Lease Before Buying, Build Equity, Build Markets. Leasing allows you to build equity and markets, important prerequisites to acquiring a farm large enough for your long-term plans. Notably, in family transfers often the land is the last asset to transfer and this gives the younger generation experience in owning the business and time to build equity in equipment, livestock and a home (and pay any student debt). Growing a farm business and acquiring land in a non-family transfer can follow a similar plan. Lease a farm large enough for you to get started, realizing you will acquire additional land or relocate to a larger farm down the road: a phased approach is often necessary to allow you to incrementally leverage equity and market growth opportunities. It also allows your business to evolve, giving you better information about the size and type of property and facility you need in the long-term. Retired farmers can be excellent landlords who may give you needed advice and a future option to purchase.
Where is the farmland? Recognize Arms-Length Transactions Are Not Common. Most farmland transfers occur between related parties and not through the open real estate market. Accessing quality farmland to lease or purchase requires relationship building in your farming community. Building skills in agriculture and successfully farming on leased or purchased land is far more likely to result in offers to lease or purchase additional land. High quality farms with a good resource base for a viable farm enterprise are rarely found by pursuing real estate listings because they are already spoken for by neighbors, family members or employees who know the attributes first hand.
According to U.S. Farmland Ownership, Tenure, and Transfer, “Ten percent…of all land in farms is expected to be transferred during 2015-2019, most of which…will change hands through gifts, trusts, or wills. Of all land expected to be transferred, only about a quarter (21 million acres) will be sold between nonrelatives.” The amount of farmland expected to be transferred in the real estate market to a buyer not already connected to the seller is relatively small.
How will I pay for it? Save and Establish A Lending Relationship. If you plan to borrow, establish a lending relationship with an agricultural lender by borrowing for equipment or livestock while leasing property. Lenders will request cash flow projections, historic profit and loss statements, a capital plan, a current balance sheet and a personal financial statement that reflects personal assets and liabilities. [Go back to Lesson 4 for help with these!] Prepare a list of farm assets to accompany these documents. Check your credit score and address any issues or misrepresentations you might find. For direct market and value-added businesses or businesses with multiple enterprises, submitting a narrative business plan will help lenders understand your business model and markets. Approaching a lender with these documents demonstrates management capacity and track record they are looking for. Discuss to your purchase goals with the lender and get their recommendations on how much to save, what is a realistic timeline and how else to prepare for a purchase.
Dirt Capital Partners invests in farmland in partnership with farmers throughout the Northeast United States, promoting sustainable farmers’ land access and security. We work with sustainable farmers who have successful, existing operations, established markets and the opportunity to grow and expand their business through long-term, secure land access.
Looking for more help? This video explains just one aspect of using the Finding Farmland Calculator. Find all of the instructional videos at youngfarmers.org/calculator.
Use the Finding Farmland Calculator to compare two or more different farm purchase scenarios. Refer to your financial projections from the activities in lessons 3 & 4 to complete the Financial Statements section too.
Read the results in the Affordability Outlook section to better understand the different ways a bank will evaluate your creditworthiness as a borrower. Also consider how much cash you would require at closing, and the long-term ownership costs of each property.
Do you consider these purchase scenarios affordable?