An overview of a sale-leaseback
A sale-leaseback is when an investor acquires the land from the farm owner-operator and leases it back on a long-term basis to the existing farmer. This type of transaction can be an effective means of alternative financing for progressive farmers.
Determine why you want to do a sale-leaseback
A sale-leaseback can help to improve the financial position of an operation in many ways. Capital from the sale itself can be used to pay off current debts and strengthen the farmers balance sheet. It can also be reinvested back into the operation and used for capital improvement projects, buying equipment or other operational expenses. With the additional access to capital from the sale-leaseback transaction, the farmer has the financial flexibility to operate their farm with less risk and less stress.
Understand what’s in it for your investor partner
Looking at farmland from the investors point of view, there are a few reasons why a sale-leaseback is appealing. First, they get to partner with a farmer who has been on the land for years and already knows how to best care for that specific property. Second, a sale-leaseback is an opportunity for an investor to gain exposure to the unique investment characteristics of American farmland. Land has consistently proven to be a long-term store of value and it isn’t volatile like the stock market. Third, investors are looking for a return on their investment - which comes from both the annual cash rent and long-term land appreciation. These returns are often reflected in terms of annual cash yield or cap rate. Lastly, investors typically look for long-term partnerships that have the ability to grow. By partnering with a progressive farmer, they can have confidence that their investment is well worth it.
Choose your lease type
There are many things to consider when setting up the lease and it is important to find an agreement that works for both the farmer and the investor. First, both parties must determine what type of lease makes sense - is it straight cash rent, a flex lease or a crop share agreement. Once that is determined, the next step is choosing a rent price that is fair for the farmer and aligns with the landowners investment targets. Lastly, choosing a contract length that aligns the long-term interests of both parties is important. Typical contracts range from 3-5 years, but it’s not uncommon to see longer arrangements.
Setting up a strong foundation from the start helps build a long-term relationship for both the farmer and investor.
Interested in doing a sale-leaseback? Apply today to get started.