The Farmland Sale-Leaseback
The “sale-leaseback” concept, where a farmer sells a parcel of land to an investor and then leases it back, has proven to be a very effective means of alternative financing. Over the past two decades, this concept has expanded from a strictly “need-to-sell” proposition, to a farm business growth strategy. While many farm operators may have casually considered the concept of selling a farm and then leasing it back from an investor-buyer, further research shows there are some real advantages when utilizing this vehicle.
Improves financial position for high-debt farmers. For farmers facing financial difficulty, a sale and leaseback can offer relief. A farm sale can improve the financial ratios, free-up cash flow, and allow for continued operation. This can truly be a win-win-win situation for the farmer, investor, and lender.
Acts as a long-term growth strategy. The sale-leaseback concept can be effective with a single farm or multiple properties. A farmer can buy several farms over time, improve them, and then sell them with a lease in place. This method of growth can produce substantial returns and economies of scale. Or, if you are restricted from expansion because of a tight rental market, a sale-leaseback can be the tool to keep the operation growing profitably.
Allows control of the farm asset with more profit potential. Studies have shown that for most farmers, controlling land via a lease can be more profitable than directly owning the land. Because the typical investor desires a long-term relationship, the leaseback farmer often has an opportunity to control the asset for an extended period of time.
Sell when land prices are still near historic highs. The demand for quality farmland remains strong, and prices remain near record high levels. As with most investments, the best time to sell is when prices are high and it’s relatively easy to find a buyer.
The owner gives up title. The seller of any real estate asset gives up their ownership interest upon the closing of a sale. In doing so, a seller does not have the same control as when they owned the asset.
2-3 year lease terms are typical. Many investors are in the market for the long-term. However, they often want the ability to make changes if/when a tenant is underperforming, or when economic conditions change. With an original 2-3 year lease term (a proving period), the investor-owner and the farmer-tenant become familiar with each other. Assuming quality work, the investor is generally amenable to lease the farm to the same tenant in the future.
Investors prefer cash or “flexible” cash leases. Most investors use farmland as both a solid long-term investment as well as an annual cash-generating asset. Thus, most investors are more comfortable with the known cash returns offered by cash leases. Flex leases, with a cash base where the investor assumes some yield or price risk, are becoming more popular. But… most investors avoid crop share arrangements where they must pay bills and assume too much risk.
Sellers must be realistic. Farmland investors follow land prices and rent trends. In addition, they often have several farms to choose from when buying. Therefore, few leaseback sales include a substantial sale-price premium or a large rental discount.
Hertz Real Estate Services has 70+ years of experience in working with farmers and farmland owners across the Midwest, and we have participated in many sale-leaseback transactions. We understand agriculture and the difficulties facing today’s farmer. We have both the experience as well as the expertise needed to work with all types of people and sale situations – and we welcome the opportunity to serve you by helping you connect with farmland investors.