Utilizing leases can benefit farming operations

MALTA, Ill. — Sharing long-term goals with financial professionals can help farmers take advantage of opportunities for their operations.

“Often around this time of the year, I’m sitting down with my customers to look at their balance sheets,” said Buck Hill, financial officer for Compeer Financial. “Make sure when you walk in to have conversations, you’re expressing long-term goals.”

“Fortunately, over the past three years, we’ve been able to build up really good cash reserves from higher revenue years and higher profitability,” said Hill during a presentation at the Illinois Soybean Growers’ Farm Business Summit.

“The cash has been getting used up, so we need to be conscious as we go back to times of tight environments and more of a cash preservation mindset,” he said.

As farmers add assets to their operations, Hill said, they should consider it a financial tool in their toolbox.

“Ask what can it do to increase the rate of return for yourself or how does it add flexibility and leverage to your operation,” he said.

The debt-to-asset ratio on Illinois grain farmers is currently at 19.5%, Hill said.

“That is a really healthy level from a balance sheet perspective,” he said. “My larger concern right now is being able to conserve working capital.”

Typically, Hill said, farmers have three major goals — building cash assets, keeping a sustainable line of equipment and preserving or expanding their land base.

“Those are really difficult things to do all at once,” Hill said.

“It becomes more difficult with a multigenerational family when you’re deciding when to pass the torch to the next person or when it is time for a person to take on a land purchase,” he said. “Let’s get a plan in place and then be willing to adjust that plan.”

The appraisal team at Compeer Financial does benchmarking by appraising the same farms multiple times a year over the last 25 years.

“This helps us set a trend for where farmland values are going,” the financial officer said. “We’ve gone from sub-$5,000 per acre to an average appraised value of over $20,000.”

In DeKalb County, Hill said, the farmland values have peaked out around $16,000 per acre.

“The highest selling tracts are large tracts and continuous tracts with high productivity,” he said. “We are still seeing a lot of inventory and there are some sellers that may have unrealistic expectations.”

It is difficult to forecast interest rates, land values or commodity markets.

“But we can manage through those things by having conversations early and often on what direction you want to go,” Hill said.

Lease Agreements

Different types of leases are tools farmers can use in their operations to meet their goals.

“Probably the most common type is the tax deductible lease,” said Anjie Erbsen, senior leasing specialist for Compeer Financial, who also spoke during the Farm Business Summit.

“For example, if Compeer is the lessor, we own the asset on paper and we’re going to rent or lease it to you,” Erbsen said. “That means you’re going to write the rental expense off your taxes instead of the normal depreciation on it.”

Typically, there will be some end-of-term options available to the farmer.

“We’ll give you the option to purchase the asset at the end of the lease or you can give it back to us at the end of the lease,” Erbsen said.

The second type of lease is called a non-tax lease.

“With this lease, the client owns the asset and you can do a $1 buyout at the end, but you don’t have the option to return it,” Erbsen said.

Sometimes farmers are hesitant to lease, the leasing specialist said, because they have a perception that it is a high-cost way of buying something.

“But in today’s world, it’s really competitive with conventional financing, as well as cash buying,” Erbsen said.

“Some farmers think if they frequently roll assets like tractors, combines or sprayers that they can’t lease those machines,” she said. “But actually they can and I have a lot of clients that lease assets that they trade frequently.”

Leases are a really good way to manage working capital.

“Leases don’t require a large down payment up front like a conventional loan,” Erbsen said. “If it’s a construction project, it typically doesn’t require a payment until everything is completed.”

The payment schedule for leases can be customized to meet the farmer’s need.

“We can do harvest pay, step-up payments or step-down payments,” the leasing specialist said. “And there’s flexible collateral requirements with no mortgage when we do a project with a lease.”

For estate planning, a lease can be used to transition assets from one generation to the next, Erbsen said, on things like buildings, bins and equipment.

“A couple of things you may not realize you can lease is tile for your farm,” she said. “That’s a program that’s growing pretty substantially in Illinois.”

There is also a lot of interest in solar projects for farm operations.

“I probably quote half a dozen solar projects a week for their general farm, grain system or livestock facilities,” Erbsen said.