Who’s going to pay your debt?

Who’s going to pay your debt?

Farm families are all over the board with answers to a question like this, so I will try to address a few of the potential answers.

• Some say, “we have no debt, so this column is not for us.” Well congratulations, because many farm families have dreamed of being out of debt. For some, getting out of debt has felt like a mirage because every time they got close there was a set-back or they bought more! Here’s my question for you: Having farmland paid for is great, but are you limiting the growth of your farm by not having it leveraged or by allowing someone else to use it for collateral? I understand you do not want any more debt, but would it be a good idea to allow your farm heir to use your land for collateral?

• Read more on farm finances:

  

  1. Ignorance might be bliss, but that doesn't make it the right choice for farm families
  2. North Dakota Attorney General's Office looks into Bill Gates-related farmland sale
  3. It only takes one small problem to make a big problem
  4. Entity linked to billionaire Bill Gates pays $13.5 million for Campbell Farms' North Dakota farmland
  Some think “we have a bunch of debt but we plan to have it all paid for before we die.” For those in that category, I would suggest there are two solutions — live long enough or have enough life insurance with beneficiary coordination or collateral assignments to cover your debt. One of those options can be guaranteed while the other is wishful thinking.

• Some say, “We will never live long enough to pay off all our debt so our children will inherit our debt.” The question is, are all the children going to get the debt equally or just the farming heir? If all are going to get the debt equally, I can almost tell you there will be thoughts of a sale before the sun sets when they inherit the ground. I have seen children who think a $100,000 house loan is a lot, so the thought of inheriting $500,000 of debt would freak them out completely. They will be selling assets very quickly so they do not have debt. Keep in mind that repaying debt will significantly cut into the income they receive from the land rent and will encourage the likelihood of liquidating some land. In most cases, they’re not farming for a reason. They either didn’t like the farm, or were very talented in some other area, or never "thought like a farmer."

• Some say the farm heir should get all of the farm and all of the debt. Maybe they can handle your debt, but can they handle that plus sibling buyout payments? Let’s look at this example. Let’s say you have a 1,000 acre farm with $2 million of current land debt on a 20-year note. The land payment would equal about $140,000 per year or $140 per acre. No big deal, right? It isn’t, while you are living. But what if you have three children and one of them is farming and they are going to buy out the two non-farming children at a 20% discount? Based on $12,000 per acre land, that gets the buyout to about $9,600 per acre or about $6.4 million of new debt to buy out their siblings. If done on a 30-year note, the payment would be about $384,000 per year or another $384 per acre on top of the $140 per acre to service the existing debt, for a total of $524 per acre. That is not going to work, but you can stop before that because they’re not even going to get that loan. That will be kiboshed by most lenders, who are not going to allow a land loan to exceed $5,000-$6,000 per acre based on all the acres.

I don’t have a great fear of debt, as long as I have a plan that works to repay it. Often, I see people miss a step in planning when they don’t combine servicing existing debt with how much new debt will be incurred from family buyouts.
Myron Friesen is the co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be contacted at 866-524-3636 or friesen@farmestate.com.