Rising Land Prices
Feb 11, 2014
From Legacy Moment (01.10.2014).
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"Can a young farmer really be successful if we don't sell our land at a discount? If so, how do we come up with a fair price, since we count the land as a large part of our retirement?" Although not far into the succession planning discussion, for this reader, land value is top of mind.
Yes, without a doubt, a young person can be successful, whether they own the land or not. Consider for a moment that many other commercial ventures, especially in the early stages of business growth, are located in leased facilities. From manufacturing plants to factories, from retail establishments to restaurants, many operations are established with long-term real estate leases. Over time, and with the right capital management plan, a person can one day afford to invest in land assets. But when starting out, mortgage payments are often an untenable expense.
As the current owner, your land could be a key to your financial security in retirement. With the appropriate lease agreements and a well-drafted buy/sell agreement, you can ensure your financial independence while helping your child[ren] get a good start in farming. So rather than selling at a discount, I suggest you establish a fair lease for the land. The agreement should include a cost-of-living adjustment, renewal provisions and a first right of refusal in case you (or a subsequent heir) need to sell your interests.
For many of our client engagements, one of the first things we do is establish separate entities for the land and the operation. In addition to helping better manage the assets, it establishes the foundation for an equitable distribution to non-farming heirs. For most, a substantial portion of the farming operation is comprised of leased property. Renting from family is no different than renting from any other landlord.
Beyond the tangible values of the land, we attach other intangible qualities that can hinder succession planning efforts. As land values continue to increase, we sometimes have to reevaluate our attachment. Although land is an integral part of the farming operation, 'control' could be a better objective than outright ownership.
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