Finding motivated sellers
There are two types of seller: those selling voluntarily and those selling because they have to. Although the majority of the farms coming onto the market are from voluntary sellers, the latter group generally provide better buying opportunities.
Voluntary sellers are usually retirement age farmers with time on their hands to wait for a good offer. They will often only sell in more buoyant markets (i.e. after a particularly good season in their local area). Forced sellers on the other hand aren’t able to time the sale of their property or hold out for higher offers.
It is a little known fact that the majority of forced sellers actually wish to continue farming. Usually they’re selling because they’re either at risk of foreclosure or unable to finance their farming operations sufficiently to service debt. This kind of poverty trap can befall any farmer, including good ones. It could simply be the result of a couple of below average seasons or because they overextended themselves and expanded too rapidly during the good times.
Many of the acquisitions Land Commodities makes are purchase and leaseback transactions with these sorts of sellers (i.e. the farm is purchased by our client and leased back to the selling farmer). Often the leaseback agreement will include provisions giving the tenant first right of refusal in the event of a future sale of the property by our client.
This sort of arrangement has a number of advantages for farmland investors:
- Access to a broader range of potential acquisitions – Because we offer farmers an alternative to a standard disposal / repossession or subprime borrowing, we often have access to deals which aren’t available on the open market. This allows Land Commodities to cherry pick acquisitions which offer the best value and rental income to our clients.
- Better buying prices – Because most of Land Commodities’ clients are passive investors involved in the asset class purely for its investment merits, this gives us a competitive advantage when bidding against farming buyers (who require vacant possession). Sellers will often take a lower price if they are able to continue farming operations after a sale.
- A better class of tenant – Leaseback tenants are experienced at farming the acquired property. A good farmer with historical knowledge of a particular farm and its operating channels has a better chance of managing risks and producing profits compared to a tenant who is a newcomer. What is more, because the tenant usually has a surplus of capital from the sale (after paying down any mortgage) he is sufficiently funded to make the investment required to optimise the farm’s productivity.
- Reduced risk of mismanagement – A diligent and motivated farmer will utilise land management practices which enhance the productivity and, in turn, the value of the agricultural asset. By offering the tenant the possibility of reacquiring the farm in the future, they are incentivised to maintain our clients’ assets to the very highest standard because they could share in the value added by their actions.
- Immediate income stream – By definition, under a leaseback purchase a tenant is in place at the point that the land is purchased, thus rental income always commences the same day ownership begins.
- Higher rental rates – We are often able to achieve a premium rental rate under leaseback tenancies. Additionally, it is often possible to agree more favourable rent review terms (e.g. automatic upward only annual inflation linked rent adjustments).
- More reliable rental income / lower risk of default – If the farming tenant defaults on his rental payments at any point during the period of his tenancy, any right he has to reacquire the property in the future will no longer apply. This creates an additional incentive for the tenant to avoid default.
Through our extensive Australian network we work on a continuous basis to identify these sorts of opportunities on behalf of our clients. Getting these leaseback transactions right requires very diligent analysis of both the tenant and the farm. Land Commodities ensures that leasebacks are only entered into with the right tenants on the right terms.