Buying farmland is a major investment demanding high upfront costs; however, there are multiple sources of revenue that ag land investors can use to reduce their overall risk and supplement their repayment capacity.
Factoring in Farm Income
In cases where farm income is sufficient to service the land debt, investors can align their loan payments with cash rental income.
Land investors can assess the sufficiency of the farm’s cash flow to service debt and real estate taxes by calculating their cash rent equivalent (CRE). The CRE can then be compared to the expected rental income in the area where the land is located. The CRE is calculated by adding all land payments (principal and interest) plus real estate taxes and dividing by the number of acres generating rental income.
In cases where the income generated by the land is insufficient to service the land debt, investors can leverage non-farm income to supplement their debt payments.
Leveraging Non-Farm Income
- Structure all debt to match non-farm income sources.
- Utilize a two-note structure where the first loan is tied to the income generated by the farmland on annual payments, and the second loan is tied to the non-farm income source with payment frequency and term based on cash flow streams.
- principal + interest + taxes, divided by the number of tillable acres.
In the scenario above, the CRE is higher than typical cash rental income. Therefore, it would be beneficial to split the $500,000 loan in a way that the annual (or semi-annual) loan payment is equal to cash rental income in the area where the farm is located. The remaining loan amount can be set up on monthly payments supported by non-ag income, such as wages or other investments.
Financial Strength of the Borrower
For investors who have significant assets in privately held companies and other entities, it may be necessary for the lender to verify those assets and any associated income derived by them. Typically, the size the of the request and complexity of the investor’s assets and income are used to gauge additional information requirements.