If you have been leasing the same piece of land for years and the owner tells you they are thinking about selling, there is a very high chance that you will at least consider purchasing it.

When you have leased land for a long period of time, you know how it performs, and you have probably spent a fair bit of time and money improving the soil, managing weeds and working it into your rotation. It also provides income that your business has become accustomed to, which can make the thought of losing it difficult.

The tricky part about purchasing leased land is that you are increasing your debt without necessarily increasing your income, as the production from those hectares is already part of your business.

With spring sales coming up, it is a good time to consider whether purchasing land you already lease makes sense, what you need to check and how to prepare before an opportunity comes along.

Leasing or purchasing, what are the benefits and drawbacks?

Leasing allows you to increase the area you farm without finding the capital to purchase every hectare. It can help you get more out of the machinery and labour you already have, while leaving funds available for working capital, equipment and other priorities.

The downside is that you have less control over how long the land remains available, what future lease payments might be and whether you can justify improvements when you may not receive the full benefit of them.

Purchasing gives you greater certainty over access to the land and more confidence to invest in improvements that will benefit the business over time. Ownership also allows you to build equity as you repay debt, with the potential for further growth if the property increases in value.

However, ownership requires a much larger financial commitment, and that debt needs to be serviced through good seasons and poor ones. It can also tie up capital and borrowing capacity that you may need elsewhere in the business.

The decision needs to take into account both the cost and the role that particular property plays in your operation.

What changes when you buy land you already lease?

If you buy an additional property that you have not previously farmed, you are adding more productive land to the business and, hopefully, more profit to help service the additional debt.

If you are already leasing the property, that production is already included in your income, so the main financial change is replacing the lease expense with the costs of ownership.

Although the lease payments disappear, you now have interest and any required principal repayments. Depending on your existing lease agreement, you may also take on rates, insurance, repairs and other costs that were previously the responsibility of the owner.

This is why it is important to compare the full annual cash flow commitment of purchasing with what you currently pay to lease. Principal repayments reduce your debt, but they still need to be funded, and a purchase that looks manageable when you only consider interest may put more pressure on cash flow once all commitments are included.

Knowing the property’s production history gives you a useful starting point, but the purchase still needs to work at the price and loan structure being considered.

How reliant is your business on leased land?

There are plenty of benefits to leasing, but it is worth considering how much of your business depends on land that may not always be available.

For example, if you own 1,000 hectares and lease another 1,500, what would happen if 500 hectares were sold and you could no longer farm them? What if two lessors decided to sell around the same time?

You may lose the income from those hectares, but machinery repayments, employee costs and existing debt commitments will not necessarily reduce by the same amount. Your remaining country would need to support more of those costs, unless you could adjust the business or find suitable replacement land at a lease price that still stacks up.

There is no perfect balance between owned and leased land, as every business is different. However, understanding what the loss of a lease would mean can help you decide which properties are most important to retain and whether being in a position to purchase should be part of your planning.

Where possible, maintaining open communication with landowners and understanding lease expiry dates, renewal arrangements and what your agreement says about a sale can also help you plan ahead. It will not remove every uncertainty, but it may give you more time to consider your options.

Do your due diligence, even if you know the property

If you have leased a property for 10 or 15 years, you probably know far more about its farming performance than most buyers. You know which paddocks perform, where water sits, what weeds you have been battling and which areas need attention.

However, knowing how to farm the land is different from knowing exactly what you are purchasing, so the usual checks are still important.

Before committing, work through the following with the appropriate advisers:

• Title, boundaries and access: Confirm what land is included, whether access is legally secured and whether there are easements, restrictions or other interests affecting its use.
• Water: Understand the reliability of the supply, what licences or entitlements are included and any transfer requirements.
• Infrastructure and improvements: Check what is included in the sale, who owns it and what may need repairing or replacing, including fencing, sheds, yards, bores and pumps.
• Existing lease arrangements: Clarify how your lease, any rent paid in advance, crops and improvements you have funded will be dealt with at settlement.
• Purchase costs and ownership structure: Obtain legal and accounting advice on the proposed ownership structure, contract terms and applicable tax, duty and settlement costs.

More on land purchase due diligence here.

It is also worth getting an independent view of value. Knowing a property well, having invested in it and wanting to retain it can make it harder to separate its market value from the additional value it offers your business.

There may be good reasons why a particular block is worth more to you, but you still need to understand how much extra you can comfortably afford to pay.

Work out your limit before the sale

With spring sales approaching, having your finances reviewed early can give you a clearer understanding of your position before negotiations or an auction put pressure on the decision.

Discuss the sale method, deposit, settlement timeframe and any finance conditions with your broker and solicitor before committing. Your purchase limit should allow for the costs of buying and the working capital you will need afterwards, rather than simply reflecting the maximum loan available.

Don’t forget to factor stamp duty and other purchase costs into the capital you will need.

Major banks tend to lend at a loan-to-value ratio (LVR) of 60–70% for agricultural land. This means you will generally need to cover the remaining 30–40% of the land’s assessed value, plus stamp duty and purchase costs. This may come from cash, available equity in land you already own, or a combination of both.

If you know land you lease may come up for sale, or you have your eye on another property, planning ahead can put you in a stronger position. Reducing existing debt, building cash reserves and using equipment finance secured against machinery rather than farmland can help preserve equity in your land.

That available equity may help support a future purchase while keeping your overall lending within the bank’s preferred LVR. It is only part of the picture, though. The bank will also need to be comfortable that your cash flow can cover the additional repayments.

What would the purchase mean for the rest of your business?

We say this a lot, but just because you can borrow the money does not necessarily mean you should.

Before purchasing, we like to run the numbers through a good year, an average year and a poor year, while also considering what would happen if interest rates increased. This helps show whether the business can comfortably meet its commitments and how much room there is if things do not go to plan.

You also need to look beyond the purchase itself. How much working capital will remain available, what other debt are you servicing and is there machinery that will need replacing in the next few years?

Another consideration is whether purchasing this property would prevent you from acting on a more important opportunity later. If you lease several blocks, it can be useful to think about which ones you would prioritise based on their productivity, location, infrastructure and importance to the business.

It is also worth running the numbers on not buying. Would farming a smaller area, reducing machinery or finding another lease leave the business in a stronger position than stretching to purchase this particular property?

Client Experience

A few years ago, we worked with clients who had leased a property for more than a decade. They knew there was a good chance the owners would eventually sell and wanted to be ready, so they started preparing well before it came onto the market.

They kept an eye on land values, reviewed their gross margins and interest rates, reduced other debt and saved towards the purchase. When the property eventually became available, they were in a much better position to act.

We have also worked with a farming family who expected a leased property to be sold eventually, but thought it was still several years away. In the meantime, neighbouring land became available and they purchased it, only for the leased property to unexpectedly come onto the market not long afterwards.

We reviewed the numbers and approached several lenders, but with the debt from the recent purchase, they simply did not have the capacity to buy both.

It was a disappointing outcome and a reminder that land opportunities do not always arrive in the order we would like them to. While you cannot control when an owner decides to sell, you can consider how each purchase affects your ability to respond to the next one.

So, should you buy it?

Sometimes purchasing leased land is the right decision, particularly if the property is important to the scale of your business, losing it would create problems and you can comfortably afford the ongoing commitment.

It is understandable to feel pressure to buy land you have farmed for years, but the fear of losing it should not be the only reason for purchasing. You need to consider both what happens if you lose those hectares and what happens if you take on the debt required to keep them.

If there is a property you lease that you would like to own one day, start those conversations now. Understanding its likely value, reviewing your borrowing capacity and identifying whether you need to reduce debt or build cash can put you in a better position when the opportunity comes along.

We can work through the numbers with you before there is a contract or auction date putting pressure on the decision. Whether purchasing looks achievable now or needs a bit more preparation, knowing where you stand gives you time to plan.

If there is land you would like to purchase, start the conversation early. To help us work through the numbers, it is useful to have:

• The income you expect the land to generate and its recent production history.
• The likely running expenses and what you currently pay to lease it.
• What you would be willing to pay.
• The cash deposit or existing property you could offer as security.
• Your current debts, repayments and any major spending planned.
• Any known sale dates or settlement requirements.

You don’t need every figure finalised before calling. We can help estimate interest costs, repayments, stamp duty and other purchase costs, then work through what the purchase would mean for your cash flow.