THE LORANDA GROUP, INC

I’ve been buying and selling farms for nearly 30 years.  One of the first things I learned – an existing lease will discount the sale price of a farm.  The appraiser will tell you it’s because the buyer does not get the “full bundle of rights”, which includes the right to lease to whomever he chooses, on whatever terms he chooses.  The seasoned broker explains it differently – a farmer does not like to bid on a property that he cannot immediately take full possession of.  Better stated… farmers don’t like to be landlords for others.  They want to plant and harvest the crops themselves.  In theory, investors would still be interested in a lease encumbered parcel.  But they too may discount the price because the lease terms, or the farmer, aren’t what they want.

The amount of the discount will vary depending on the length of the lease, the quality of the ground, and how competitive the neighbors are.  For many years, people thought a price reduction of $200 – $300 per acre was appropriate.  Today, however, in the era of $7.00 corn, we have witnessed that discount shrink considerably.  And at some recent auctions I’ve attended, there has been no discount at all.

So what has changed?  I personally believe there are two factors at play. The first is the fact that both farmers and investors are flush with cash at the present.  And farmers have always attempted to buy land when they’ve had the financial ability to do so.  The second is the fact that so little land is now on the market with no increase in supply likely.  So the farmer has a choice… A. I can wait until next fall and hope that a farm in my area will be for sale; or, B. I can buy the farm with the existing lease now, realizing that I only have to ride with the lease for one year.  This isn’t the ideal scenario, but when there’s little on the market for sale, buying now with a lease is better (and possibly cheaper) than waiting and hoping that something will pop-up later. 

The farms where I’ve seen this happen this winter had some common features – they had good quality soils; they were situated in an area where nothing had sold for quite some time; and the surrounding farmers were financially strong.  Not all farms will fit this criterion so the results may differ.  And if/when commodity prices fall in the future, the lease discount may reappear.  Bottom line – the rules are different now.  Assuming there are any rules at all.