Business models: Leasing equipment

Over their lifetimes, television facilities must buy new equipment and expand. And soon they will have to bear the additional expense of making the transition to digital television. But, with the downturn in advertising revenue over recent months, not everyone can just sit down and write a check.
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Over their lifetimes, television facilities must buy new equipment and expand. And soon they will have to bear the additional expense of making the transition to digital television. But, with the downturn in advertising revenue over recent months, not everyone can just sit down and write a check. Many facilities are considering alternative ways to fund these expenses.

The critical issue facing television facilities is the mismatch between the capital investment needed to make equipment changes (whether digital or analog) and the uncertain revenue streams the new equipment will generate. The potential profit from DTV, as well as the timing of such revenue, is still unclear to many lenders. Despite reports of the growing number of digital television facilities and receivers, the current consumer base is very limited. And, even though the consumer base should grow over the next few years, the rate of growth is unknown. This puts shivers down the spines of lenders. Add to this the limited life expectancy of equipment and other “tangible assets” necessary to remain in the television business, and lenders tend to scatter like rats leaving a sinking ship.

According to surveys conducted by SC Research International, the life expectancy of equipment at studio and production houses ranges from five to 10 years; at transmitter plants, it ranges from 15 to 20 years. In the television industry, the insistent attachment to equipment “buzz words” and the need to keep up with competitors can force participants into a race not unlike the Kentucky Derby. An example is the all-too-familiar situation in which a facility feels it must purchase a newly introduced piece of equipment on short notice. When a new “must have” device comes out on the market, there goes the capital budget. But, whether it's a short-notice purchase, a well-planned long-range equipment upgrade, or equipment for the transition to digital, it all comes down to the same question: “How will we pay for it?”

Companies like Sony offer some rather creative funding: nothing down and pay nothing for a year or more. Harris has created its own leasing division called Harris Broadcast Financial, which will either fund the sale or find a way to get it funded.

If the customer needs or prefers financing of some form, they get AMEX or a number of others, such as California Leasing, involved. As far as the vendor is concerned, the structure and pricing is the same, regardless of payment form.

Systems integrators, large and small, will go the extra mile and find ways to get their designs and equipment into facilities. With studio or production-house upgrades costing tens of thousands of dollars, and transmitter-plant upgrades starting near the $1 million mark, it makes little difference if you buy and install or have a systems integrator do it for you — you still have to pay for it, one way or another.

There are three main assets that require funding: real estate, transmitter-site equipment and studio/production house equipment. Keep in mind that the primary objective is to minimize the “gap” in cash flow created by the mismatch between any capital investment and the undetermined revenue streams that the new equipment can potentially create.

Regardless of the way a television facility decides to fund its equipment or other purchases, it is exceedingly important to deal with a financial institution that is experienced and familiar with the television industry. This tends to make things go much easier for all concerned.

So what is the best way to pay for new equipment now to be better prepared to reap its benefits later?

With respect to real estate, many competitors have found it financially desirable to share equipment and operate under one roof. Centralcasting or hubcasting has been one approach. Other broadcasters have formed corporations, built mega-facilities and then rented them back to themselves and, as new kids come on the block, rent to them as well.

Two such transmitter-site operations come to mind: the Sutro tower complex in San Francisco and the DTV Utah Project atop Farnsworth Peak near Salt Lake City. Each has it own particular nuance, but the concept seems to be working quite well at both locations. There are, of course, several other successful joint ventures. In some cases, entrepreneurs have developed transmitter sites and rented them to stations, all with varying degrees of participation and maintenance.

It certainly makes a great deal of sense to have all receiving antennas pointing in the same direction in one market. Collocating people with common interests permits each member or partner to fund its individual operations by itself while letting a cooperative manage the shared items. This lets the station focus on its equipment and relieves it of responsibilities such as building maintenance and the like. Also, operators report that it is easier to get funding for projects like these than going it alone.

Financing anything, by any means, requires a credit check. If your organization has a history of late pays or bad credit, it makes it all the more difficult to get what you need when you need it.

You should consider several financing options, including one or more of the following: using free cash flow, refinancing the facility, financing the equipment or leasing it. It is most important to keep in mind that the primary value of equipment is its use, not its ownership. Over 30 percent of all capital equipment in the United States is acquired through leasing. According to one source, eight out of 10 companies lease their equipment.

There is one aspect to leasing that is sure to get your accountant's attention: it conserves valuable bank line capacity. Leasing is a positive way of conserving working capital, especially in challenging economic conditions where preserving liquidity is the pragmatic course of action. By using a leasing company, you still get the equipment, and you can still use the bank lines for other purposes such as expansion, real estate purchases, leasehold improvements or acquisitions. Lease financing also allows you to acquire more and/or higher end equipment at the same financial exposure.

Financial service companies like Arrow Capital can create customized equipment leasing programs to allow broadcasters to increase revenue and grow market share.

Also, leasing offers some rather interesting tax advantages. If structured properly, leasing can provide a 100 percent tax write-off. It can also offer you the option of deducting 100 percent of the lease payment as a pre-tax business expense. Be sure to consult your CPA in these matters.

In addition to this, it is easy to measure monthly payments for equipment leases. Thus, it is easy to establish whether or not a particular asset is producing the appropriate revenue to pay for itself and producing a profit for the company. In the leasing agreement, you can include clauses that will allow you to retire equipment that is sitting idle and not generating income.

In many cases, the leasing company assumes and manages the risk of ownership of the leased equipment. At the end of the stated lease term, the leasing company is responsible for the disposition of the asset, relieving you of burden and expense. Some lease structures allow you to keep the equipment, if you want, by purchasing it for a nominal fee — in some instances, as little as one dollar.

You can structure leases to keep pace with technology by including upgrade clauses or adding equipment clauses. And you can achieve this while satisfying the financial aspects of your business by using lease structures that allow you to customize a program that addresses your requirements for cash flow, budget and transaction structure.

Certain types of leases help you better manage the balance sheet and improve your overall financial picture by conserving operating capital and freeing up working capital and bank credit lines. Some leases can be structured for no down payment — 100 percent financing. You can also match the term of the lease to the useful life of the equipment. Many lessees choose to structure their leases to include repairs and maintenance, if needed.

There are many other advantages to leasing that you should consider when contemplating equipment acquisition or facility improvements. But you should make sure you have someone on your side who will ensure that the particular spins you require are written into the lease. Also, it is very important to have someone who knows how to shop the exigencies of your lease. Some lenders won't even talk to you if your lease is under a million dollars. You must consult an accountant.

There is one important point that bears repeating: the primary value of equipment is its use, not its ownership. And leasing may be the best way to get the equipment you need to use.

Larry Bloomfield is a consultant in the broadcast industry. The author wishes to thank the following organizations for their assistance in preparing this report: Acrodyne Industries (www.acrodyne.com), Arrow Capital (www.arrowcapital.net), Balboa Capitol (www.balboacapital.com), GE Capital Commercial Equipment Financing (www.gecapital.com), Harris Broadcast Financial (www.secureeleasing.com/broadcast/home.html), RAF Consulting (www.RAF-Consulting.com), SC Research International (www.SCRI.com), Thomson Multimedia (www.thomsonbroadcast.com) and Tyco Capital/CIT Financial Group (www.tycocapital.com).