Paul Bosley is national marketing director for First Financial. His health club industry experience includes working for Titan Management Co., Healthclubexperts.com, Q Sports Clubs and Bally HTCA/Holiday Health & Fitness Centers. He has a bachelor’s degree in Health Science & Recreation Management and is studying to get his associate’s degree in accounting. He has spoken at the Club Industry and International Health, Racquet & Sportsclub Association conferences. For more information about leasing, please contact Paul at (800) 956-7313 or by e-mailing email@example.com.
In today’s lending environment, I am asked frequently if any lending is being done. The good news is that lending is indeed being done. The bad news, however, is that as a direct result of our prolonged recession, many funding sources have gone out of business and have exited the leasing business. This erosion of lenders has put additional demand on those remaining funding sources that have a finite amount of capital to lend. As a result, the underwriting criteria of remaining lenders to approve a lease application have become more stringent.
In a typical lease transaction, the security collateral offered to a lender is the fitness and nonfitness equipment being leased. The value of the leased fitness equipment depreciates immediately after installation. When you consider a fitness center lease from a lender’s perspective, what do you think the fitness equipment is worth if the lease defaults and if the lender tries to resell it after two years of use? Considering what remanufactured fitness equipment typically sells for compared to new machines, it falls to about 50 percent of the value.
In some cases, major equipment vendors will guarantee a lease approval for a lender to secure the sale of their line of equipment on a recourse basis. In these cases, the lender is approving the lease transaction based upon the lease application with the understanding that in the case of a default, the vendor will remove the equipment and make the lender whole. This service is a profit center when the lessee pays as promised and a cost of doing business in the case of a default to the equipment company.
Club owners also need lockers, security systems, computer systems, software, removable flooring, refrigeration equipment, vending machines and signage to build a new club or to remodel an existing fitness center. Because a club owner needs this equipment in the normal course of conducting business, these items can be included in the lease as a soft cost rather than a hard asset since they have more limited resell value in the case of a default.
The keys to lease approvals are cash flow, credit and collateral.