Des Moines, IA December 16, 2013- As an aging population of farmers seeks liquidity for succession planning, retirement planning and other needs, investors are ramping up efforts to purchase farmland, visiting farmers, COOPs, realtors and others touting the benefits of farmland purchases with lease back options.
It’s an arrangement that has been popular for decades and it is supposed to help farmers get liquidity while still allowing them, and perhaps an heir, to continue farming that land.
The arrangement seems to make sense; farmers are concerned about their ability to continue renting farmland for production and landowners are concerned about having good tenants.
Does this arrangement make sense financially for farmers and is this the best way to get needed cash?
At least one researcher says, “No, this is not a good arrangement for farmers and yes, there is a less expensive way.” Meet T Allen Dyer of the Farmland Marketing Group, Inc. of Des Moines, Iowa.
Dyer grew up in Wisconsin, America’s dairy land. His mother’s side of the family were dairy farmers for over 100 years, and his father, an executive with Transamerica Occidental Life Insurance (now Aegon), owner of nearly a billion of dollars of farmland. Over the last 7 years, Dyer and his employer (a group of farmers and investors), have worked on a solution to an aging population of farm families' growing need for liquidity.
"Do the math" suggests Mr. Dyer. “The only person who benefits from this type of arrangement is the person or institution buying the land. It is an unattractive, inadvisable step toward liquidity for the farmer and is completely unnecessary. There are better alternatives.” Dyer assures.
The model Dyer’s employers have developed is embraced by every farmer who is exposed to it. It is, after all, a model of the farmer’s own design, based on years of face to face visits with farmers from all over the Midwest. Dyer suggests farmers move slowly and consult a farmland liquidity expert, like his firm, to work through the numbers and alternatives.
Dyer says firmly, “A lease back is not a good alternative and the guy proposing it is not your friend. When farmers learn that there are alternatives that allow them to get liquidity without having to sell their land outright, without paying a large capital gains tax, realtor commission or auction fee, they are thrilled. No farmer should have to lose control or possession of his farm to get some cash."
While it sounds absurd, this is exactly what has been happening with the sale of farmland for the better part of 100 years.
Dyer admits his model has upset a great many people. He has proposed this idea to many of this country’s biggest investors and investment groups. Most are dismissive, electing to continue on their current paths for as long as possible, at the expense of farm families. "A change is coming," Dyer assures. "When farmers find out about this alternative, outright sales could stop altogether."
The mathematics and long term consequences of a farmland lease back, (See the accompanying chart) , according to Dyer’s firm:
For the sake of simplicity, Dyer's example assumes a 100 acre farm, valued at $10,000 per acre, is being sold for $1,000,000. The example assumes that the farmer pays capital gains taxes, realtor commissions and other final expenses totaling $200,000, which come out of the $1,000,000 sale proceeds, leaving the farmer $800,000.
Additionally, the farmer takes $100,000 for debt reduction, a vacation and a vanity purchase, like a new truck, leaving $700,000 to invest.
The first column, titled “Investment Account 3%”, is the farmer’s investment account projecting growth over 10 years, with additional summaries at years 15 and 20. This account is projected to be growing at a rate of 3% per year and assumes no additional withdrawals.
The second column, titled “Net of Rent”, assumes that the farmer elects to continue renting from the new owner, and pays $400 per acre for the life of this example, with no rent increases and with the charge for the rent subtracted from the farmer's investment account at the end of each year after he has earned the 3% on his investment.
The fourth column shows the value of the farmland that was sold to investors based on a 7% rate of appreciation.
The last column shows the difference between what the farmer has in his investment account and the value of the land that was sold, to calculate the farmer’s loss in any one year.
As the example shows very clearly, farmers who sell and lease the land back will suffer significant financial loss over time.
Dyer continues, “The reality is that the farmer probably won't earn the 3% return we have projected. He will likely earn less. He will make other withdrawals from his investment account. The investor or landlord will increase rents. The example above probably presents an overly optimistic picture of what will happen. As a result, the farmer will be devastated financially by this lease back arrangement and the investor will be that much richer, at the farmer’s expense.
Dyer again suggests that his firm has a method by which farmers can get cash without borrowing or having to sell their land outright, without losing possession or control of the land and without outrageous capital gains tax, realtor commissions or auction fees.
“No other asset class requires all investors to sell outright before any investor gets their cash. No other investment’s value is based only on last year’s cash return without any consideration for the investments appreciation record or potential, why are farmers being subjected to these conditions” asks Dyer?
Dyer laughs, “Can you imagine investors who buy stock in companies like Apple, John Deere and Microsoft suddenly finding out tomorrow that their stock would no longer be valued based on the stock’s potential rise in value but only on the previous years’ dividend; that only a handful of buyers would be bidding on their stock and that the broker or brokerage firm selling the stock would be charging a 6% commission?”
Dyer suggest, “All the big players in agriculture have been made aware of our new model, the one’s that care about farmers will embrace the model and make farmland a liquid asset, those that don’t will continue to make outright acquisitions at farm families expense.”
For information, without obligation, contact Farmland Marketing Group at email@example.com