Transition planning is multi-faceted. There’s the business, the land, and the emotions to deal with; and figuring it out is contingent on the owners’ willingness to start a hard conversation.
For farm businesses, often rooted in a family ownership, this means the parents must first have the initial discussion says Merle Good of GRS Consulting, which often unveils the mother’s focus on family relations, and the father’s focus on the business.
“So to get the two parents to agree, we have to start there,” says Merle, adding that otherwise families often resort to doing nothing.
In this interview from FarmTech at Edmonton, Alta., father-daughter duo Merle and Annessa Good join RealAgriculture’s Jessika Guse to talk land transfer options, starting first with a focus on capitalization rate.
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Understanding capitalization rate
The first stop Merle makes in discussing land transfers in the above interview is to discuss capitalization (cap) rate.
The cap rate is a look at the rate of return of a property over a year, and is often expressed as a percentage. It compares the property’s cost to the net operating income it returns.
“So, where we live at Cremona, we can gross $500 an acre pretty well year-in, year-out — our land’s $5,000 an acre,” says Merle, adding that means it takes $10 in capital to make $1 of gross revenue. If net sits around 20 per cent, that means it takes $50 in capital to make $1 gross revenue. “So I want people to understand how much capital it takes to run an agriculture business today.”
Merle says he thinks that conversation has to happen between parents, but also with off-farm children, to help everyone understand the capital it takes to run a successful business.
Annessa agrees, adding the point highlights the importance of having conversations, and learning about the process. As well as being Merle’s daughter, she’s also an agriculture transition specialist with Farm Credit Canada.
Annessa believes operational clarity should be the mantra in farm businesses.
Land transfer options
In discussions on land transfer for the senior generation, Merle often says, “thou shalt die with some land,” as he believes land ownership is the ultimate security. But that doesn’t mean the whole operation needs to stay in the older generation’s ownership — in fact, there are ways to ensure a successful transfer to the junior generation while also providing security to the senior generation.
“The first recommendation for transferring land while alive is called the Life Estate – Remainder Man Interest,” says Annessa, explaining that it provides both generations clarity of ownership on title at the same time.
The Life Estate – Remainder Interest guarantees income for life, occupancy, and enjoyment of property for the older generation, she says, while the younger generation knows they have that ownership now.
The second option is a Repurchase Option, she says, which is essentially two separate contracts that allow the older generation the option to repurchase the property if something changes down the road.
And while a will is probably not ideal in most farm operations, it is an option, and it requires significant thought as well. Firstly, says Merle, if land is going to a non-farm sibling, how are you trying to protect the business?