Midwest sale/leasebacks on the rise: Hertz

Challenging conditions facing Midwest farmers have helped bring about an increase in sale-leaseback transactions in recent months, according to the president of real estate services at Iowa land broker Hertz Real Estate Services.

Doug Hensley told Agri Investor that as farmers have made financial arrangements for year ahead, his brokerage has seen more interest in sales to financial buyers that will allow farmers to continue operating the assets than during other recent years. In some cases, Hensley said, a farmer will look to begin by securing a sale/leaseback for a piece of farmland that is not critical to their operation in order to improve their overall financial situation.

“If I can sell it and continue to farm it by getting a leaseback on it, I’ll take the sale proceeds with the amount of equity that I already have in it and pay down debt or just improve my financial standing from a cashflow or working capital perspective,” Hensley said. “That is what a lot of people are doing right now.”

Hensley explained that some farmers have traditionally used sale/leasebacks as a growth tool that allows them to make improvements on undervalued land before returning to the market for a quick sale. In the current environment, however, Hensley said that the tactic is more often part of strategy to deal with financial stress.

After consecutive years in a low agricultural commodity price environment, most Midwestern banks now have loans been monitored closely for stress, he said. As those banks negotiated operating lines for their borrowers in recent months, many are encouraging borrowers with existing debt from last year to explore strategies for improving their financial conditions.

“Bank regulators are not going to allow most of these rural banks to continue allowing a borrower to have carry-over debt, year and after year after year,” Hensley explained.  “The bank regulators are watching that very, very closely right now.”

The buyers in recent sale/leaseback farmland transactions have been both individuals and institutions or funds, according to Hensley. He added that while funds in general have been more focused on other areas of the country offering higher returns, a desire for a balanced, diversified portfolio has helped encourage farmland funds to also remain active in the Midwest market.

“When you put together a portfolio of underlying assets, you are going to want to have some of the orange groves and almond groves, but you are also going to want to have some of the plain vanilla corn and soybean exposure, because when one zigs, the other zags,” he said.