Golf Business Magazine - The Golf Industry's Leading Business Publication

Thursday, November 10, 2005

Golf Business Magazine - The Golf Industry's Leading Business Publication: "Leasing vs Buying Turf Equipment

In the debate between leasing and buying, leasing turf equipment is increasingly becoming a popular option at many golf courses across the nation.

Tim McNutt set about outfitting Harbor Lakes Golf Course in Granbury, Texas, with hundreds of thousands of dollars of turf equipment before the new Dick Phelps-designed layout opened for play last summer. The question was how much of that equipment to lease and how much to purchase, taking into consideration wear and tear caused by the combination of a grow-in and year-round golf in the Greater Dallas area. Harbor Lakes leased roughly 40 percent, with mowers accounting for most of that budget line."

"Greens mowers can be used as much as 300 days a year here," explains McNutt, vice president and partner of Prime Golf Group LLC, which operates four Dallas-area courses. "Deck and rough units are pretty much in use 200 days a year. After four years, a typical greens mower in the Dallas market will just be worn out. You would spend as much money keeping it [an owned unit] running as you would on lease payments."

Rather than simply paying cash or obtaining a bank loan, course operators like McNutt have become much more sophisticated in recent years about how they acquire turf equipment, using a combination of leasing, installment financing, cash and loans. With golf revenues flat or down in a still-struggling economy, many cash-flow-strapped courses have made the lower monthly payments available through leasing, in particular, an increasingly important part of their equipment-financing mix.

"There are a number of factors [favoring leasing]," says Rhonda Flanery, manager of sales and marketing for golf and turf leasing for John Deere, which has seen "an uptick" in lease arrangements in recent years.

Among the benefits of operating leases offered by manufacturers and third-party finance vendors are capital conservation, improved liquidity, reduced tax burdens (in some cases), access to new technology, reduced maintenance on newer equipment, flexible financial terms and improved asset management.

Because green fees are more sensitive to the ups and downs of the economy, public courses generally have been more likely than private clubs to lease equipment since private clubs benefit from more predictable membership revenues.

"Cash flow is a major factor and is the driver behind many of the decisions made at a course, regardless of type," says Flanery, whose company offers a program called the John Deere Credit MasterLease. "If you look at annual lease payments compared to laying out the capital for machines, you can certainly acquire more machines to care for the course using a MasterLease program rather than capital purchases."

With competition for golfers at an all-time high, owners must keep their facilities in tip-top shape. "If golfers find a course not in the type of condition commensurate with the green fee they have paid, in all likelihood they won't be back," Flanery says. "A course may be able to pay for only two pieces of equipment with its budget. But through the MasterLease program, it may be able to bundle four or five pieces and improve the overall play for the consumer because it has that flexibility from a cash-flow perspective."

Ron Ort, vice president of CitiCapital Commercial Corp.'s Golf Turf Division, leases Ingersoll Rand equipment as well as that of other manufacturers. "We are seeing an increase in leasing activity," he says. "It is primarily to stretch the capital budgets superintendents are forced to work with today. If you can't buy the fleet you are looking for with cash, you might be able to do so with a lease. That makes the course more efficient by replacing obsolete equipment today rather than waiting until the next budgetary cycle." Peter James is group president of captive finance with Textron Financial Corp., whose mission is to support the sale of Jacobsen and E-Z-GO equipment. Textron has seen an increase in the amount of leasing, although James believes that may be as much a function of internal company changes as it is the golf course marketplace.

"Courses like leasing because they don't have to take on the complete risk of ownership," James says. "Particularly with this type of equipment [mowers], after three or four years it is often in the courses' best interest to replace it anyway. With a lease, they do not have to pay for the whole piece of equipment. The finance company takes the risk of ownership at the end of the term. Leasing in the golf business has become the standard in golf cars and it will become the standard in turf equipment. It is a cheaper way to go in the long run, particularly if you don't want to amortize the entire cost of the equipment."

John McPhee, senior marketing manager/services with Toro, estimates 75 percent of all turf equipment is financed through leases or loans using a variety of funding sources-original equipment manufacturers, local banks, third-party finance companies and others. Toro offers a leasing program in partnership with GE Capital, providing leases through its distribution channels.

"Our financing volume has more than doubled in the past two years," says McPhee, noting that more courses chasing the same number of golfers has encouraged operators to stabilize their budgets as much as possible. "They still have fixed costs associated with operating the course regardless of the number of rounds. What they are trying to do is stabilize those costs through financing."

Because they wear out in a few years and technology changes fairly rapidly, reel mowers used on greens and fairways are obvious financing candidates. "Owners and superintendents are going to be the most conscious of those areas and want the highest quality of cut possible," McPhee says. "So they'll want to keep those fleets fresher and take advantage of new technology enhancements. Financing is a way to get into the new technology more quickly instead of waiting for a capital budget to become available."

Adds Toro Finance Marketing Manager Paul Danielson, "Tax and accounting considerations play into these decisions. If you have a product that turns over fairly rapidly, to keep the pristine conditions of the course, you may want to roll equipment in and out more quickly with fewer implications to your tax and accounting books. Most reel mowers would fall in the leasing category."

While the tax benefits of financing turf equipment are of interest primarily to for-profit facilities, municipal courses may have tax-revenue constraints that force them to work with limited budgets, making financing an attractive alternative. "It comes down to how many dollars you have to get the job done," Danielson says. "We've seen growth in financing with municipalities as well."

Though leasing makes sense in many cases, ownership may be the way to go in others. Some advantageous tax laws favor ownership, Danielson says. The benefits of the Jobs and Growth Tax Relief Reconciliation Act of 2003, set to expire in 2005, allows course owners a 50 percent depreciation bonus, meaning equipment can be depreciated more quickly. "This is a very good time to acquire equipment for a for-profit public course operator," the Toro executive says.

Also, Section 179 of the federal tax code allows a direct-expense deduction. "It used to be that small business could deduct only $24,000 in purchases. That has been raised to $100,000 for equipment put in service by the end of the year," Danielson says. "Then you couple that with the fact we are at historically low interest rates.

"Typically, one financing option will not be right for every piece of equipment. Look at it on a piece-by-piece basis. Financing should support your acquisition strategy rather than drive it."

Some equipment is worth owning because it lasts a long time, requires little maintenance and the technology changes more slowly, agrees Todd Gray, senior vice president of Wells Fargo Leasing, based in Des Moines, Iowa. Aerators, grinding equipment and tractors are examples. Course operators may use cash to purchase that type of equipment, but often prefer dollar-buyout leases that allow them to achieve ownership while saving cash flow along the way.