We recently sat down with Jim Clark, who has been with Halderman Real Estate and Farm Management for 36 years in farm management, appraisal and investment advisory.
We wanted to explore the pros and cons of farm sale-leasebacks. Sale-leasebacks are used in the retail world as a tool to separate operations and the ownership of commercial property. Owning and operating farmland can be a different proposition from other types of assets, and Jim illuminated some of the nuances.
How does a farm sale-leaseback work?
It's a situation where a farmer sells their farm to an investor or a corporation that is contingent on the farmer leasing the land for a specified period of time. Typically the lease term is three to five years.
What are some of the factors that prompt a sale-leaseback?
Farmers do it for a couple of reasons. The first is that they are looking to raise capital for their operation. They also do not want to lose acreage like they would with a pure sale. With a sale-leaseback they can generate capital and keep farming the land.
For this reason, an investor can usually acquire the farmland at a discount relative to the open market. It is generally a win-win situation for both parties.
What are the mechanics of the transaction?
A farmer will typically approach Halderman about the possibility of a sale-leaseback. Once we perform some initial due diligence on the property, we screen our investor database for prospective purchasers.
After generating an offer, we start putting together the terms of the transaction based on the objectives of both parties. Once there is an agreement on the terms, we set a closing date.
Can you tell us about some of the benefits of a sale-leaseback for the parties involved?
In addition to generating operating capital, farmers can often retire debt that they have incurred over time. The increased capital can be used for new equipment and they can have continuity with regard to land they have already farmed. In a lot of cases, the new capital can make their operations more efficient, in turn leading to greater profitability.
And in many cases, what starts as a relatively short term for the sale-leaseback, say three to five years, rolls into subsequent renewals. In one case I can think of, the farmer is in the 18th year of farming after closing on a sale-leaseback.
Are there any negatives?
Since most of the initial terms of the transaction are fairly short, it could be the case that after five years or so, the lease agreement won't be renewed, and the farmer will not be able to continue to farm the land.
What are Halderman's main roles?
We facilitate the entire process, from bringing the parties together, to setting the selling price, and assisting with the due diligence effort and structuring the lease agreement.
And finally, what are some of the best practices associated with the sale-leaseback process?
I think it's important to convey to the farmer to keep an open mind, and to realize that there is a possibility that down the road they wont have the acres to farm. It's also usually a good sign if the farm manager is already established with the parties involved to facilitate the terms and ensure a smooth transaction.