B.C. TRANSITION TOOLKIT FOR NON-FAMILY FARM TRANSFER – Stage 1
Considerations: Entering Farmer
As an entering farmer considering a transition plan, there is much to think about: your current lifestyle, farm business management skills, financial capacity, and plans for the future. Your pathway will be shaped both by things outside of your control, such as land prices, and choices you make, especially around your lifestyle. The land base is important, but is only one element of a farm business plan. Clarifying your vision and needs will help you understand what farm transfer model might fit.
The bottom line is that a farm business needs to be financially viable. Examine the type of farm you want to run, its financial status and potential to expand, as well as your capacity to take over a farm. Joining an existing farm business often means revenues that support one farm family now need to support two or more.
As you look inward at your own skills and capacity, you may want to deepen your business management skills. Young Agrarians, Farm Management Canada, and the B.C. Ministry of Agriculture, among others, offer programs and educational resources to help you build these skills. Identify areas you want to strengthen and map out a pathway to gaining those skills over time.
QUESTIONS TO ASK YOURSELF:
- How do you define farm business viability?
- Do you have a strategic mindset to help guide the farm towards continued success?
- Do you have the necessary skills and experience to take over the farm?
- Do you have the right people supporting you?
- What is your leadership style? Do you have the leadership capacity to make sound management decisions and lead the team?
- What do you envision for the future of the farm, and how will you get there?
- What are the risks involved, and do you have measures in place to mitigate these risks?
- What will your relationship with the current farmers be, as the future unfolds?
- Are there critical timelines to consider for achieving transition and transfer milestones?
- What elements of the farm culture (e.g. traditions, division of labour, ideals, values) do you want to keep from the current farmer, and what do you want to let go of?
- How do you want to steward the land? Should certain areas be restored and/or protected?
- How will you communicate with the previous generation of farmers?
- What is your conflict resolution style?
- How do you want to commemorate the history of the farm?
LAND: TO OWN OR NOT TO OWN?
It is important for entering farmers to understand what type of landholding model is the right fit. Do you want to own land? Share ownership with others? Or perhaps not own the land at all? Many new farmers would like to own land if it were possible, but let’s challenge the assumption that owning land is necessary to farm. If you don’t own land, you will probably lease it, whether from a private landholder or a community organization. Half of Canadian farmers under 35 lease land for their farm business, as do 35% of overall farms.(1) Many entrepreneurs don’t own the premises out of which they operate. When starting a restaurant, your first step likely wouldn’t be to buy the building, but to lease.
Because farming is a land-based business, much investment is in the land, soil and attached infrastructure. It’s not easy to pack up and move a farm. As well, owning land may help you access loans as the land gains equity and can be used as collateral. Land ownership also addresses core needs for safety and security; knowing there will be a roof over your head both this winter and when you retire.
There’s a retirement angle to owning land, too. Buying land now pays off in the long-term. Canada’s wealth management culture is geared towards people owning their home by retirement, at which point they can live mortgage-free or downsize, and maybe leave a legacy for their children.
So, should you own land or not? Only you – and your financial reality – can answer that question. Part of developing your vision and deciding which model best meets your needs is understanding your capacity for risk versus your desire for flexibility. When you don’t have access to capital, you may have to accept more risk. That said, risk can be a matter of perception.
If you choose a transition model with a path to land ownership, your hurdles will centre on financing, and finding suitable financial collaborators. If you opt for an alternative model where you don’t own land, you will need other mechanisms to provide the security and stability needed to both run your farm and plan for retirement.
When setting your goals, it’s helpful to focus not on the solutions (such as owning land) but on identifying the needs those solutions may address. Once you get at that underlying layer, you may see creative solutions. What if we look at the needs owning land seems to address through a different lens:
FINANCIAL CAPACITY: Your decision about owning land will ultimately be determined by your financial capacity: simply put, can you afford to buy land? Maybe you have family to help, you have savings, or you have off-farm income that will allow you to qualify for a mortgage.
WEALTH MANAGEMENT AND RETIREMENT PLANNING: Land ownership is not the only way to ensure you’ll have something to live off when you retire. In fact, it may not be a wise retirement strategy if you end up in a situation where you need to sell the land to access your retirement funds – when maybe you’d prefer to stay, or one day transition your farm and land to the next generation.
A wealth management expert can help you structure a diversified solution to build wealth based on your projected needs in retirement. Opening a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TSFA) is a step towards starting.
HOME SECURITY: Farming is unique among business models because home life is tightly woven with work life. Sometimes it’s hard to see where one ends and the other begins (that’s especially true of the work day, as many farmers will attest). A key consideration for current farmers in transition planning is where they will live, whether that means staying on the farm, or moving to a new home. In 30 or so years, you will be faced with the same questions, and thinking through your retirement now will help you plan for the future.
FLEXIBILITY: As a landholder, selling is an exit strategy when things aren’t going well, or external factors take you in a different direction. This is, of course, regionally dependent as some properties may be more attractive on the market than others. Selling is not always simple, quick, or even guaranteed. That said, it’s commonly accepted.
Leases can be structured so that they can be “assigned;” essentially, sold to a third party, who would then hold the lease and be the farmer. The difference between selling a property you own and selling a lease, is that when you sell a lease, the landholder must also approve of the person to whom you sell. It is customary to include a clause that approval cannot be unreasonably withheld, with the test being that the person coming into the lease be of equivalent abilitiy and financial standing.
Complexities aside, a long-term, secure lease can be transferred, and can have significant financial value. You may not immediately see dollar value in a lease the same way you can see dollar value in property for sale, but a lease is most certainly a valuable, if not commonly understood, asset. We encourage you to seek lease development support through the B.C. Land Matching Program or a lawyer to ensure your lease addresses all the relevant details.
BUSINESS SECURITY: There are plenty of stories out there about new farmers who lease land for a few seasons, and just as things are getting good – the soil is thriving, systems worked out, customer base built – the land is sold, and the farmer has to move their operation. There’s no way around that kind of heartbreak. There is risk if you don’t own the land, but well-designed leases can provide the kind of security needed for farmers to invest long-term. A registered lease “runs with the land,” meaning that if the land is sold, the lease continues in effect. A registered lease, coupled with a long duration, say 30 or 40 years, can provide long-term stability for a farm business. Even a 3-year or 10-year lease agreement provides a formal contract with a level of security.
ACCESS TO CAPITAL: One of the best arguments for owning land as a farmer is that it can make it easier to qualify for business loans – that said, first you have to qualify for a mortgage, and then you have to service that debt, which can be a lot to manage while transitioning into a farm.
Leases can also have value that can be leveraged to obtain financing, where a lender will see a lease as a type of collateral or security that will allow them to lend to you. A key consideration in leveraging a lease for financing is that the lease term must be longer than the amortization period for whatever it is you’re financing. If you purchased a tractor that would amortize over 10 years, your lease term would likely need to be 15 years.
You should have an idea of what financing you might need for your business in the future, and talk to a lender about how you can leverage a lease to obtain funding. Finding a lender you trust and building a solid relationship will help you plan for your farm’s financial future and put you in a better position for future borrowing needs or debt structuring. Keep in mind your accountability to that relationship in terms of meeting loan commitments.
QUESTIONS TO ASK YOURSELF:
- What are my current financial resources and needs?
- How capital-heavy is my business model? Will I need to depend heavily on financing?
- Will I need off-farm income (e.g. to purchase the land) or to sustain the business?
- How much money is needed from the farm for the current farmer’s retirement?
- How does my business plan measure against the current farmer’s financial needs? If it doesn’t balance out, what changes do I need to make?
- How much money will I need in retirement? How am I currently saving for retirement?
- Where can I live now? Where do I want to live when I retire?
(1) Statistics Canada. Table 32-10-0407-01 Tenure of land owned, leased, rented, crop-shared, used through other arrangements or used by others. doi.org/10.25318/3210040701-eng