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Lessons to Learn in Agricultural Real Estate

Paul Dietmann
Educational Opportunities: 
Grain, Young, Beginning Farmers
Home > Education & Events > November 2018 > Lessons to Learn in Agricultural Real Estate

Farmers typically want to own as much of the land they farm as possible.  It makes sense.  Land is the base of almost any farm enterprise, and investing in additional agricultural real estate seems to be a no brainer.  Having ownership of the land assures that it will always be available to the farm operation.  It’s also seen as a long-term investment, and a legacy that can be passed from one generation to the next. Many highly profitable retail businesses such as Walgreens, however, choose to lease most of the real estate on which they operate. 

In today’s environment, with land costs seemingly forever on the rise, purchasing every parcel just isn’t realistic -- particularly for young or beginning farmers. I would argue there are some helpful principles farmers might be able to glean from corporations like Walgreens when it comes to real estate.

Location is crucial.  Just as a farmer wants to amass as much good land as possible in a specific geographic area, Walgreens knows that the location of their real estate is essential to their success.  If they don’t have their business in the right spot, it might not generate enough net cash flow to keep operating. 

Long-term control.  A farmer needs to farm a given parcel of land for many years to sustain their business.  After spending a lot of time and money locating the perfect spot on which to site a store, Walgreens needs to operate in that location for many years in order to make a profit.  How successful would the store be if it was at risk every year of having another pharmacy swoop in and outbid them for the spot?  Walgreens typically enters into very long-term leases with its landlords; 25 years is the norm. Perhaps agreeing on a longer than normal lease term will help you sleep a little better at night in the years to come. (Please note: legal lengths of farmland lease terms vary from state to state, so make sure to check before you commit to an agreement)

Make life easy for landlords.  Once it settles on a location, Walgreens asks the landowner to cover the cost of building the store.  In exchange, Walgreens guarantees the landowner a good, long-term return on the investment through rent payments.  They typically enter into a “triple-net lease,” which means Walgreens pays the property taxes, utilities, and any maintenance on the building.  Once the store is built, the landlord just has to deposit rent checks. As a crop producer, you always need to be cognizant of inputs and costs, but there may be other creative ways (like snow removal or otherwise helping to keep the property maintained and in good condition) you can make life a little easier for your landlord, in turn making them more likely to give you right of first refusal when the lease agreement term is up.

Reputation makes a big difference.  Walgreens operates in a highly competitive environment; every other retailer wants those same prime locations and is willing to pay up for them.  Farmers interested in leasing land need to constantly build their reputations and cultivate relationships so landowners view them as their first choice.

Leasing frees up capital to be deployed in ways that generate the most cash flow and profit.  Since its cash isn’t tied up in an illiquid investment like real estate, Walgreens is able to invest inside the stores.  The same can go for you as a farmer. Perhaps upgrading your equipment, making sure you have enough working capital to survive some pricing dips or investing in new technology to improve efficiencies is a smart choice for you right now.

Finding a farm to rent can be a challenge.  And there’s heavy competition for the opportunities that do exist.  However, if you can find a good place to rent, the financial advantages over buying land can be substantial.  You have to be able to rent the farm for multiple years to be successful, particularly if it requires you to make capital improvements.  In order to get and keep a long-term lease, you need to make life as carefree as possible for the landowner.  Always pay the rent on time and maintain the farm as if you owned it.  You’ll build your reputation for dependability and other opportunities will come your way.
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