When you need a new piece – or a new fleet – of equipment, researching the specs and prices of various different makes and models is just the first step. The next is to figure out how you’re going to acquire that equipment. Are you looking to make a cash purchase? Does it make more sense to finance? Would your club prefer to lease? How about renting? Depending on specific circumstances, any of these might be the best strategy. But how to know? We sought the expert opinions of experts at several different equipment manufacturers.
So what is the best way to acquire equipment? “The short answer is that it depends,” says Paul Danielson, finance marketing manager with Toro. “What works best for you might not be best for your neighboring superintendent.” According to Danielson, Toro doesn’t necessarily promote one acquisition type over another when it comes to golf maintenance equipment. “It’s a matter of whatever works for our customers,” he says.
Paul Hollis, executive vice president at Redexim North America, agrees. “There is no right or wrong, just different situations for different courses,” he explains. “The superintendent has to look at their course’s financial situation, their own budgets and their immediate needs, then the effect leasing, buying or renting will have on each. Determining what’s best requires some foresight and predictions about what the future will bring, which will always remain a challenge. Sometimes you are making an educated guess with the information that you have, but you still have to do the full analysis.”
Looking at leasing
Rhonda Flanery, account manager for sales with John Deere Financial, explains that there are generally two types of leases used in the golf maintenance industry: an operating lease (also known as fair market value lease) or a lease-purchase (also known as a dollar buyout or capital lease). The decision between the two typically comes down to accounting or tax considerations.
“An operating lease is one where the customer uses and pays for the use of the equipment, and then generally turns it in and replaces it at the end of the lease,” says Flanery. “A lease-purchase is one where the customer intends to own the equipment at the end of the lease; their payments build equity.”
Flanery says following the economic downturn about a decade ago, there was a slight trend toward fewer operating leases. “But that is starting to come back a little now; we’re seeing golf clubs that had never leased starting to take on leases,” she states. One possible reason, particularly in the private club sector, may be that a new generation of younger board members is more familiar and comfortable with the concept of leasing, having used this approach in their own personal lives with automobiles. “Then the other possible reason,” adds Flanery, “is that many clubs postponed major renovations to the clubhouse or golf course, or got behind on replacing equipment, and now they have a larger need than they want to pay cash for. So they’re looking for other avenues, but they’re sensitive to taking a loan against their operating line for those purposes, so they may say, ‘let’s look at leasing.'”
One of the advantages of leasing is inherent flexibility. That’s good because what makes sense in one part of the country may not make as much sense in another. “In some northern areas, a piece of equipment might get used 350 to 450 hours a year; farther south, they might be using it 1,000 to 1,100 hours a year. That’s a big difference, so there has to be some flexibility there,” Flanery says of the terms that might be in play when leasing equipment. That includes flexibility not only in terms of the hours, but also the terms of the lease. “In Florida, where they’re using a piece of equipment 1,000 hours a year, they only want to keep the equipment for three years, so a 36-month operating lease might be well suited for that course. Whereas in Canada, a five-year lease isn’t out of the norm.”
Leases also make it easy to turn over equipment at the end, if that’s the decision, or to hang on to it in some fashion. “When you get to the end of the lease, you can renew a lease, you can buy the equipment or you can return it,” says Danielson. “Another factor that can play into whether leasing makes sense is your mechanic staff – how well you are staffed to fix equipment. Some courses have a crew that could keep a 20-year-old piece of equipment working; others just don’t have the bandwidth to do that. Though that can get expensive.”
From a tax and regulation perspective, Danielson says there is a big change happening at the moment concerning leased equipment. “By 2020, nonpublicly traded companies will have to put lease payments on their balance sheet. That’s always been an off-balance sheet transaction,” he explains.
From the perspective of most superintendents, Danielson says that practically speaking there won’t be much of a change. “The economics of leasing don’t really change at all,” he says. “It’s just the accounting reporting that’s changing.” He says it’s still too early to say exactly what credit implications this may have for businesses or organizations. “It’s still all being sorted out in the financial community.”
Another big change is the recently enacted tax law, which might make it more advantageous for some to buy rather than lease. “Now you have 100 percent bonus depreciation that phases out; if you buy equipment in 2018, you can write it off this year,” says Danielson, who adds the important caveat that every purchaser should speak to their accountant or tax preparer for guidance on their specific situation. He also points out that “when it comes to leasing versus buying, it often comes down to whether the deductions are of value to you, and that really hinges on how profitable your business is. If you’re marginally profitable or not profitable, then all the deductions in the world won’t really help you much. But if you’re profitable and can take advantage of them, that might be a huge reason why you want to own equipment.”
Another factor to consider in the choice between buying outright or financing a purchase: Your club may have enough capital to purchase one piece of equipment, but your maintenance operation needs four pieces. Rather than purchasing just one now and waiting, it may make sense to get all four and finance the purchase because some manufacturers/distributors will offer more attractive pricing for packaging equipment purchases. Toro’s Danielson says that’s another reason why having an equipment acquisition strategy makes sense, as you can craft a plan to take advantage of these sorts of discounts if they are available, he adds.
While leasing is popular, there are certain types of equipment that are still more commonly purchased or financed. “Grinders are a good example,” says Flanery.
It really depends on the nature of the equipment. Typically, equipment that’s used daily and accumulates a lot of hours is where an operating lease might make sense because it allows a course to trade it in a few years. But frequency of use isn’t the only criteria. “Grinders are used daily and you might think that would be well suited to an operating lease, but there’s a good chance a club could get 20 years out of a set of grinders, so why would you put that on an operating lease? Either buy them outright or put on a dollar buyout lease, where you own them at the end of, say, a 60-month term, and then you have 15 more years of ownership without payment.”
Buying, financing or leasing – “it doesn’t really matter from an operational standpoint; the equipment is there full time for the superintendent to use whenever it’s needed,” says Danielson. “When you get into renting, though, you need to weigh how big your window is. If you have a task that has a one-week window versus an eight-week window, renting can be more challenging because all of your neighboring courses are trying to rent the same week. It gets to be kind of a scramble.” That same constraint is also there if you use a custom service to perform the task; other courses may also be requesting the contractor during that short window.
Redexim’s Hollis points out that renting equipment offers a lower initial investment than buying and access to a broad range of equipment, with maintenance and insurance handled by another party.
Most often, turf maintenance equipment isn’t rented, points out Flanery with John Deere. “Precision mowing equipment depreciates relatively quickly, so the rental costs are high enough that it doesn’t really make sense,” she explains.
For superintendents, most equipment rentals are not for regular maintenance but for special projects or one-time needs, says Flanery. “If you have a need for a piece of heavy equipment, like a full size backhoe-loader, for instance, that might be something that would make sense to rent for a short period of time.”
If it’s only needed for a period of weeks or months, renting makes more sense than a purchase or lease. Similarly, she adds, for a golf course that only performs a certain kind of maintenance on an annual basis (deep-tine aerification, for example), renting the equipment – or contracting out the service – might be best.
Making a plan
“A well-planned turf maintenance acquisition starts with a good equipment replacement strategy and plan,” Flanery says. Taking the time to do this planning will often answer the question about what type of equipment acquisition strategy makes the most sense for each piece of equipment.
“Look at every machine you have and how many hours are on it,” she says, “and think about, ideally, at what maximum hours would it be best for the club to dispose of that asset. A southern club might want to have greens mowers for three years and then replace – that decision will then lead you to the right financing solution. If you want to only keep it for three years and then replace, why would you pay to own it?”
Of course, Flanery notes there are a variety of additional factors that need to be considered when formulating or updating an equipment replacement plan. Course conditioning expectations are one important factor in driving equipment usage patterns. “A change in expectations warrants a review of the equipment replacement strategy,” she says. “Maintenance practices are also an important factor. All leases come with an expectation of following recommended service and repairs as outlined in equipment manuals to protect the value of the asset and alleviate lease maturity concerns.”
Danielson adds that it is also important for superintendents to consider the impact their acquisition strategies might have on the course or club as a whole. “Superintendents tend to be focused, rightly so, on the operational aspects of equipment … but, especially when it comes to larger purchases which superintendents are involved with, you need to look at it from a ‘what’s best for the overall enterprise’ perspective.'” Having a discussion about the potential savings or tax advantages with those responsible, or the club’s financial management, will benefit the superintendent in the long run, he points out, because it will ensure that equipment acquisition decisions make sense for the whole enterprise. “You want to make sure that everyone is rowing in the same direction,” says Danielson.
Resources at the ready
Many equipment manufacturers, including those contributing to this article, offer customers access to financing and leasing programs through their distributors or dealers. “We run a national financing program that’s made up of three vendors,” says Danielson. The company’s distributor network assists customers to work through the process. “A simple credit application gets the process started,” he explains. That might be enough for smaller transactions, which can usually be approved quickly; larger purchases; or those where the purchaser has some credit challenges that are more complex and will likely require additional financial data. Expect a similar process regardless of where you obtain financing or obtain leasing.
Flanery advises superintendents consult to with their John Deere distributor regarding options available. “Getting started is easy,” she says. “Complete and send in a ‘Golf Course Profile’ to begin the process. The informational requirements will vary based on the lease amount requested, complexity of organizational structure and entity’s financial position.”
Customer-facing support and service is a fundamental goal for equipment companies, Hollis says. “The key for us is to keep it simple for the customer and make sure that they are getting the best rates and customer service in the industry.”