Leases You Can Bank On

Changing interest-rate scenarios and the aftermath of a challenging year for clubs are having direct effects on financing decisions—and making it more critical than ever to carefully consider the source of your leasing arrangements.

by Joe Barks (editor@clubandresortbusiness.com)
March 2006
 

The lines between banking, financing and insurance have become quite blurred in recent years, but there’s one aspect of all three businesses where there’s never been any distinction at all: In all of them, the tough times are when you really find out if you have a true partner.

Clubs and resort properties affected by last year’s wave of hurricane-related damages and claims learned this again last year, when they saw how their insurance providers either came to their rescue, or ran the other way (see “Making Risk Your Business,” C&RB, January 2006). Further reminders—for properties everywhere, not just those that took hits from the storm—came when insurance renewal decisions and premium notices went out at the end of the year, once again showing which carriers were really committed to the industry.

Now, in more of a delayed-reaction acid test, clubs and resorts are getting similar insights into just how much of a partnership they really have with their sources of financing and lease arrangements for course maintenance equipment, golf carts, and other products or systems they use on their properties. A tightening overall lending market, because of continued rises in interest rates, has combined with stories making the rounds about how some lenders behaved during last fall’s trying times, to open many club managers’ eyes about just who they can rely on for their financing needs, and at what cost and on what terms.

“When [club and resort] customers of ours in Florida were devastated by the hurricanes,” notes an executive with one leasing company, “we issued a blanket deferment that no payments would be due for several months, and that they could work out a schedule with their individual representatives to help them get their feet back on the ground. To us, it was a no-brainer to make these kind of arrangements, because we knew there would just be no benefit to stepping on someone’s throat while they were down.

“But we’re now finding, as [lease renewals] have come up, that word about how our customers appreciated this consideration has spread [within the industry],” this executive adds. “And it’s helped to create a real competitive advantage for us and others who have shown their commitment to the industry, versus local banks and other financing sources that weren’t nearly as accommodating.

“In some cases, we’ve even heard stories, if you can believe it, about local banks that took steps to repossess equipment when too many payments were missed,” he continues. “And now we’re hearing that this time around, because of the [hurricane] experiences and the rising cost of money, some [lessors] are getting much tougher as they’re negotiating new leases about payment terms, penalty fees, collateral and other restrictions.”

Asked about this, a veteran club manager says he learned long ago, when working out financing arrangements, to make a distinction between “people who want to make their money by continuing to lend you money,” versus sources that seem overly concerned about collateral or “what else they can get their hands on” if problems arise.

This manager adds that he currently leases through the financing arm of an equipment manufacturer. This “creates the best of both worlds,” he says, because he’s been able to work out arrangements, both during a course restoration and after storms, to get the company to store or move equipment as needed. So he’s now added a qualifier to his rule of thumb: “It can be OK to have [the lender] get their hands on your equipment—if that’s their business in the first place.”

New Terms of Endearment

Many properties are also discovering, as interest rates continue to creep up, the importance of working with lessors who can be creative and flexible, even during “normal” times.

“The short-term [interest rate] situation is worse than the long term right now,” points out one manager. “So to reduce our annual operating expenses we’ve worked out capital leases, which is basically like purchasing through a loan, for the equipment we don’t mind eventually owning or that we think we can easily sell at the end of the lease. And for the things we don’t use as much, we’re working out hourly-restriction leases, which offer better rates.”

The restricted leases—which peg interest rates to usage, with unlimited use coming at a premium—are also gaining favor with seasonal properties, a leasing company executive notes. “If you’re pretty sure you’re only going to use [a mower] 600 hours a year,” he notes, “you can really lower your rate, and your payments, by establishing a maximum-use ceiling.”

Still, despite the benefits to be gained from these types of arrangements, the overall rise in costs associated with higher interest rates is still prompting some club managers to revisit the basics of the lease-vs.-buy question, and check to see that leasing is still the way to go in all cases. Beyond the closing gap between lease and purchase payments, which reduces the cash flow benefit that is one of leasing’s main attractions, this inclination to review the financial equation is also growing, it seems, because of some surprising success that many clubs are now having selling used equipment on eBay.

In a roundtable discussion held at the recent Golf Industry Show in Atlanta, Dan Clark, owner of Willow Creek Golf Course in West Des Moines, Iowa, told how he has sold over 90 used golf carts over the past four years on eBay, at an average price of just under $1,900.

The market of interested buyers, Clark told attendees, has extended far beyond other golf-related operations. “I get a lot of contact from people living in retirement communities or other areas where [the golf carts] are a better alternative than cars for them to get around,” he said. “Institutions are also active buyers in this market.” He also reported success selling used course maintenance and foodservice equipment, and again not always to other golf operations.

While no club manager really likes to be in the business of owning equipment and dealing with all of the associated headaches, if there’s a better chance of selling it after it’s paid for and has outlived its usefulness to the club, that can certainly reduce one of the primary aversions to buying it. But a leasing company executive cautions that this may be a temporary temptation—and even if it isn’t, picking up an extra couple grand 10 years down the road will come at the expense of a lot of other missed benefits—and added costs—in all of the years before that sale is made.

“One of the best things about leasing golf carts is that you can just roll the fleet over every three years, and your members and guests love always having nice new, clean carts to use,” he notes. “If you’re pushing a cart through the last months of your purchase terms, just so you can then get it up on eBay, I’m willing to bet it’s not going to be in the same kind of condition that members will be pleased with.

“Besides,” he adds, “if there really is that kind of market now for used carts, it’s a good bet it will soon get flooded with supply. After all, there are plenty of used carts that the manufacturers take back from leases, too—and again, most of them are in a lot better shape. So they’ll find their way onto eBay, too, and either be more attractive to the buyer, or drive everyone’s selling price down.” C&RB

To comment about this story, suggest topics you'd like to see covered in future issues of C&RB, or just ask a question, contact editor@clubandresortbusiness.comeditor@clubandresortbusiness.com

 

 

 

 

 

 

Summing It Up

 

• As with insurance providers, response to hurricane-caused disruptions and other recent challenges facing the club and resort industry has been varied, and revealing, among sources of leases and other financing needs.

• Tightening interest rates are spurring increased explorations of capital leases and hourly-restriction terms.

• The higher cost of money also has some clubs rethinking the lease-vs. buy question; surprising success selling used equipment on eBay is breaking down one aversion to purchasing.