Leasing works both waysMarch/April 2012
THE HOLLOWAYS AND CROOKES
- Leasing v. share farming
- Leasing traps
- Investing in capital on leased property
Leasing a property enabled Ian and Alice Holloway to run a much bigger dairy operation than they would have been able to if they’d bought the land. It also allowed them to diversify their asset base and achieve an acceptable work-life balance.
For land holders Stephen and Sarah Crooke, leasing provided an income and freed up time and energy to concentrate on their gourmet ice-cream business, while retaining the family farm and their home.
The relationship has worked so well that last year a 10-year lease was signed, allowing the Holloways to build a 50-stand rotary on land they don’t own. From their perspective, and the bank’s, it was a profitable business decision (see box).
The Holloways and Crookes are an outstanding example of a successful lease arrangement; and to succeed it must work both ways.
We talked to the Holloways and the Crookes to find out why leasing worked for their situations and to get some tips for those thinking of going down the leasing path.
By 2006 the Holloways had share-farmed for six years and were ready to operate a dairy business independently. Buying a property large enough to support the scale they wanted to operate was going to involve borrowing millions of dollars, which didn’t rest comfortably with the couple. Leasing presented an opportunity to have complete control of their dairy business while building their assets without such a high level of debt.
Mrs Holloway, a tax consultant by training, said there was no avoiding paying for the use of land: purchasing a property means paying interest to the bank while leasing involves paying rent.
“To buy an equivalent property to the one we lease would involve an annual interest bill of $300,000 to $350,000,” she said.
The lease payments are a lot less which has taken some of the pressure off the Holloways.
“We’ve been able to build our equity in other farm assets, build a new house and take some holidays. That’s been a better balance overall for our business and our family.” (see box)
As lessors, the Crookes have no direct involvement in the dairy operation.
“Because Stephen and Sarah still live on the farm and buy milk for their ice-cream, we see them often. They are always interested in what we are doing, but they don’t interfere. From the start they were very clear that they wanted us to bring our farming style to the property,” she said.
Mr Holloway said he manages the property as if it were his own.
“Some people talk about restricting the level of inputs such as fertiliser because it’s not our land. That would be crazy. The level of inputs we use is determined by our goal is to operate a profitable business.”
Ian and Alice Holloway
|Aim:||To build a profitable dairy business within a comfortable debt level with a medium-term goal of improved work-life balance.|
|Land:||Lease 440ha from the Crookes; own 74 ha; lease 46ha from Ian’s parents|
|Own:||The herd, plant and equipment|
|Herd:||490 milkers + young stock|
|Equity:||88% ($3.4m assets)|
|Return on assets:||Average 29% (peak of 42% in 2010/11)|
By 2006, Stephen and Sarah Crooke had been dairying for 25 years. Their children had left home and the couple had established a gourmet ice-cream business for a new challenge. With the ice-cream business growing faster than expected, the couple found themselves stretched by the demands of both the dairy farm and the new business.
Mrs Crooke said they didn’t want to sell the property.
“Although our boys didn’t appear interested in dairyfarming we feel very connected to the land and our home and we weren’t ready to leave it. And of course we needed a source of very high quality milk for our ice-cream.”
Leasing enabled the Crookes to achieve their goals and they accept the returns reflect the level of risk and involvement they have with the dairying land.
“Our income might be higher if we sold the property and invested the money. But our decision wasn’t driven by maximising the return on investment. Leasing the property provides important income but the decision was about more than money.” Mrs Crooke said.
“We are delighted to be able to retain our connection with the land, live in the place we love and continue our ice-cream business. The Holloways have made that possible because they look after our land so well,” said Mrs Crooke.
Sarah and Stephen Crooke
|Aim:||To generate an income and free up time and energy to concentrate on gourmet ice-cream business, while retaining the family farm and home.|
|Land:||Lease 440ha to the Holloways; retain house block and wetlands|
|Business:||Gourmet ice-cream business is in a rapid growth phase|
The Holloways and Crookes agree that the relationship is at the heart of a successful leasing arrangement. And while the relationship involves trust, it is built on robust discussion and a written agreement.
The Crookes had confidence in the Holloways because they’d known them for some time.
“We’d worked together on LandCare projects and we felt we shared some important values about farming and the environment. We knew they were good farmers who looked after their cows and their land,” said Mrs Crooke.
But there were many details that needed to be discussed and clarified so that all involved understood clearly who was responsible for what. Both couples called on the experience of trusted farm advisors to help them work through the issues.
Mr Crooke said that it was really important for both parties to think about issues and discuss things that could go wrong. The discussion can be confronting at times but it can’t be avoided.
“By talking about our concerns and how we might go about working them out we grew to understand each other’s perspectives.”
“Once we understood what was important to each party it was easier to come up with an arrangement that works both ways,” he said.
With the general conditions agreed upon, the next step was to have them incorporated into a formal lease agreement by a solicitor.
Victorian dairy consultant John Mulvany spoke to the Australian Dairy Conference about some of the farm lease arrangements that he’s been involved with.
“The Holloway-Crooke arrangement has been very successful. Although the relationship is influenced by the personalities involved, having a written agreement is essential. It defines the expectations of each of the parties involved,” Mr Mulvany said.
He said major sources of conflict which should be clarified in the lease.
Major sources of conflict which should be clarified in a lease
- Plant and equipment maintenance versus capital replacement
- Farm repairs and maintenance and weed control
- Level of fertiliser applied
- Pasture re-sowing and cropping
- Effluent systems
- Access by the lessor
“Leasing does not involve frequent contact with the lessor, as might be the case in a share farming arrangement. That’s why the details need to be agreed upon at the commencement of the lease period,” Mr Mulvany said.
In early 2011, the Holloways built a 50-stand rotary on the Crooke’s land.
Mr Holloway said the decision involved re-negotiating a number of the conditions in the lease, including signing up for 10 years to allow them time to make the investment worthwhile.
“When we started thinking about a new dairy we’d been leasing from the Crookes for about four years so we were confident the relationship was working. But there were still a lot of issues to discuss about how the investment in a new dairy would work for both families,” he said.
“Once we’d agreed on the conditions we had a new lease drawn up,” Mr Holloway said.