Who will pay your debt? -Agweek

Who will pay your debt?

Farm families are everywhere with answers to a question like this, so I’ll try to touch on a few of the potential answers.

  • Some say, “we don’t have any debt, so this column isn’t for us.” Well congratulations, because many farming families have dreamed of being debt free. For some, getting out of debt felt like a mirage because every time they got closer there was a setback or they bought more! Here’s my question for you: having paid farmland is great, but are you limiting your farm’s growth by not using it or allowing someone else to use it as collateral? I understand that you don’t want to go into debt anymore, but would it be a good idea to allow your agricultural heir to use your land as collateral?
  • Some say, “We will never live long enough to pay off all our debts so that our children inherit our debt. The question is, will all the children receive the same debt or just the farmer heir? If all of them get the same debt, I can almost tell you that there will be thoughts of selling before sunset when they inherit the land. I’ve seen kids who think a $100,000 home loan is a lot, so the thought of inheriting $500,000 of debt would freak them out. They will sell assets very quickly so that they don’t have debt. Keep in mind that paying off the debt will significantly reduce the income they receive from ground rent and increase the likelihood of liquidating some land. In most cases, they don’t farm for a reason. Either they didn’t like the farm, or they were very talented in another area, or they had never “thought like a farmer”.
  • Some say the heir to the farm should get the whole farm and all the debts. 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 a current land debt of $2 million on a 20 year note. The land payment would be approximately $140,000 per year or $140 per acre. No big deal, right? It is not so as long as you live. But what if you have three children and one of them is a farmer and they are going to buy out the two non-farmer children with a 20% discount? Based on $12,000 per acre of land, that brings the buyout to about $9,600 per acre or about $6.4 million in new debt to buy out their siblings. If done on a 30-year note, the payment would be approximately $384,000 per year or an additional $384 per acre on top of the $140 per acre to pay off existing debt, for a total of $524 per acre. It won’t work, but you can stop before that because they won’t even get that loan. This will be rejected by most lenders, who will not allow a land loan to exceed $5,000 to $6,000 per acre based on all acres.

I don’t have a big fear of debt, as long as I have a working plan to pay it off. Often I see people miss a planning step when they don’t combine the servicing of existing debt with the amount of new debt that will be incurred as a result of family buyouts.
Myron Friesen is co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be reached at 866-524-3636 or [email protected]


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John A. Bogar