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Frequent Visitor

Sale-Leaseback of small portion of farm to generate working capital

I was recently approached by an investor interested in acquiring a 40-acre portion of my farm (500+ acres) under a sale-leaseback arrangement.  The sale would generate immediate working capital (around $350K) and rental terms were reasonable.  From what I can gather, investor is interested in assembling multiple similar-size units from other farmers to create a diversified portfolio.  I'm trying to assess the downside, but seems to be far more positives than negatives from my vantage point.

Anything that I may be missing?  I would have first rights to purchase 40 acres back at end of 5-year term.  Investor seems reputable, but plan to investigate further.

Thanks in advance for any feedback.

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Senior Contributor

Re: Sale-Leaseback of small portion of farm to generate working capital

See if you could find out what his intentions of use are (solar farm)he may sell easements and even if you buy back they go on and on.  Not always anything wrong with that but if you intend to buy back you might want to know ahead.

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Frequent Visitor

Re: Sale-Leaseback of small portion of farm to generate working capital

Appreciate the reply.  Based on the proposal, I'll still retain the right to farm the land under a standard rental agreement, so nothing will change aside from a transfer of ownership on the 40-acre parcel.  Seems like a much better option than a bank loan, but again, want to be sure I've looked at all of the different angles before accepting.

Thanks again for your feedback.

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Honored Advisor

Re: Sale-Leaseback of small portion of farm to generate working capital

Did you ask him if he wanted to buy the whole 500 acres?   Smiley Happy   I`ve heard locally of a guy buying poorer ground claiming he wanted a place to hunt and he`d lease it back to the farmer and he did, but only until he could get it into a CRP program which tied it up for 99 years.  Then there`s the issues of grass and tree roots plugging tile and in some cases they purposely plug the tile to make a duck pond.  The whole patch of ground gets to be a wet mess affecting neighboring farms.   But if he`s paying $9,000/acre, I doubt if he`s making a CRP play. 

I guess have a lawyer look it over. He could be looking to eventually use the land to put up houses, which requires a minimum of 40 acres in some counties? Which could make neighboring land worth more or be a hassle with livestock and spraying next to houses with sensitive gardens and such.  Depends on what his ultimate plans are.  If he`s looking to rent out land, a 40 here and a 40 there wouldn`t be the best, the largest contiguous chunk of ground would be most desirable for leasing to farmers.

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Senior Advisor

Re: Sale-Leaseback of small portion of farm to generate working capital

Capital  Gains  Tax  Liability  -  might  be  looked  at  also - ? 

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Frequent Visitor

Re: Sale-Leaseback of small portion of farm to generate working capital

Appreciate the great feedback!  What he's told me is that he really likes farmland as an investment -- given the overall stock market uncertainty -- but is concerned about putting all of his eggs in a single farm acquisition.  So he's buying smaller tracts from top operators -- between 40 and 120 acres, depending on the size of the farm -- across a few states, and then leasing the acquired land back to those same farmers.  So in my case, at least, I'll still be farming my entire 500 acres, including the 40 I would be selling to him on a sale-leaseback basis.

Unless I'm missing something, it strikes me as a fair arrangement, but agree that having a good attorney review the docs for potential issues is a good idea.  The $350K would certainly come in handy right about now : )  

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Honored Advisor

Re: Sale-Leaseback of small portion of farm to generate working capital

Sometimes that is the problem.... it solves an immediate problem.  Therefor looks "rosy"  but then it is gone.

But with interest where it is, why not borrow the 350k and pay the 12K interest after harvest?

If there is no room in the cash flow for that 12K interest, reconsider management. 

When we can't figure out a way to borrow  5% and below money and return 10%(payback plus 5), then where are we?

And if cash looks better than land, why not sell it all to him and see if he needs a caretaker?

 

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Honored Advisor

Re: Sale-Leaseback of small portion of farm to generate working capital

We don`t have enough information to really give advice specifically, like what is the basis on the land?   That will affect the capital gains tax.  If $300,000 after taxes gets you to "debt free" or close enough to it and there`s been enough "pain" the last 5 years that the $300,000 won`t be blown on a new pickup, home remodeling and vacations.  I would say $9,000/acre land offers might not always be there, our global competition in grain production are able to sell cheaper, the main reason is their land costs are lower.  So, there is a possibility our land costs will come down over time.

Right now there`s deep pocketed +70yr olds that buy land for cash and since they farmed owned land, their only land cost is the property taxes as they see it.  Well, when they die, their kids will sell it off and use the cash for their suburban lives.  One day at some point farm land prices will have to succumb to real life economics and that could be substantially less than $9,000/acre.

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Frequent Visitor

Re: Sale-Leaseback of small portion of farm to generate working capital

Thanks for the input.  Much appreciated.  My capital gains hit won't be significant, so will have minimal impact, but certainly a good point to highlight.  I'm personally not a fan of taking on more debt, so leaning toward selling a piece, continuing to farm and then buy back or extending the sale-leaseback, if possible.  But recognize this might not be for everyone.

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