Today’s world of low commodity prices has left many farmers hurting for working capital. Lenders are having hard conversations with clients on eliminating some debt to free up some cash, leading many operators to sell part of the farm. Unfortunately, this is becoming a more common issue, and to make matters worse, there aren’t a lot of options out there to sell your land quietly.
What to consider when selling your land
If you’re a farmer and are faced with the decision to sell, consider starting with the end in mind - what is your goal of selling your land? The answer to this question will determine the way the land should be sold. If you’re looking to sell the whole farm, a public auction or public listing may be the way to go - as it provides more exposure for your property. However, these methods don’t provide the most privacy and you won’t be the one farming those acres anymore.
What is a private sale-leaseback?
If you’re looking to sell, but want to keep farming the land, a sale-leaseback with an option to buy might be the best option. What is a sale-leaseback? This type of transaction is when you sell your farm to an investor, then rent it back from them at a set price. Putting a 3-5 year rental agreement in place is typical. This creates a win-win for both you and the buyer. You get to keep farming the land and they get to buy a solid investment that they know is being taken care of. One of the benefits of this is that the transaction is typically a private matter, so your neighbors don’t even have to know. It can also give you, as the farmer, peace of mind and be a creative option to enable you to keep farming the land. In addition to a rental agreement, it’s not uncommon to see an option-to-buy agreement in place, as well. This means that not only do you get to keep farming the land, but you will have the first chance to repurchase the land from the investor at the end of the rental contract. This can be attractive for an investor buyer because you have an aligned incentive to both steward the land well.
There is optionality for farmers
To make this type of agreement work, both the farmer and the investor must be flexible to come to terms on a deal that makes sense for both parties. Oftentimes, investors will work to help a farmer stay on the land, as long as the farmer can get used to paying rent for the property instead of owning it themself. A sale-leaseback is simply another option on the table, in addition to refinancing or selling at auction or a public listing.
20% of land is purchased by investors
So how active are land investors in the market today? Farmland investors or investment firms make up 20% of all buyers in U.S. land transactions, according to the Realtor Land Institute.
Investors are looking for a safe, long-term solution to diversify their portfolio and farmland is fitting the bill. Read our post here about the different investment strategies investors are using for farmland.
In tough economic times, farmers who have creative grit when facing tough decisions will step up and do what is necessary to keep farming for another season. A sale-leaseback isn't always ideal, but it's a creative alternative to stay afloat, instead of losing the farm and finding a job in town.