What prompts a farmer to consider a sale-leaseback?
There are quite a few reasons a farmer may approach the idea of a sale-leaseback. The most common being this: they want to improve their current financial position without decreasing their operations land base. Unlike a traditional sale, by doing a sale-leaseback the farmer maintains access to the land through a long-term lease, while still receiving capital up-front from the initial sale.
Benefits of a sale-leaseback
The capital gained by the farmer during the transaction can provide an opportunity for growth within the operation. Not only can this offer relief to any debt, but it can also be put back into the operation to cover equipment, inputs and other operating expenses. This can improve the overall well being and efficiency of the operation, while still allowing the farmer to maintain the ability to farm the land and setting them up with the possibility to expand in the future.
Potential cons of a sale-leaseback
The nature of a sale-leaseback is partnering with an investor for a 3-5 year lease period, or oftentimes much longer. As with any partnership arrangement, once this term comes to an end there is a possibility the investor may not want to renew the conditions established in the initial lease contract and it will have to be re-negotiated. Building a strong relationship with your new land partner is important. Having a shared common goal of improving the land can lead to a long-term relationship and often-times the investor will want to lease the land to the existing farmer when they know the land is being cared for properly.
Sale-leaseback best practices
Determining a sustainable rent price that works for both the farmer and investor is a big part in setting the contract up for success in the future. In some situations, a “flex-lease”, which takes into consideration the risks the farmer may occur during the growing season, are becoming more popular and may be an option to consider. Along with price, establishing long-term rent agreements and sustainability goals for the land are important. Deciding on the best possible length of lease, understanding where both parties would like to see the land improve during that time period, or considering putting an option-to-purchase within the contract are all essential considerations to discuss.
Interested in doing a sale-leaseback? Apply today to get started.