If your farm struggles with cash-flow problems, yet you are sitting on a large amount of land equity, a sale-leaseback can be a possible solution for your stressful situation.
Before you vow you’ll never sell a piece of land, consider the benefits. A sale-leaseback can make a lot of sense.
LIQUIDITY THROUGH LEASES
In a sale-leaseback, you sell land, and the buyer agrees to lease it back to you. Often, the arrangement gives the seller the right of first refusal on buying back the ground if the buyer later decides to sell it. This first-right-of-refusal option used to be hard to find, but increasingly sale-leaseback transactions include this important provision.
This arrangement can provide the liquidity to run your farm as you intended, not based on what your cash flow permits. It offers the breathing room to escape the pressures of cash-flow challenges.
Sale-leasebacks are popular in many industries, including agriculture. They’ve been credited with keeping good companies afloat during tough times.
Before you enter into a sale-leaseback, consider these questions:
- Is it just putting a bandage on an unsustainable operation? If a sale-leaseback will lead you into long-term profitability, that’s great, but if it’s only kicking the can down the road and ignoring deeper problems, it’s not your best option.
- Have you evaluated the economics? Calculate the differences between what you would be paid for the land in a sale-leaseback versus what you would earn if you sold it outright. Remember to weigh the cost of the lease too. If you sell your property for less in a sale-leaseback but can make it up in the lease terms, it might be a good deal.
- Do you understand the impact on your resource allocation? For example, if you farm 5,000 acres and start selling ground, that will affect your labor and equipment needs. Or, if you sell more land than you decide to lease, that can throw off the efficiency of your equipment use. Advisers can give you benchmarks on resources needed for your operation’s new size.
- What tax or lending issues will a sale-leaseback create? Be aware a sale-leaseback doesn’t mitigate tax obligations. Moreover, your lender will likely have a lien on the property, so it’s important to understand how much of the sale’s proceeds might belong to the bank. This is often where things blow up, so engage with your lender and accountant early in the process.
EXPLORE THE OPTION
I see too many land-rich farmers just barely getting by as they struggle with major cash-flow issues. If you’re in that situation, stop. You owe it to yourself to explore the concept of a sale-leaseback. It can be a no-brainer if done for the right reasons.
