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#047 - Vendor Finance Vs Lease With An Option Vs Debt Funding · Dollars In The Dirt

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  You don't need straight bank debt to get into the right rural property. Most
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  producers think if they don't have the bank size deposit today, they
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  need to sit on the sidelines. After helping hundreds of farmers secure
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  over a billion dollars in finance, I can tell you that the right mix of
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  vendor finance, a lease with an option or debt funding can
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  get you the right deal moving forward without setting your business up to fail.
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  So in this video, I'm going to show you exactly how each path
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  works who it suits and the traps to avoid before
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  you sign anything. Starting with vendor finance, this is
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  where the seller takes a portion of the purchase price as an ongoing
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  loan to the buyer rather than being paid all the cash up
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  front. In practice, you often see a mixer where a bank provides
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  senior debt over most of the value and the vendor sits behind
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  the second ranking security for their proportion. There will normally
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  be a priority arrangement put in place or a protocol that
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  lays out who gets paid first if things go wrong and
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  what triggers enforcement and how interest and repayments work between
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  the parties. Vendor finance matters because it creates a bridge for
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  buyers who might not have a deposit, trading history or
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  cash flow but can produce value in the medium term. For
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  example, you might be a young cattle producer looking to purchase a
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  place with a vendor note covering 30% while the bank
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  covers 50% and the buyer puts in 20. The
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  seller's funding lets the buyer get into the property and
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  undertake improvements and build trading history to refinance down the
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  track instead of waiting years to save a big deposit. So practically,
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  the next action is to involve a finance broker and a solicitor early
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  to get the bank engaged to approve a structure with partial senior
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  debt and a second ranking security. Ask for a clear priority
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  agreement that sets out and remedies the notice periods. And
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  get an independent valuation that shows exactly the security for
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  both the bank and the vendor. And if you're the buyer, run
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  cash flow models that include the vendor repayments, And if
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  you're the vendor, insist on a repayment structure that protects your
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  capital and sets out how the improvements by the buyer will be
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  treated. Moving on to the second option that we could look at is a lease with an
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  option to purchase. A lease with an option is a two-stage arrangement where
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  you lease the property up front and then you have an option to purchase
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  the property with an agreed price and term. Often some or
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  all the rental payments are credited against the purchase price and you
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  have time to create value in the property and build equity. You
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  can build improvements, improve the stocking rate, and you're also producing
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  trading history with the bank so that you've got three years worth of financials that
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  you can use then to go to the bank when you need to pay out the vendor finance. Legally,
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  this option is a lot more complex because you need to document the lease
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  arrangement, you need to document an option arrangement, and
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  there's a lot of negotiation there around the terms of the lease, what
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  happens to improvements, and then also around the option agreement around
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  the purchase price of the property and the term around that
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  and when the contract will be finalised and the property is
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  transferred to the new owner. So you could lease a
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  2,008 hectare property for five years, put in troughs, laneways, lift
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  the carrying capacity, and then exercise the option in year three as
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  the cash flow improves. And that way you get into the property, you
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  have the time to build equity into it, and demonstrates to
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  the bank also that you have the ability to operate the business before they're
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  committing to giving you the funding to get in there and buy it. If you don't have
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  the deposit, it gives you the ability to build that deposit while you're
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  leasing the property without having the interest payments coming through
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  the business upfront. Obviously, you've got a lease payment instead, but
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  this sometime is credited off the purchase price of the property and assists you
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  in building equity. The thing from a vendor's point of view, it helps get
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  a next generation into a property that mightn't get there. And sometimes some
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  of these vendors are happy to see people get into properties, you
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  know, to carry the legacy on for the business they've built without just
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  putting it into the open market. There's vendors out there that are happy to see younger
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  people get a start in the industry because they often know how hard it
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  is to get started. So the practical next step is to go share an option
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  price mechanism and how if any improvements are credited and
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  get professional legal documentation that protects both sides and
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  sets clear timelines and notices around when the option's to
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  be exercised, when the property's to be settled. It's important
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  to discuss this with your advisors, potential lenders, about
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  the lease terms early so that they can assess whether they'll lend on the options,
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  making sure that you've got the money available for when you need to exercise the
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  option. So you need to really talk to the lenders early, talk to your accountant early,
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  and obviously your solicitor will be heavily involved in this negotiation. Finally,
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  keep excellent records for every improvement, any costs, so
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  that when you get the property valued, you can go to the value and say, these are all
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  the improvements we've done since we exercised the option to really
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  show that why the property could be worth what it is in the future. And
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  that helps you with building that equity also by showing increasing carrying
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  capacity. The next option is around straight debt funding. And this is the more traditional
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  way that we'd look at acquisitions of property. It's a classic bank loan
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  where a lender provides the money and you buy the property. The lender
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  takes a first ranking security over it. The mortgages are
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  standard. The covenants are tied to the farm business performance. This
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  is the more traditional route because it's clean. It's often cheaper over
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  time than the alternative arrangements. Lenders know how to underwrite this
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  and monitor these loans. And the trade-off is that the banks usually
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  expect a lot higher equity or a deposit. and a consistent trading
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  history, demonstrate capacity to service. And this
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  is where younger people starting out in the industry often struggles because
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  they don't have that trading history. They don't know how to put their projections together and
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  they don't have the equities, usually the biggest challenge that we find. So
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  the first two options around leasing with an option, you
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  know, with vendor finance often allows younger generations to
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  get a start where the more traditional banks require that bigger deposit
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  equity position. So the bank funding route matters when you
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  got a deposit. This option is often the best because it's very straightforward. You
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  know, the banks, the investor in your business, grazing businesses go
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  down this route because they've got a solid balance sheet and it's a lot more straightforward
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  to scale up in this model. Often the lender takes your existing property
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  security as well as the new property to take a mortgage over both your
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  current one and the new one as primary and the covenants and redraw limits
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  are featured set out around that. And this is often based on your risk profile, your
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  business. So work with a broker who can structure the loan to include funding
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  for any on costs with the purchase, stamp duty, legal costs, any
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  development or improvements on the property. Put that together and present it in
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  a pack so that potential funders can understand exactly what
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  you're trying to achieve with your business. If you need tax or
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  legal structure input around the ownership structures or for
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  GST, obviously involve those advisors around your accountant, your
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  solicitor. As the bank loan deal with the security and serviceability, they're
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  not going to provide any advice around that structured side of things. It's
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  important to get those advisors around you and making sure they understand where you want
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  to take your business as well. Choosing the right route comes down to three practical
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  questions. How much time do you need to build trading history and
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  equity? How willing is the vendor to support the transition and
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  what cash flow is needed to develop the operation? For a buyer with
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  little deposit, but a vendor keen to support them and
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  a clear plan on how to add value to the property, vendor finance or
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  a leaseable option is a sensible way to go. For a buyer with solid equity,
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  trading history, straight debt funding is obviously going to be the best option
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  there. Imagine three scenarios on the same 1200 hectare property. In
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  scenario one, the vendor carries 25% and lets the buyer operate while
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  payments are made. In scenario two, the buyer leases it
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  for five years, improves the waters, the yards, builds the
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  stock numbers up, and they have a locked in set price to purchase that
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  in a few years time. In scenario three, the buyer pays a 30% deposit
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  or uses equity in an existing property. Each pass has different
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  cashflow options, different equity positions, which will be
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  different, and each influences what lender will accept when you
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  go to borrow the money to get into the property. Run the numbers with your brokers and
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  advisors who specialise in rural purchases and loan structures for
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  farms. Present the pack to the vendor so that they can see the plan
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  as well, so it's important to have the vendor on board and explain to them how
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  the arrangements could potentially work. Remember, the broker's role is
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  to present your purchase to the lenders in a way that manages their risk and shows
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  your capacity to repay and how you choose the structure that fits the
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  transaction rather than forcing you to do a one-size-fits-all solution. There's
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  one more issue that gets missed when people compare these pathways, and that's
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  the exit. Every structure needs a clear point where the arrangements become simpler,
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  not more complicated. With vendor finance, that usually means a
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  realistic refinance plan at the end. With a lease and an option,
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  it means knowing what financial position you need to be in before you
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  reach the option date so that you're able to get the funding to complete the
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  purchase. And with a straight debt purchase, it means making
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  sure your repayment profile leaves enough cash in your operation and
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  also making sure that you have enough equity up front to be able to complete straight
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  debt funding up front. So say you buy a block and the numbers
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  work only because you assume a strong cattle market for five straight
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  years. That's not really a strategy, it's more hope. So
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  a better approach would be to decide what must improve
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  for the deal to stand on its own, whether that's carrying capacity, profitability,
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  stronger cash numbers, cash reserve, and what equity percentage you
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  need to build to be in a position to complete the purchase. The
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  documents you need to reflect that plan as well. You want to have a
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  purchase price, interest, repayment date and the ability to refinance set
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  out clearly before anyone signs. That protects the buyer, the
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  vendor and the senior lenders because nobody's trying to reconstruct a
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  commercial deal when the pressure arrives. It also makes sure that future
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  finance conversations are much easier. When you show that the arrangement was
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  designed with a sensible pathway to full ownership, The lenders can
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  assess this so they understand when the refinance request is going to
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  come and it takes out any uncertainty around different timelines and
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  productivity and profitability so everyone knows exactly where things need
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  to be for the contract to be finalised. The property itself matters but
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  the pathway from day one to a stable ownership is what makes a
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  bankable deal. Guys, if you want help working through the different options,
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  which route would suit your business, your situation the best, reach
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  out to my team. We can do a call with you to understand the property you're looking to
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  purchase. You know, if you're looking at the vendor financial arrangements, some things
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  to look out to discuss with the vendors and how your cash flow might look.
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  We can help you working through your cash flows to work out the different timings
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  of payments, making sure that everything's structured the way it needs to. And
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  then we can also help you with structuring the deal to put it to a lender. if
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  you're heading that in that approach as well. And then also work with you if you've got
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  a lease with an option, you know, working with the lenders to make sure they're comfortable that
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  once we get to the end of it, how that would look. So that's exactly what
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  we do for grazing families across regional Australia when they're looking to
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  buy, expand, or planning the handover to the next generation. Details
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  are in the link below, guys, and I look forward to helping anyone out that's
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  looking, going down these sort of arrangements. See you in the next episode.