs, as we did not meet the bank’s definition of ‘normal wear and tear.’

“Sea Island was also required to pay for the shipping costs, but we were able to negotiate a more favorable return location,” adds Collett. While getting a bank to change the wording of the equipment return clause is rare, it is realistic to ask the equipment distributor to agree—in writing—to accept responsibility for the return of the equipment at the end of the lease, with no additional cost to the lessee.

Familiarity Breeds Contentment
A good way to get help with problems that may arise around excess usage, the end-of-lease condition of leased equipment and/or its physical return is to agree to start a new lease from the same distributor.

“If you lease through the same distributor repeatedly, slight transgressions concerning equipment condition and/or excess usage at lease end are much more easily forgiven,” notes Black.

Collett agrees: “After the initial lease package at Sea Island, we leased the same brand of equipment for many years and it was always much easier to work through minor lease-end problems,” he says.

Ultimately, by reviewing lease terms closely at the start of the process, a better understanding will result of what is required throughout the full term of the agreement—and that can help to avoid the horrible surprise of unexpected negative financial implications when it’s time to bring things to an end.