Should I buy the land I’m currently leasing?

For many farmers, operating on leased land is par for the course.

Sometimes, the lease might extend for decades. And for some, it might be a short-term solution.

But what happens when the owner wants to sell – or you decide you’d rather lease than buy?

Unfortunately, as with many business questions, the answer is, it depends.

Whether you should buy land that you’re currently leasing depends on your financial situation and your future business goals.

In this blog, I want to talk about some things to be aware of when you’re thinking about buying land you already lease. And if you’re considering leasing land now, with a plan to buy it in the future, these tips might help you weigh up your decision.

Leasing farm land has its advantages

If you’re looking to expand production, leasing land is one of the easiest ways to increase the size of your business. It removes the need for a large capital investment or mortgage and allows you the flexibility of using the land for the time you need it. Perhaps you want to expand into a new area or new type of crop. By leasing the land, you can test to see if the land is suitable and whether it will allow you to meet your business goals.

Leasing can also be a good way to expand without needing to cover the costs of additional rates or insurance. You can also make use of existing infrastructure like fences and buildings.

Another reason to lease land is if you have surplus machinery, labour or equipment. By using your resources efficiently, you can reduce your overall cost of production.

Understanding the financial implications of buying leased land

Many farmers start by leasing land with a goal of eventually buying it. And while that might seem like a smart idea, it comes with some added financial burdens.

The biggest hurdle many farmers discover when they decide to buy leased land is the added expense. Interest payments on the land might be more than the cost of the lease, and because you’re already farming the land, there is no additional income. In fact, your expenses might also increase as you will need to take over costs like insurance and rates.

Before you agree to buy the land you’re leasing, you need to work with your advisors to crunch the numbers. Look at the short-term and long-term implications. While the interest costs may be more than the lease, you also need to factor in the cost of moving and finding a new piece of land to rent.

Looking for long-term security and stability

If you can make the numbers work, there are benefits to buying the land you’re leasing when the owner puts it up for sale.

But this will only work if you’ve prepared. Buying leased land needs to be part of your long-term strategy, with a suitable financial strategy attached to it. You need to start saving early, explore your financing options and stay informed about the market.

If the land is a crucial piece of your farm business puzzle, you want to be prepared for when the ‘for sale’ sign goes up. Perhaps you can explore the option for including a ‘right of first refusal’ clause in your lease. That way, when the owner decides to sell, you have the option to buy the land before it goes to market.

Maintaining a good relationship with the landowner, and using your lease negotiations to get an update on their plans, will ensure you don’t get caught out.

Be clear on your plans before you lease

If you decide to lease land, you need to consider your long-term plans. If you’re unlikely to continue leasing, you don’t want to invest in unnecessary improvements.

But if you lease with a view to buy the land in the future, then factor in those costs. If you can use leased land to increase production but reduce production costs, put those savings towards the future cost of purchasing the land outright.

Case Study 1 – where buying leased farmland worked

Background

My clients had been leasing their farmland for over a decade. They were operating under a formal agreement, granting them the first option to purchase the land if the owners decided to sell. While the exact timeline for the sale was uncertain, it was inevitable the opportunity would eventually arise.

Strategy and Preparation

To ensure they were ready when the opportunity presented itself, my clients adopted a proactive approach. They conducted an annual review of their financial position to make sure that they were on track to secure the funds for the purchase.

It included:

• Assessment of Land Value: Regularly updating their understanding of current land values to anticipate potential purchase costs.
• Interest Rate Trends: Monitoring interest rates to gauge how borrowing costs might affect their overall financing.
• Gross Margins: Evaluating the profitability of the crops they planned to grow, ensuring that the purchase would be financially viable in the context of their expected revenue.

Debt Reduction and Savings Strategy

Recognising that securing a large sum for purchase would require substantial financial preparation, my clients took additional steps to strengthen their financial position.

• Debt Reduction: They made a concerted effort to reduce existing debt. By paying down debt and minimising liabilities, they improved their borrowing capacity.
• Savings Plan: They implemented a disciplined savings plan, setting aside funds specifically earmarked for land purchase. This not only increased their financial readiness, but also provided a cushion for unexpected expenses.

Outcome

When the land was finally offered for sale earlier this year, my clients were well-prepared to make a competitive offer. Their proactive planning, including debt reduction and strategic savings, enabled them to acquire the property.

Case Study 2 – where buying leased farmland didn’t work out

Background

I was approached by a farming family who were eager to purchase a piece of land they had leased for several years. They expected the land would be sold eventually, but the owner had said it would be some years down the track before that happened.

However, as often happens, circumstances change unexpectedly. The land owners put the land on the market much earlier than they had expected.

Challenges

My clients had recently purchased some neighbouring land, which left them fairly highly geared and financially stretched. They faced several challenges.

• Financial Position: The recent purchase meant they were carrying a significant amount of debt, making it difficult to secure additional financing.
• Market Timing: The sudden shift in the sale’s timing meant they hadn’t prepared financially for such an early purchase.

Action Taken

To explore their options, we conducted a thorough financial analysis. I workshopped it with their existing bank and several others to see if we could get it across the line.

Outcome

Despite our best efforts, the combination of their high gearing and the unexpected timing of the sale made it challenging to secure the funding. The family couldn’t fund the purchase, so the opportunity to purchase the land slipped away.

Is buying leased farmland for you?

As you can see from the case studies, the decision to buy leased farmland involves careful consideration of your current financial situation, your goals for the future of your business and your financial plans. It’s definitely one of those situations where you need to know your numbers, have clear plans and work closely with trusted financial advisors like your accountant and broker.

Over to you

Have you ever considered buying the farmland you lease?

If you’d like some support to understand how this could work for your business, please get in touch.

And if you know someone that could benefit from this blog, please share it with them.