Is your farm in the realty business?
Equity on most Canadian farms is generated in two ways — selling the proceeds from production and by owning property with increasing value.
Speaking at the Agricultural Excellence Conference in Winnipeg last week, the head of Canada’s largest farmland investment company argued there are situations where farmers would benefit from turning the value of their land into funds that can be invested in the actual farming operations.
“By doing a lease-back, it helps them reduce their debt, improve their cash flow and just generally be a more efficient farm,” explains Tom Eisenhauer of Bonnefield in the video below, filmed at the AgEx Conference.
The decision to own or lease land should depend on which part of the farm business has the highest returns, he says: “If you as a farmer are earning more on your land than on your farming operations, keep your land. But if you think you can make more money farming than owning land, why don’t you redeploy some of that capital from your land into farming operations?”
A sale and lease-back arrangement might also help with intergenerational transfers when the younger generation can’t afford to buy land from their parents. For some farms, the lease-back deal might allow them to expand their land base to maximize operational efficiencies, he says.
“We’ll work with that farmer to find land to buy and then lease it to them for growth,” he explains.
There are also instances where a farmer may want to maintain access to land they have previously rented, but can’t afford to purchase it when it comes up for sale.
“The danger is that land gets sold to someone else and they’re no longer farming it. In those situations the farmers have brought us in to buy that land and lease it back to them on a long-term basis,” says Eisenhauer.
Lease rates (or returns to the pension funds behind Bonnefield) are usually in the four to five percent range, says Eisenhauer.
He notes they want farmers to treat leased land as if they own it: “We have a very long-term lease arrangement. It’s not quite, but you can almost think of it as being perpetual. After so many years it will renew and extend. We call it a rolling lease. That way he or she know they have long-term access to that land if they want it.”
The concept of operating a business without owning the property is widely-adopted in other sectors, notes Eisenhauer.
“This trend first started in commercial real estate back in the 70s and 80s. It’s happened in hotels, commercial real estate, industrial real estate, even aircraft operators don’t own their own planes anymore — they lease them,” he says. “Farming has been slow to adopt this. It’s probably 20 years late, but it’s a trend that we see beginning to happen.”