Leasing has long been recognized as a smart financial option that can help to maximize cash flow while minimizing investment outlays. Â And indeed, more companies are now acquiring new equipment through leases than through bank loans, according to the Association for Equipment Leasing and Finance. Â Over the last ten years, use of leasing finance options in the U.S. has tripled-and while there was a slowdown in leasing activity in the past two years, a recent lease market study predicted that in 2008, because of tightening credit and cash-flow squeezes, growth in this option will be seen again.
Resorts and clubs are very much a part of this trend, with 73% of properties now reporting in industry surveys that they do some leasing, both in their staff offices (for copiers, computers, phone systems, postage meters, etc.) and elsewhere on their properties (for course maintenance equipment, kitchen equipment, furniture, etc.). Â The top three reasons cited by clubs and resorts for leasing instead of buying are: 1) to have a better ability to manage their property’s growth; 2) to take advantage of the latest technology; and 3) to improve asset management.
Leasing can be an especially good idea for minimizing initial cash investments when starting up a new club; as a manager who’s been involved in several property start-ups myself, I can personally attest to how they were a huge help in getting us up and running and through those first years. Â But I’ve also seen how too many start-up properties can get in over their heads with too many leases. Â It’s sort of like college students who sign up for too many credit cards and then find themselves with so many obligations they can’t even pay off their college loans, let alone their credit debt.
But unlike college kids who are probably charging things they really don’t need and should just find a way to live without them, the challenge for club managers is to find ways to strike a pro per balance of their financing options for all of the equipment that’s needed to run their operations. Â Usually, this comes down to cash flow-related decisions. Here are some of the key factors that, in my experience, have helped me make the best calls on lease- vs.-buy issues:
- Replacement Costs– When I arrived at my current club, I found that we had lease arrangements set up for all computer printers. While this might make sense for higher-end laser printers, the price of the inkjet printers that are fine for most departments’ needs have fallen so low, they’ve also become disposable. Â Why lease these printers, when they can be purchased for a minimal amount of cash?
- Changing Technology– Equipment that meets your business needs today may be obsolete three years from now. Â Leasing can give you the flexibility to maintain a competitive edge by not only making it easier to start out with today’s best technology, but then also all owing you to upgrade more readily, if the pace of change is such that the equipment soon loses its advantage.
- Upfront Outlays-Most leases require minimal (if any) down payments, although if you’re with a startup property that hasn’t yet established a credit history, you may find that larger advance costs (or at least an extra month or two’s payments, as deposits) may be involved. Â But generally leases allow you to get immediate use of equipment with minimal upfront costs.
- Payment Flexibility-The number and variety of payment options that leasing companies now offer make it much easier to find an arrangement that works best for a specific need or budget. Â There are plans for seasonal or “skip payment” arrangements (good for properties that have significant swings in month-to-month activity); deferred payment plans (which can help hold down costs while you’re ramping up with training and learning how to use new equipment most efficiently and productively); “step down” and “step up” programs (to either start out with larger payments and then lower the finance charges over time, or increase payments in step with improved revenues), and many other creative options.
- Accounting Simplicity–Leasing can eliminate the need for complicated depreciation schedules, because lease payments are generally line-item expenses on your profit and loss statement. Â And, because these payments can often be treated as a pre-tax business expense, you may even reduce your taxes, depending on your club’s status. Â (As always, you should make sure to get your club’s finance and accounting experts involved with each individual lease-vs.-buy decision; this has become even more critical as the options for leasing arrangements have expanded. Â It is also critical to have other sets of expert eyes read the fine print of any leasing contract, to make sure you haven’t missed some hidden traps.)
- Predictability–Unlike bank lines of credit that usually have variable rates, lease payments are fixed, no matter what happens in the financial markets. Â So if you’re looking to fund equipment over a period when interest rates promise to be volatile, leasing can help lock in some peace of mind. Â Remember the 1980s, when interest rates rose from 9% to over 20% in one year? Â That’s what drove a lot of the growth in the leasing market cited earlier, because no one wanted to go through that again.
- Cost of Ownership–A variety of tax benefits can often be gained through “finance to own” leases. Â If your property qualifies (again, this is a call your finance and accounting experts will have to help you make), you may be able to deduct a significant portion of a capital expense in the first year of a lease arrangement. Â Certain types of equipment are especially well-suited to this path to ownership, including golf cars and other vehicles, course aeration, mowing and other maintenance equipment, and other equipment with long “life expectancies” and an extended projected value to club operations.Â (How a lease can qualify to be capitalized in this way is an article in itself-but you should start by becoming familiar with the “four-point test” that’s involved with the process; if a lease satisfies any one of the four tests, it is automatically classified as a capital lease. Â The tests include Transfer of Ownership; a Bargain Purchase Option (below fair-market value); Lease Terms Above 75% of the Life of the Leased Item; and Greater than 90% Fair- Market Value.)
- Year-round Efficiency–For properties that acquire equipment at different times throughout the year, leasing can help streamline the process, through Master Lease Lines that can be secured to cover ongoing needs. Â A discounted rate can be earned for all items cove red by the master lease, and there’s only one agreement to sign.
- Avoiding “Passing the Hat”–In private clubs, this may be the most compelling factor for taking a longer look at leasing right now. Â Because of what so many clubs are now spending on major renovation projects that are funded through special assessments, it’s certainly not nearly as easy-or advisable-to try to ” tax” membership through capital dues that fund needed equipment acquisitions. Â That often makes leasing more attractive, to help lessen the blow of unexpected expenses, retain more working capital when revenues are low, and keep more cash on hand for future needs.
If any or all of these factors lead you to a decision to lease, you still, of course, need to be careful as you proceed with the arrangement. Â Beware of early termination charges, term lease costs, and end-of-lease buyout options. Â In addition, if at the end of your lease the equipment shows more wear and tear than normal, you may be subject to additional fees; many new properties that have leased their initial equipment have found this out the hard way, getting hit with substantial extra charges at the end of the lease because of the added wear and tear caused by heavy construction dirt and grime.
As with all decisions we make as club managers, its best not to be forced by habit or convenience into any specific financing method.Â Every property can benefit from using a variety of financing options, so it’s important to stay flexible. Â Yes, it takes more time to look at all of the options-but it can be well worth the effort, to help optimize savings and financial efficiencies for your club.
Article written by: Don E. Vance, CCM, CPC, Chief Operating Officer/General Manager, Hound Ears Club
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